European Real Estate Sector Underestimating Risks of Extreme Weather Events

Extreme Weather Events and Property Values

LONDON (June 16, 2014) The impact of extreme weather events on property values needs to be urgently addressed by the real estate sector, according to a new report published by the Urban Land Institute (ULI). The report, entitled Extreme Weather Events and Property Values, argues that although the industry is increasingly helping to tackle the causes of climate change, it is not paying enough attention to the risk posed to individual assets from single extreme weather events such as storms, floods or droughts. The report is being released ahead of this week’s ULI Europe Real Estate Trends Conference in London where a panel of industry experts will debate the impact of extreme weather events on the property industry.

The report, authored by Sven Bienert, Professor of Sustainable Real Estate at the University of Regensburg and ULI Europe’s Visiting Fellow on Sustainability, highlights that the number of extreme weather events has doubled globally since the 1980s, to an average of over 800 per year over the past decade. These events are increasingly threatening real estate values in areas prone to natural disasters and affecting the cost and ability of investors to insure their assets.

Direct financial losses relating to real estate and infrastructure caused by these severe weather events have tripled globally over the past decade and the costs to reinsurance companies now amount to US$150 billion per year. However, the report emphasises that the real impact on investors and the wider economy is much greater when consequential and indirect losses such as lower economic activity and reduced rents are taken into consideration.

As a result, the report concludes that the property sector as a whole is underestimating the threat and impact of extreme weather events on asset values, with investors not typically factoring in these risks into their portfolio allocations. Furthermore, the industry is mitigating the risk of natural disasters by relying on paying rising insurance premiums. However, the report warns that for specific regions and high-risk locations the direct and indirect losses may make this strategy unsustainable, with even current “safe haven” locations having to be re-evaluated.

“The real estate sector has rightly paid considerable attention to addressing its contribution towards climate change,” commented Sven Bienert Professor of Sustainable Real Estate at the University of Regensburg and ULI Europe’s Visiting Fellow on Sustainability. “However, less focus has been placed on understanding how individual weather events, often caused or exacerbated by climate change, affect real estate values and the ability of investors to continue to insure their assets. As a result, the financial uncertainties caused by extreme weather are being considerably underestimated by real estate investors.”

The report includes a new tool which enables investors to assess risk and calculate the potential Annual Expected Losses (AEL). In addition to the calculation tool, the report also outlines a number of key recommendations for real estate investors to protect their portfolios from the impact of extreme weather events:

  • Regard sustainability initiatives as more than just a cost driver, and make more intensive efforts to ensure that assets and the respective allocation of these assets are “future-proofed”. Fulfilling today’s regulatory requirements is just the starting point on a much longer and broader route to a successful sustainability strategy.
  • Ensure a higher awareness of risks related to climate change so that, corporation-wide, they are treated as a strategic issue.
  • Evaluate the annual expected loss for properties or portfolios caused by future climate change and extreme weather events.
  • Be alert to the broader indirect and consequential effects of severe weather on real estate.
  • Rethink asset allocation in terms of regions, asset subclasses, and micro-locations. In addition, re-evaluate core and other assets in locations that may currently be treated as a “safe haven” for investments.
  • Increase the adaptation of existing building stock if the outcome of an asset analysis is “hold”. Some properties can be made more resilient through relatively minor retrofits (such as improvements to facades, roofs, site infrastructure, windows and doors, connections between building parts, etc.).
  • Develop proper risk-management tools that focus on climate change, and integrate them into existing controlling functions and processes.
  • Improve awareness of potential new regulation of greenhouse gas emissions as part of stricter climate policies.
  • Consider mitigating potential severe weather impacts through use of weather derivatives or portfolio diversification.
  • Think on a regional or even property-specific level because natural disasters are best treated with regional climate data and models.
  • Act now to reduce risk from climate extremes with measures that might range from incremental steps to transformational changes. Extreme weather events are already impacting financial returns in the real estate industry and in the future will continue to do so on a far greater scale.

The report joins a growing body of work by ULI on the topic of resiliency, including After Sandy: Advancing Strategies for Long-Term Resilience and Adaptability, which examined the impact of Super Storm Sandy on New York City and New Jersey in the United States and made wider recommendations for future land use and development. The Institute is also undertaking further work on the topic of resiliency with Lloyds of London.

To download a copy of the full report, please visit http://europe.uli.org/report/extreme-weather-events-property-values

About the Urban Land Institute

The Urban Land Institute (www.uli.org) is a global non-profit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in creating and sustaining thriving communities worldwide.  Established in 1936, the Institute has more than 32,000 members representing all aspects of land use and development disciplines.