Extreme weather events and natural disasters have become more frequent and intense; the number of floods has quadrupled since 1980 and doubled since 2004, [1], reported MSCI.
Properties that appear attractive today could be underwater or reduced to ash before their return on investment is fully realized. Yet investors struggle to quantify the severity of long-term climate risks; they seek both a better understanding of their exposure and improved ways to manage it.[2]
Understanding of existing and planned regional risk assessments and resilience measures could lead to better appraisals of present and future risk. The United Kingdom is the third-largest property market globally, following the United States and Japan.[3]
MSCI mapped flood-risk data from the U.K.’s Environment Agency (EA) to 11,000-plus private real estate assets[4] in England within MSCI’s database of measured client portfolios[5] to assess which ones were most vulnerable to flooding.
The EA’s June 2019 dataset shows the yearly probability of river and/or sea flooding in four risk categories:[6],[7] very low (less than 0.1 percent chance of flooding per year), low (0.1 percent to 1.0 percent chance), medium (1 percent to 3.3 percent) and high (greater than 3.3 percent). Crucially, this dataset considers both flood hazard and vulnerability based on any flood defenses in place, as well as the current conditions of those defenses.
We found that, overall, 4 percent of the properties were in medium- to high-risk flood zones — but exposure varied widely by specific location and sector. England’s second-most populous county, West Midlands, is an example: Although only 3 percent of measured assets by capital value were categorized as medium- to high-risk, around 30 percent of residential-sector assets were deemed at risk. At the local-authority level, in Reading, 54 percent of assets across all sectors — with over £900 billion ($1,104 tillion) of measured assets — were at risk.
Greater London, on the other hand, was somewhat less exposed. This is due in large part to the Thames Barrier, the world’s second-largest movable flood-defense system, which protects Greater London from high tides and storm surges emanating from the North Sea. The Thames Barrier can provide a flood defense as tall as an eight-story building, protecting 1.3 million people and billions of pounds in property value.[8]
The map below illustrates that the largest concentrations of assets in Central London closest to the Thames itself are at low to very low risk of flooding. In contrast, the postcodes with most assets at risk tend to be located closest to the Thames’ tributaries in less central areas of Greater London.
How can real estate investors manage these risks? A detailed asset-level risk-exposure assessment is a useful first step. After assessing exposure, investors may consider avoiding high-risk areas. Another approach may be to transfer the risk to insurance companies and tenants as these hazards become more probable and extreme; however, insurance premiums may rise — or worse: Insurance coverage itself might become unattainable. Alternatively, investors might consider whether to engage with policymakers and regulators on local climate-resilience strategies. Regardless of the approach, investors can likely no longer ignore these risks.
[1] "New data confirm increased frequency of extreme weather events: European national science academies urge further action on climate change adaptation." ScienceDaily. March 21, 2018.
[2] Burgess, K. and Rapoport, E. 2019. “Climate Risk and Real Estate Investment Decision-Making.” Heitman, Urban Land Institute.
[3] Teuben, B. and Bothra, H. 2018. “Real Estate Market Size: Annual Update on the Size of the Professionally Managed Global Real Estate Investment Market.” MSCI Research Insight.
[4] Our analysis is based on geocoding of real estate properties representing 98 percent coverage by number of assets and 96 percent by capital value of the England real estate market (11,500 assets with $253.4 billion capital value) in the MSCI UK Property Index (13,130 assets with $281.2 billion capital value).
[5] As of Dec. 21, 2018.
[6] “Risk of Flooding from Rivers and Sea.” Environment Agency. June 17, 2019.
[7] The resolution of the flood-risk data from the U.K.’s Environment Agency (EA) dataset is based on 50- x 50-meter cells.
[8] “The Thames Barrier: How the Thames works, and when it is scheduled to close.” Environment Agency, Sept. 13, 2019.
