Report: Climate Change Affecting Investors’ Decisions

April 9, 2019

More real estate investors are taking into consideration the impact of climate change on their properties, according to a joint report from the Urban Land Institute and global investment management firm Heitman. The report is based on a series of interviews with institutional investors, investment managers, consultants, and other stakeholders to identify how they are factoring climate risks into their purchase decisions.

“The interviews revealed that while there is growing awareness of the impacts climate change could have on real estate investment, the industry has not yet developed a standardized response,” the report states. “At this early stage, investment managers view insurance as the primary means of financial protection against physical damage from climate events. However, insurance will not protect against a reduction in demand for assets in locations seen as vulnerable to climate risks.”

Rising sea levels, hurricanes, wildfires, and floods have greatly affected several markets in recent years. In 2017, insurers paid out a record $135 billion globally in damages caused by storms and other natural disasters, according to the report.

Climate events and threats can lead to increased insurance, maintenance, and operational costs and a possible decrease in property value, according to the report. More than $130 billion of U.S. real estate is in metro areas that rank in the top 10 percent of risk to sea level rises, according to research from Heitman and Four Twenty Seven, a climate risk analytics firm.

A few of the strategies institutional investors are taking to combat climate risks include:

Assessing the physical risks. Some real estate investment managers are completing mapping exercises to understand the current and future risks of climate change to their properties, such as sea level rises, flooding, heavy rainfall, extreme heat, wildfires, and hurricanes. Risks unrelated to climate change, such as earthquakes and terrorism, are also factored into these models. As one investment manager told researchers: “We are doing this to be proactive. We want to be able to understand what the upper bound of the value impact is so we can adjust for it with our investment strategy.”

Adding protection. Some investors said they were exploring how climate mitigation strategies, such as seawalls, dikes, increased elevation, and additional cooling systems, could help better protect their properties.

Evaluating insurance coverage. Many investors were proactively looking at their insurance to make sure they were protected. For example, they were looking at insurance partners to help anticipate rising premiums due to climate risks and the availability of coverage. They also told researchers they hoped that in the future, insurance providers would reward those who are proactive in investing in mitigation efforts to better protect their properties against climate risks.

Assessing city-level responses. Investors may be more attracted to cities that are proactive in addressing climate change. Some investors told researchers they were evaluating the city government’s preparedness for climate change. “They are seeking markets where governments have the authority, function, and funding to address climate risk, whether at the municipal-government level or through supportive national policies and practices,” according to the report.

Climate and Real Estate Investment,” Urban Land Institute (April 2019)