Increasing regulation of climate risk reporting will aid real estate investors decision-making, claims a report from The Urban Land Institute and Heitman.

Entitled Change is Coming: Climate-Risk Disclosures and Their Implications for Property Owners, the report shows how investors can use data resulting from government regulations requiring real estate companies to disclose climate-related risks.

Investors and other market participants interviewed for the report say more accurate risk information could help them avoid investing in stranded assets, whose value will depreciate due to damage from adverse weather events or an inability to comply with new climate regulations. 

“Governments and investors alike recognize that climate risk is financial risk," said Lindsay Brugger, head of urban resilience at ULI. "New regulations are proliferating across the globe and offer new data sets for enhanced investment decision-making. Investment managers will need to stay ahead of these rules for success in a rapidly evolving global market."

"Climate risk disclosures provide a crucial lens through which investors can evaluate the long-term viability and value of their real estate portfolios,” said Laura Craft, global head of portfolio sustainability strategies at Heitman. 

“By leveraging this data, investors can proactively navigate regulatory changes, identify potential stranded assets, and allocate capital towards sustainable, climate-resilient investments. It's not just about mitigating risk; it's about identifying the investments positioned for the future."

More regulation of climate risk disclosure will produce a number of benefits, the report argues, such as standardising reporting and allowing investors to allocate their capital toward the best strategies for addressing climate change.

The report also details measures investment managers can take to make their portfolios attractive to potential investors, such as tracking asset-level carbon emissions, providing a comprehensive review of a fund's aggregate climate risk, and staying informed about regulatory changes.

The overall impact of rising sea levels and floods on European real estate is small, but certain market segments are vulnerable to losses, new research from AEW has found. 

Using data from Munich Re and The Climate Company, the investment manager’s report quantifies the impact of physical climate hazards, in particular river flooding and rising sea levels, on European real estate returns. The report looks at 196 market segments across Europe.

The headline data from the report suggest the overall financial impact of physical climate risks will be minor: despite 75% of the market segments covered being subject to flood risk. For example, the average annual expected loss from river flood risk is only 0.7 basis points per annum of prime capital value.

However, Hans Vrensen, managing director, head of research & strategy, at AEW in Europe, says: “This market average loss estimate does not reflect micro locations or individual building characteristics and hides some extreme market results. 

“Some segments such as Lyon prime residential, which is expected to be the most at risk market to river flooding, show high risks at near 13bps pa. This means that investors should consider adopting an active screening or monitoring approach.”

Looking at sea levels, the average annual expected loss for sea level rise is estimated to be 1.3 bps across the affected 47 market segments, with the Netherlands most vulnerable. Average annual losses are estimated at 1.9bps pa. However, Vrensen said the estimates did not take into account the effect of future flood defences, as there was no data for projected construction of these.

The average water-related risk for the 37 market segments exposed to both river flooding and rising sea levels was only 1.7 bps pa. 

AEW plans future research to examine the risks of the heat island effect (where cities experience much warmer temperatures than surrounding areas) and subsidence, which is arguably the most expensive physical climate risk, in Europe. 

Vrensen says: ““More work is still needed to resolve inconsistencies between existing data sources as well as uncovering data to help estimate the risks from urban heat islands and subsidence. This is when building foundations are damaged by clay soils affected by droughts -- possibly the most expensive physical climate risk.”This article is free to read until September 8