The impact of long-term global warming is already being felt across the globe with coastal flooding, heatwaves and major ecosystem change pushing the planet into dangerous new territories.
A new report from global real estate firm Heitman LLC and the Urban Land Institute has underscored a need for the property industry to better measure the impact and improve its understanding of the investment risk posed by climate change.
The report, based on existing research as well as insights from more than 25 leading investors and investment managers in Europe, North America, and Asia Pacific, has gauged the industries current position on risks associated with global warming.
“Understanding and mitigating climate risk is a complex and evolving challenge for real estate investors,” ULI chief executive W. Edward Walter said.
“Risks such as sea-level rise and heat stress will increasingly highlight the vulnerability not only of individual assets and locations, but of entire metropolitan areas.”
Walter noted that building for resilience, on a portfolio, property and citywide basis, would become imperative to staying competitive in the near future.
“Factoring in climate risk is becoming the new normal for our industry,” Walter said.
According to the United Nations, last year was the fourth warmest year on record, with 20 of the warmest years on record occurring in the past 22 years.
In 2017, the year hurricanes Harvey and Maria hit the United States and storms battered northern and central Europe, insurers paid out a record $300 billion globally for damage caused by storms and natural disasters.
Bushfires have ravaged Tasmania over the summer with up to 24 fires destroying 200,000 hectares.
Flames tore through the foothills of Mount Eliza and Mount Anne in the Southwest National Park, destroying ancient old-growth forests.
Insurers haemorrhaged more than $670 million from the violent hailstorms that battered Sydney and the NSW central coast late-December, with 90,000 claims recorded.
Catastrophic flooding, which hit North Queensland earlier this month, inundated thousands of homes in Townsville and killed more than 300,000 head of cattle around Cloncurry, Julia Creek and Hughenden, stripping the cattle industry of close to $300 million.
Currently more than eight out of every 10 Australians live within 50 kilometres of the coast, exposed to both extreme weather events and chronic industry-disrupting fluctuations, such as rising seas.
The report noted that while the real estate industry as a whole has begun to recognise and manage risks, for the most part the industry currently relies on insurance to cover the majority of the shorter term, financial-oriented risks related to climate change.
“Opportunities are emerging across the real estate industry for investment managers and investors to better assess climate risk and navigate the potential impacts of climate change on assets and portfolios,” Heitman chief executive Maury Tognarelli said.
As things stand, many investment managers are looking to insurance partners to help anticipate rising premiums caused by climate risks, availability of coverage, and to understand mitigation opportunities.
Currently, premiums are largely levied on the basis of historical analysis so are not likely to take into consideration future climate risks.
Some industry players making investments into areas with potential climate risks have found that insurance premiums have gone up or coverage has gone down.
“An eventual downward repricing of higher-risk assets will be the market's way of redirecting capital to locations and individual assets where it is expected to be better insulated from these particular risks,” the report said.
“This process will be painful for investors who are caught off guard, but those who are prepared have the potential to outperform.”
The report highlighted that the industry will need to better understand and recognise the pricing impacts of physical climate risks, and how climate change is likely to have more of an effect on valuation in the future as asset and market liquidity are affected.
Climate change must shift from “a qualitative part of investment decision-making, to being quantitative and impact driven”.