How investors can understand and act on climate risk in real estate portfolios 

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Flood insurance concept. Home inside lifebuoy swimming in the water. 3D rendering © alexlmx /123RF stock photosGlobally, the number of floods has quadrupled since the 1980s and doubled since 2004, which poses risks to both residential and commercial real estate investments.

Yet, institutional investors are still struggling to quantify and manage the long-term climate risks to their private real estate portfolios, according to a new report by MSCI Inc. that looks at the physical risks of climate change to real estate.

“We used geospatial analysis to explore the exposure of private commercial real estate assets to the most salient local climate hazards — flooding, water stress and hurricanes —using a sample data set from MSCI’s database of measured client portfolios within five real estate markets: the U.S., the U.K., the Netherlands, Australia and South Africa,” it said.

The report found not all real estate portfolios located on the coast or near rivers are exposed to flooding because precise location matters as do local measures in place to mitigate risks.

As an example, the report noted few assets in London are at risk of flooding because of the Thames Barrier, which is one of the largest flood defense systems. As well, a defense system in the Netherlands safeguarded more than 97 per cent of its most at-risk assets measured in the study. On the other hand, 81 per cent of Australian assets and 70 per cent of South African assets that were measured are suffering chronic water stress.

“When seeking to understand physical risks, we find that a detailed understanding of exposure is the first step investors may undertake,” the paper said. “However they choose to manage the risk to climate hazards, exposure to physical risks cannot be ignored.”

For institutional investors that have identified their exposure to risks, they can either avoid those assets, transfer the risk to insurance companies or try to control the risks, whether that’s through engagement with policy-makers or other innovative means, it said.

“Resilience measures can be taken at the company level, individual property level or regional policy level. Regional level resilience measures may be necessary when there are significant risks to an entire region that can only be addressed through a private-public partnership. Regardless of the approach, climate-related risks should no longer be ignored.”

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