To stay ahead, real estate must embed climate resilience into every stage of the property lifecycle. Resilient buildings are not only safer, they’re also more desirable and better equipped to withstand challenges.

What are physical climate risks?

Physical climate risks relate to the financial risks and losses that can arise from the adverse effects of climate change. These come in two forms: ‘acute event-driven hazards’ such as floods and wildfires, which cause immediate damage and disruption, and ‘chronic hazards’ like increasing temperatures and sea levels rising that slowly erode property value over time. The implications of these risks to the real estate sector include: 

• Rising damage and repair costs from extreme weather events like floods, wildfires, heatwaves and droughts becoming more frequent and severe as a result of climate change. 
• Impact on valuations as physical climate risks over time make homes harder to insure or mortgage, and buyer demand shifts toward more resilient, future-proof locations, resulting in property values decreasing in high risk areas. 
• Increasing investor expectations to identify, assess and report on climate risks, using regulation and frameworks such as GRESB, EU Taxonomy and IFRS S2/TCFD, while identifying opportunities for resilience to enhance asset performance and long-term value.
• Tenant satisfaction becoming an influencing factor of a property’s long-term viability as physical climate risks become more common. Tenants are increasingly prioritising comfort, safety and reliability.

Opportunities for climate resilience:

1. Acquisition: Physical climate risks are increasingly being assessed within acquisition due diligence processes, as a way to understand the potential impacts of climate change on the value and long-term viability of a property before purchase. 
2. Planning and construction: During construction of new buildings, physical climate risk and resilience assessments can be used to inform building specifications with resilient design, materials and infrastructure which can withstand the impacts of a changing climate. The challenge is ensuring physical climate risk is fed into the multi-phased process of a building construction project, as well as ensuring all members of the project are aligned on climate resilience objectives. 
3. Operation and maintenance: At entity level, climate resilience is increasingly being added to reporting benchmarks such as GRESB, where the Climate Resilience Indicator encourages wider adoption of climate resilience measures, informed by physical climate risk assessment and scenario analysis. At the property level, building certifications such as BREEAM require evidence of building level practices to manage potential exposures to physical climate risks. Proactively assessing and managing physical climate risks is imperative to avoid growing costs. 
4. Renewal or disposal: Physical climate risk and resilience at the renewal or disposal stage is about how to reduce risk before it is transferred to a new owner. Addressing physical climate risks involves proactively addressing any vulnerabilities or improving asset resilience to make a property more attractive for sale and improve value, circling back to the principles of the acquisition stage.

There is increased prevalence on factoring in physical climate risk assessments and developing strategies for climate resilience across the property lifecycle. The need for climate resilience and future proofing real estate has never been greater.

Further information

Contact Megan Steven or Sarah Brayshaw