Schulich partners with UN to study how climate change impacts real estate values

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Physical climate risk is fundamental and critical to all real estate investors, but according to a new report from the United Nations, in partnership with York University’s Schulich School of Business and Henley Business School in the United Kingdom, there is a lack of information and understanding about how these risks could affect property values in the long term.

The report, released by the United Nations Environment Programme Finance Initiative (UNEP FI), is titled “Climate Risk and Commercial Property Values: A review and analysis of the literature.”

Researchers found little information that clearly outlines the interaction between climate hazard exposure, market sentiment, and asset value and pricing. Photo by Sean Pollock on Unsplash

The research was commissioned to support real estate investors in correlating recent extreme weather events to real estate values and prices, and how risk should factor into future projections. It aimed to identify the patterns in the reduction in price of assets and changing behaviour in the real estate market due to acute and chronic climate risk.

“Climate change is becoming one of the most important structural forces and risks that long-term investors in all asset classes need to proactively consider in building resilient portfolios,” said Professor Jim Clayton, the Timothy R. Price Chair at Schulich and director of the school’s Brookfield Centre in Real Estate and Infrastructure. “Institutional real estate portfolios with exposure to cities and regions that are increasingly susceptible to climate change impacts face heightened risk. This paper provides a timely review of academic research that indicates climate risk is starting to have a more sustained impact on pricing and on investor decision-making.”

Despite the increased concern among investors of the impact of recent extreme weather events such as flooding, hurricanes, rising sea levels and wildfires, the report concluded there is an incomplete picture of the channels through which climate hazard exposure has an impact on asset value and pricing.

The research also found that, although commercial real estate investors may be increasingly aware of physical climate risk when acquiring, developing and upgrading assets, there is only modest evidence as to how commercial real estate markets have, in the past, responded to extreme events.

Overall, the researchers found little information that is available to investors and other market participants that clearly outlines the interaction between climate hazard exposure, market sentiment, and asset value and pricing. This has great implications, as the nature of physical climate risk is such that values, prices, and investment decisions will increasingly be influenced by actions of lenders, insurers, occupiers, regulators and government, and all these parties depend on good data and information flows.

The report recommends further work in the following areas:

  • improving market surveillance;
  • shaping financial and valuation modelling practices;
  • strategizing for public and private investment planning in local area resilience; and
  • researching to build the evidence base for climate risk analysis and disclosure.

The review concludes that not enough is understood about how physical climate risk is currently included in the pricing of assets and how this has impacted the real estate market. The report did find that prices in the past have often “bounced back” from falls caused by extreme events, but this may not continue to happen. Mandatory mitigation requirements from the insurance market and other governance capacities can be critical in helping to provide confidence to investors and mitigate value losses over time; however, the extent to which this protects future asset values in areas subject to climate risk is unknown.

The full report can be found here.

About the UN Environment Programme Finance Initiative

The United Nations Environment Programme Finance Initiative (UNEP FI) is a partnership between the UNEP and the global financial sector to mobilize private sector finance for sustainable development. The UNEP FI works with more than 400 members – banks, insurers and investors, and over 100 supporting institutions – to help create a financial sector that serves people and the planet while delivering positive impacts. By leveraging the UN’s role, the UNEP FI accelerates sustainable finance.