Real Estate Investors Must Address Climate Change More Effectively to Avoid Negative Impacts on Value

New ULI report reveals that real estate firms are taking insufficient action against climate risks

LONDON (November 18, 2016) – A new report released today by the Urban Land Institute (ULI) found that 47% of respondents in a survey of top real estate investors do not yet undertake any form of climate-related risk assessment. The report uncovers significant shortcomings in the way real estate investment and management firms currently address longer-term consequences associated with climate change, such as sea level rise, extreme weather events, and energy and water shortages. These problems are exacerbated by an industry that underplays the significance of climate risk: 76% percent of survey respondents cited insufficient market recognition of climate risks as a major barrier to expanding their climate resilience. Entitled Climate Change Implications for Real Estate Portfolio Allocation: Industry Perspectives, the report draws on a survey of 50 senior executives at leading real estate investment and management firms, mostly based in Europe.

“This report shows that real estate investors need to be more proactive when it comes to the longer-term impacts of climate change,” said ULI Europe CEO Lisette van Doorn. “These effects of climate change—from extreme weather to changes in the availability of natural resources—can have dire consequences for real estate assets. While investors are taking steps to mitigate the impacts of climate change, such as improving energy efficiency in buildings and pursuing green building certificates, the report shows there is significant room for improvement, especially when trying to adapt to climate change impacts. Investors must expand their understanding of and reaction to the implications of climate change to avoid detrimental impacts on value.”

According to the report, real estate investors generally have a good understanding of the key threats posed by climate change and the way in which climate-related changes will affect their portfolios. However, the report notes that investors lack understanding of several key climate change implications. Respondents underestimated the risk of sea level rise to real estate assets and lacked knowledge of climate change impacts in regions outside of their main business focus. The report recommends that portfolio managers address knowledge gaps relating to climate change, both in terms of the direct impacts climate change will have on assets and the ways in which regulatory and market responses may affect demand and costs.

The report also reveals widespread divergence between investment and climate change time horizons.  Over three-quarters of respondents (77%) have holding periods of less than 20 years. Of the remaining respondents who have average real estate holding periods of more than 20 years, only a quarter of those respondents appraise investment opportunities over 20 years.  Because many of the most severe anticipated effects of climate change are more than 20 years away, this approach could result in neglecting the long-term risks to investments, including the impact of climate change-induced risks on asset valuation.

Survey respondents reported taking a variety of actions to address climate change.  Ninety-four percent are investing in improvements to building energy efficiency, 71% are investing in water efficiency improvements, and 78% are pursuing green building certificates for at least some portion of their holdings.  However, only slightly over half of survey respondents (53%) reported performing climate-related risk assessments.  The report maintains that risk assessments that include sustainability and climate change factors are critical for informing business strategy, and that more robust tools – such as scenario and sensitivity analyses – should be more widely used.

To download the report, please click here.

About the Urban Land Institute
The Urban Land Institute is a nonprofit 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 almost 40,000 members worldwide representing all aspects of land use and development disciplines. For more information, please visit europe.uli.org, follow us on Twitter, or join our LinkedIn group.