By Kristen Le Mesurier, Senior ESG Analyst, Investment Research AMP Capital


 

Key points


An age-old assumption is that carefully selected real estate will be a safe harbour in the face of market volatility. In the face of extreme weather events like flooding, cyclones, sea level rises, sustained heat waves and hail storms, this assumption may not hold. Extreme weather patterns can fundamentally change the value of real estate. In the most severe cases, volatile weather patterns can destroy real estate.

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Climate change and this new age of weather volatility presents a challenge for global real estate investors. There are the physical impacts of climate change relating to the damage that occurs when extreme weather hits, as well as the indirect impacts of climate change relating to the change in rental demand and the value of assets.

Regulatory risks from governments all over the world targeting carbon emission reductions and the availability of capital are also important considerations. Institutional investors are increasingly expected to disclose the carbon footprint of their portfolios, recognising that what gets measured gets managed.

Implications for global property investors

As investment managers, we review the environmental credentials of every real estate entity before we invest. From an earnings and valuation perspective, it makes financial sense: new buildings need to be energy and water efficient to attract and retain premium tenants and existing buildings need to be retrofitted to minimise stranded asset risk. In Australia, 81% of office buildings are over 10-years old.

Final thoughts

  • Climate change and this new age of extreme weather patterns present a challenge for global real estate investors. There are the physical impacts of climate change to consider, as well as the indirect impacts on valuation, including tenant demand for resilient buildings and the cost of retrofitting existing building stock.
  • There are the regulatory risks arising from governments all over the world targeting carbon emission reductions and the investment risks arising from the availability of capital.
  • Listed real estate managers with a track record of deeply integrating these issues in their investment process will be the best placed to construct a portfolio that will deliver an attractive, resilient, long term exposure to this asset class.

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