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