Are Investors ‘Short-Sighted’ About Climate Risk?

Recent hurricanes, wildfires, and other natural disasters are a reminder that “real estate is on the front lines of climate impact,” experts in investment management said during the Urban Land Institute’s fall conference, held in Boston in October. Nearly every region of the United States is experiencing intensifying hazards, but that hasn’t stopped demographic shifts toward some of the most disaster-prone areas of the country. Real estate investors have followed the demand, expanding their portfolios particularly in the Sun Belt, which is getting battered harder every year by storms. What’s wrong with this investment strategy?

“It’s short-sighted,” said Egbert Nijmeijer, senior portfolio manager for Amsterdam-based Kempen Capital Management N.V., which owns properties across the U.S. “Investors are too focused on short-term ROI. If they were thinking about a longer-term strategy, they probably wouldn’t flock toward high-risk areas the way they are now.”

Though properties at high risk of natural disasters—especially flooding—tend to be worth about 10 percent less than those at lower risk, Nijmeijer added, investors don’t necessarily need to pull out of hazardous markets. But with increasing insurance and maintenance costs related to storm-proofing and protecting property, they need to consider how this may impact their long-term ROI goals. “A lot of investors don’t understand that and just say, ‘Well, I’m diversifying my portfolio,’” Nijmeijer said. “That alone is not a sound strategy.”

Investors with large portfolios should collaborate with insurance providers to assess the climate risk of individual properties rather than relying on data about entire neighborhoods or cities, said Laura Craft, head of global sustainability for real estate investment management firm Heitman. “You need an assessment of your specific property—not the one across the street or those within a certain radius—because actual risk varies from property to property,” she said.

Doing so allows investors to be more strategic when deciding whether to take measures to mitigate a property’s risk, such as raising it above the flood zone or installing flood gates, or unload it, added Emilie Mazzacurati, founder and CEO of market intelligence provider Four Twenty Seven. “REITs are most exposed to risk because of the diversity of their portfolios,” she said. “There’s plenty of data available on climate risk to real estate so you can prioritize your investments.”

Craft said investors should pay attention to the relocation patterns of people who are leaving high-risk areas. Citing a study that predicted 2.5 million people will leave Miami over the next 10 years, she said there may be less risky investment opportunities in the markets those people are moving to. “There are definitely areas that will benefit from increased climate risk, and these are the places investors may want to focus on expanding future portfolios.”