Investors and investment managers are increasingly focusing on developing and embracing tools and techniques to better assess climate risk and resilience at both asset, portfolio, and market level. Going forward, markets with a proactive approach and a continuous focus on sustainability and climate risk mitigation strategies will be frontrunners in terms of attractiveness as investment destinations. This implies is that, in the future, assets and locations that are considered less affected by climate change or more resilient to it could well benefit from pricing premium. In the Nordic, both historical legacies and future strategies are securing a solid foundation for ensuring the commercial real estate market’s robustness.
“Since risks associated with climate change can have substantial financial implications, the number of investors and investment managers that are developing a proactive approach to address climate risk is increasing. Physical risks, such as extreme weather conditions, flooding and storms, can result in upward pressure on insurance premiums, higher CAPEX and OPEX, as well as a decrease in the liquidity and value of buildings. On the other hand, transitional risks (including economic, political, and societal response to climate change) can lead to a decrease of the appeal of metropolitan areas and in worst cases, individual assets becoming obsolete”, says Dragana Marina, Head of Research at CBRE Denmark. She adds: “Current market praxis has not many examples of investors’ pulling back from entire markets completely because of climate risks. But following investors’ increased understanding of climate risks, their investment decisions will become more climate-conscious”.
An important consideration is the ability to distinguish the potential impacts of climate risks on asset, portfolio, and market level. While sustainability largely focuses on operations, climate risks can ultimately have a greater effect on property valuations. The objective is to understand how climate risks could affect asset liquidity and, as a result, returns in both income and capital growth.
"Pricing climate risk and resilience is far more complex than pricing energy efficiency and carbon reduction. There is a general understanding that the commercial real estate industry needs standardisation of the ‘currency of risk’. Because measuring something first requires the variable to be defined. And this is what is very challenging. There is an impact on the property level, an impact on the related infrastructure that property depends on and a market impact. If a whole neighbourhood is flooded and your property is up on a hill, you might be ok in terms of damages, but you are to take a hit in terms of property’s ability to function, impacting thus its value".
Climate risk mapping tools will increasingly be used to screen current assets, portfolios, and potential new acquisitions. These tools will allow investors to gain a better perspective of the risk profile and exposure of each asset and portfolio. Based on the data, vulnerable areas can be selected and, through further due diligence, determine if risk factors have been mitigated at property and market level. For assets flagged as high risks, further due diligence process might assess the need for additional CAPEX, which then will be reflected in property valuation. Ultimately, operational risk can result in lower valuations, which is particularly important for investors considering longer time horizons.
And this is where the Nordic region really can stand out. A resilience approach applied across the Nordic region focuses on how to build capacity to deal with unexpected change, allowing for a more successful mitigation of future impacts. This is believed to further strengthen the overall attractiveness of the region as an investment destination.
“Nordic countries are consistently being ranked among the most resilient countries in the face of rising climate risks. The ability to safeguard this status will be of one of the cornerstones in ensuring continued liquidity of the investment market”, concludes Dragana Marina, Head of Research at CBRE Denmark.
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CBRE Group, Inc. (NYSE: CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world’s largest commercial real estate services and investment firm (based on 2020 revenue). The company has more than 100,000 employees serving clients in more than 100 countries. CBRE serves a diverse range of clients with an integrated suite of services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our global website at www.cbre.com.