November 29, 2022

Climate change and its risk for Real Estate

4 min read
real estate consultant service

Global warming and climate change are for real. You might have heard of melting glaciers and lands converting into deserts. But beware! Your property may be at risk too!

The effects of climate change are not limited to faraway places on the globe. Knowingly or unknowingly, your home may have to bear its risk. Tropical storms, recurring coastal floods, hurricanes, and wildfires are the adverse effects of a changing climate. The National Oceanic and Atmospheric Administration’s (NOAA) office for coastal management has assessed the risk related to climate change, and it says that up to $106 billion worth of coastal property will most likely be below sea level by 2050.

If you are a real estate investor, you have to be proactive in monitoring the potential impact of climate change on your properties. You can arrange for a real estate consultant service to do a climate-related risk analysis and see if it is impacting your property valuation.

Managing climate risk in your investment portfolio is as crucial as playing a role in mitigating the adverse effects of climate change. Look for green and energy-certified buildings when planning to invest in new properties. Take the help of a real estate consultant before you invest in properties. They help you to identify buildings that are energy-efficient resulting in enhanced asset values in the long run.

But before we move on to how you can invest in green buildings or minimize climate change risks of existing properties, let us have a look at the risks to real estate due to climate change. 

What are the risks to real estate properties due to climate change?

Real estate is a long-term investment. It is vulnerable to the impacts of climate-related events. Any climate change exposes the property, either residential or commercial, to two types of risks.

1.    Physical risk to real estate properties

The physical risk is the direct risk caused by climate change patterns. For instance, if your area is flooded, you incur losses to repair the damage caused by it to your property. So any damage to your property from extreme weather events caused by climate change increases the cost faced by investors. The costs may be short-term (like in hurricanes) or long-term (like in recurring tropical storms).

There is considerable variation in the valuation of individual properties in any given area or location. Take, for example, an area that is prone to coastal flooding. An elevated property is less prone to losses due to the flood than a property at ground level. But in contrast, a tropical storm uniformly affects all properties in the area. Hence, it is necessary to evaluate the individual property for climate-change risk analysis rather than taking an entire area as one. 

2.  Transition risk to real estate properties 

These are the risks that arise from the efforts to address climate change. These include-

  • Change in government policies
  • Change in market & customer sentiment
  • Change in legislation and regulation
  • Change in technology

Each of these has the potential to increase, decrease or disrupt the transition towards a low-carbon economy. Here, the investor incurs costs to meet the carbon-reduction targets.

Assess both these risks under different scenarios. Take the help of a real estate consultant to provide an estimate on the change of property valuations due to climate change.     

What are the options as an investor to minimize the impact of climate-related risks?

With climate changes impacting the Earth, ESG (Environment, Social & Governance) factors have a key role to play in the selection of real estate properties. ESG matters because the building sector is responsible for 30% of the world’s carbon emissions. ESG is a tool to assess, measure, and manage risks. Realtors are now focused on reducing energy use in buildings through passive design principles. They are even having their properties assessed for ESG ratings. As an investor, you can take benefit of these by investing in buildings that have good ESG ratings. It will help you save on your power bills and reduce insurance costs as well. Also, it will increase the real estate value as people prefer to buy homes that are eco-friendly and manage climate risk efficiently.    

As an investor, you have to be careful in selecting properties to invest in. Take the help of a real estate consultant before investing so that you receive proper guidance on the investment property and its climate risk assessment. 

  1.  Study the area and its geography before you decide to invest in any real estate property. Avoid investing in high-risk areas that are prone to natural disasters like earthquakes, hurricanes, or flooding.
  2.  Insure your property against disasters. Read the document carefully and ensure that it includes insurance against damages caused by changes in climate patterns and natural disasters.
  3.  If you already have a property in the risk zone, engage with policymakers. See how you can control its impact. Be an active citizen and ensure that you do your part to mitigate the risks caused by the climate patterns.
  4.  Sell the property if it is in an area that is prone to extreme events like floods, wildfires, and hurricanes.

Before you take any action, try arranging for a real estate consultant service. They will help you to assess the value of your property in new ways and decide the course of action.

Bottom Line

It is clear that climate change poses clear and material risks to your real estate property. The real estate valuations are already impacted by the physical and social impacts of extreme weather, changes in the market preferences, and growing regulatory pressures. As a responsible real estate investor, it is your duty to buy properties that try to counteract the effects of climate change. Hire a real estate consultant to help you assess and invest in properties that prominently reduce carbon emissions. Because a climate-friendly and sustainable real estate investment can preserve and increase asset value.  

It needs collective efforts from policymakers, individuals, and realtors to ensure accountability. You have to take a leading role in saving the planet. 

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