Why climate change is not affecting real estate prices (yet)
No-one can deny buildings are exposed to climate risk. So why isn’t this hammering their value? With London Climate Action Week in full swing, the Managing Director of Evora Global Chris Bennett explains why this could change.
Human beings often like to live and work near places that are actually quite risky.
Many people might like to live near a river or stream – it’s a very pleasant idea. However, if you do so already, you probably know you’re at a greater risk of being flooded than someone further away or safely up on a hill. But your scenic riverside property might still be very valuable as rivers are nice to look at.
Similarly, many people like to live in the countryside, near to forests and woodlands, and probably don’t worry too much about their increased exposure to forest fires while they admire the trees.
Properties on a seafront are also desirable and fashionable. Also, for businesses, they can be great as they often have substantial footfall. But they are at risk of rising tides and stormy seas.
Cities might be exposed to a range of different climate risks. However, they are major hubs for jobs and economic opportunity, keeping prices high.
Historical data
When calculating value, risk is just one metric and doesn’t always hold as much sway as it should. When calculating real estate values, investors tend to focus upon historical data. They look at rental yields and the direction of property values in the area and weigh these up against factors such as insurance premiums and maintenance costs.
The vast majority of the data is about things which have happened, rather than things which are going to happen. This presents a major problem with regards to climate change.
Acceleration
We know climate change is occurring and the risks to property are substantial. It is foolish to think that buildings are somehow immune to climate change and risk.
Property is, by its nature, fixed in a single location and typically made of solid materials. Many of our older buildings, with their ornate and intricate facades, are not well suited to cope with heat stress, damp, flooding or any substantial change in the environment.
We also know that climate change is accelerating and that we may find ourselves with a problem too big to fix.
Adaptation
Those in possession of large properties are not always incentivised to adapt them to the threats which they are likely to face in the decades ahead.
The hold period, when an investor is in possession of a property, is typically between five and seven years. However, the sorts of adaptations buildings would require to future-proof them against climate change are far too costly to be recouped in that time period.
For European real estate investors, climate risk is probably not a big factor affecting their decision making because, rightly or wrongly, Europe is still regarded as being fairly low in terms of climate risk.
However, I wonder how summer after summer of soaring temperatures in Europe's major cities may affect that view in the future.
Indeed, some of our clients say they are facing rising insurance premiums, some as much as 30% year on year, partly as a result of claims for damages from climate-related weather events. If insurance becomes too expensive in an area, investors may think twice about investing there.
Island states and ocean based countries, as well as many in the global south, are facing significant climate risk. Often, these are in markets which are less valuable in terms of real estate, although the wider implications are huge.
New laws
People value properties for all sorts of reasons and lack of risk is just one of them. And we can see why the future of a building might be overlooked compared with its more obvious positive attributes.
But change is afoot. In the UK, TCFD recommendations have now been enshrined into law. The UK's largest companies are starting to file their reports to investors. Indeed, at the time of writing, the very first tranche of these reports is being submitted.
Real estate investors and other large organisations must now reveal the extent to which they are susceptible to climate risk. We can expect some difficult conversations to be had, as well as some substantial price corrections.
People will always place value on risky things, but sometimes the risk is too big for anyone’s appetite.
About the author: Chris Bennett is co-founder and managing director of sustainability services company Evora Global (150 staff), whose clients include Legal & General, Hines and M&G.
