ULI/Heitman urge investors – rethink climate risk assessment

[Image: Saikiran Kesari/Unsplash]

Environmental change is already prompting people and businesses to migrate according to a new report by the Urban Land Institute and investment manager Heitman. These movements could trigger significant shifts in the demand for property.

And although some locations will benefit from climate migration, others will suffer and investors need to integrate climate migration risk into their underwriting models, the report states. ULI/Heitman liken it to the need to recognise and price-in physical risks associated with climate change such as wildfires, hurricanes and excessive heat.

Citing the Geneva-headquartered Internal Displacement Monitoring Centre (IDMC), the report states that, globally, disasters displaced nearly 31 million people in 2020 and about 14 million people could be displaced annually by sudden disasters such as hurricanes and floods.

The report, Climate Migration and Real Estate Investment Decision-Making, recommends a broader approach for assessing the risk on investment. ULI and Heitman have developed a new two-step framework for assessing climate migration-related risks as part of the real estate investment decision-making process.

Investors can use this framework to identify which markets and submarkets face heightened exposure to climate migration. It will also help ascertain which place-specific factors are most likely to exacerbate or mitigate those location pressures while highlighting which factors are likely to be material within particular investment horizons.

The report implores property investors to continue building their capacity to assess and manage migration-related and broader market-level investment risks and should actively understand the climate change adaptation needs of key markets. “This requires shifting from an asset-centric view to a market-level appraisal of risk and resilience drivers,” the report also states while urging investors to direct their investment to assets and locations that are adaptable to changing environmental conditions while enhancing the overall social and ecological resilience of communities.

“The real estate sector is reaching a crucial stage in the evolution of its approach to climate risk,” said ULI’s global CEO, Ed Walter.

“While many investors remain focused on short-term and asset-centric views of risks, thinking that they can shift investments before climate risks bite, leading investors are now turning down opportunities despite strong near-term fundamentals,” continued Walter. “They are drawing connections between migration, climate risk, and resilience. They are identifying methods and indicators to assess these links and adapting their investment strategies accordingly.”

Heitman CEO Maury Tognarelli added: “Migration patterns in reaction to climate change could lead to shifts in demand for real estate and we must begin to prepare for the possibility of societal and economic disruption fueled by this dimension of climate risk. Just as we need to underwrite the impact of physical risks on property value, we need to anticipate the trajectory of climate migration and incorporate it into our investment analysis.”