Climate Change and Property Values

Climate Change and Property Values - New UN Report

The United Nations Environment Program (UNEP) published a new report investigating the extent that real estate markets are pricing in risk from the physical impacts of climate change. The UNEP compiled the report in partnership with the Henley Business School and the Brookfield Centre of Real Estate and Infrastructure at the Schulich School of Business, York University (Canada). Which-50 yesterday examined real estate project and building valuations in the light of 2050 zero-emission targets in the UK. They concluded that the market is seeing a divergence between green and brown valuations in some commercial properties in London.

Market Behaviour Still Linked To Older Models

The UNEP report is a timely follow-on as it deals with increasing investor and regulator requests for forward-looking analyses of assets and portfolios. The authors have looked at data variables to drive financial modelling and investment decision-making. The researchers reviewed published literature for empirical findings on value and price changes and shifts in market behaviour linked to recent extreme weather events and sea-level rise. They also investigated the channels through which values and prices are influenced, including property cash flow, capitalisation rates, and financing. 

For the residential sector, “location, location” remains the key mantra. At present, adjacency to amenities offered significant mitigation to concurrent risk of climate events, but evidence is emerging that greater climate risk awareness and belief in climate change counter this amenity premium in some markets. Limited evidence for commercial real estate points to greater persistence of proximity premiums for assets close to business centres, whatever the risk. This proximity factor may imply investors’ view that such areas are more likely to attract funding for risk mitigation and post-event restoration work or simply the dominance of agglomeration value impacts.