Climate Change is for Real (Estate)

On 9 March 2023, Bouwinvest Real Estate Investors hosted the first Red&Blue Focal Point Meeting in Amsterdam, which focused on the challenges of mapping real estate asset values at risk due to climate change. Eighteen partners from different fields of expertise in research and practice exchanged their views on the topic of climate risk assessment for the built environment. Experts represent a range of domains, including real estate investment and insurance, urban climate resilience policymaking, GIS and spatial analysis, climate science, and climate resilience engineering. The meeting was held with a shared purpose: to better understand the challenges and solutions in developing real estate climate risk assessment models and decision-making processes, with eye towards aligning activities between relevant knowledge and practice domains.

The session was opened with a short introduction to the interdisciplinary objectives of the Red&Blue program, followed by an insightful presentation by the Bouwinvest team of experts, who explained their motivation for hosting this meeting. ‘‘We are all in need of a more common language around the challenges of climate risk in the built environment’’. Aligning with its mission, Bouwinvest has been exploring ways to assess and address climate risks within its investment strategy and extensive asset portfolio, which includes assets in both the Netherlands and abroad.

Bouwinvest’s latest climate risk assessment models have been developed based on public data provided by the Dutch Key Registry and the Climate Impact Atlas. The Dutch Key Registry forms a foundation for the national spatial planning policy and decision-making processes by providing data of multiple subsurface domains (e.g., topography, addresses, buildings, individual persons, etc.). The Climate Impact Atlas maps climate-driven hazards such as flooding, waterlogging, drought and heat in the Netherlands.

While presenting their approach, Bouwinvest underscored a key message: asset values are at risk – this demands actionable climate risk insight. A generative two-way exchange between participants followed this presentation. Five key themes emerged over this meeting.

1 – Divergent Institutional Risk Assessment Approaches May Require Standardization

There are no one-size-fits-all approaches for assessing real estate climate risks today. Investors, asset managers, insurers, and other key actors rely on several assessment tools and approaches – some developed in house, others purchased from third-party vendors, like reinsurers and risk-rating institutions. These tools have a variety of differences, limiting the comparability between institutions, and by extension their influence on real estate investment decision-making. For example, some assessment approaches define risk in relation to potential physical impacts but may insufficiently assign probability (and probable losses) to risks, or may be based on differing return periods. The quality and availability within and between countries also varies widely.

Real estate climate risk assessments also include qualitative appraisals that extend beyond mapping and modelling approaches. As investors evaluate assets, they also increasingly look beyond their asset to evaluate the resilience of local neighbourhoods and urban regions. This requires consideration of a wide range of factors, ranging from the robustness of building codes to larger infrastructure systems, spatial planning and market-level economic resilience. Experts observe that this variety of approaches for managing risk require scrutiny, which raises questions: Are existing climate adaptations initiatives well organised and dependable? Should real estate investors help to improve them, and how?

As an illustration of these geographical differences, experts compared distinctive approaches to managing real estate climate risk found in the Netherlands with the United States. While US real estate markets are more dependent on insurability, the Dutch system focuses much more on public infrastructure to manage flood risk, for example. Investors have varying degrees of sensitivity to these differences depending on the composition of their portfolio. For those with more exposure to the Netherlands, there is less concern about the disruptive potential of (un)insurability for now: “Insurance premiums can go up in high-risk areas, but if we can prove that our assets are climate proof, premiums will remain low.” For more internationally-exposed investors, these issues raise pressing strategic questions.

The meeting revealed that individualized or isolated approaches to real estate climate risk assessments may lead to varying and problematic risk assumptions, scenarios, outputs, and outcomes. Distinct risk perceptions and assessment approaches across and within countries, and between stakeholders, currently do not deliver outputs that everyone can buy into. At minimum, there is a strong need for at least some degree of standardization regarding the source, selection and uses of data, and regarding relevant assessment criteria.

2 – Data Quality Poses Global Challenges

What horizon should we use in our risk assessment? What equations are behind the climate models and risk assessment tools? What is origin of the data? In response to these questions, experts agree that data quality and availability pose a big challenge for more sophisticated investment decision-making in the Netherlands and worldwide.

For example, the Climate Impact Atlas offers one of the few reliable (integrated) datasets in the Netherlands. Globally, the US has datasets available that are larger than those in countries like the Netherlands. However, many other countries lack reliable datasets, and it is a crucial challenge to make that data available across different countries (e.g., on an EU-level). Municipalities are also key players in this in many contexts. For example, Australia is one country where the data provided by municipalities are used by stakeholders. Experts also reflected on the uses of larger scale, lower resolution data, versus more granular, higher resolution local data. In general, local data are preferred over global data when available – although this varies substantially between regions. Investors emphasised that local data yields more robust assessments that they can take to the board room for decision-making.

In terms of data reliability, it is difficult to compare datasets worldwide due to differing accuracy levels across countries, scales, and models. This adds complexity to modelling, as it becomes hard to benchmark outcomes. Another issue is the applicability of global data for regional or local scales. For instance, it has been demonstrated that some global data used by investors to assess risk in the Netherlands may fail to consider extensive local water management systems in place, which substantially reduce flood risk in the region – in turn offering incomplete risk assessments to foreign actors less familiar with the context. Given these issues, the experts concluded that working towards a common dataset library—most preferably an international platform covering key regions—with high-quality data is crucial.

3 – Climate Risk Insights Raise Questions About Actionability

Real estate experts tend to agree: while existing climate risk assessments provide at least some asset-level risk insights, many fundamental questions remain about their actionability. What should we do with the outcomes of the current models? What actions do asset and investment managers need to take? What kind of additional information do we need to propose actions? Participants concur that a shift from gross risk to net risk, one that factors in building-, area-, and region-scale risk mitigation, is a crucial step forward for more sophisticated understanding and intervention. By extension, actionability extends beyond the asset level, to addressing risks at the most appropriate scale depending on context. This in turn depends on the quality of coordination between stakeholders across sectors and scales. Many experts share a goal to build more collective capacity to assess (net) climate risk and to co-strategize on risk management across the real estate value chain and different spatial scales, from the asset-level to neighborhoods and regions.

4 – Securing Public-Private Knowledge Exchange Is Essential

In line with the above, stakeholder collaboration is remarkably important for many of the experts at the table. How do public and private sector stakeholders engage with each other in decision-making processes? The extent to which public and private bodies can jointly come up with arrangements and programs to manage climate risk across scales and relevant time horizons poses a key challenge looking ahead. This poses no small challenges given that public-private coordination differ widely between countries.

For example, in the US, this coordination largely takes place through relatively de-centralised, private property market-driven, and localised processes. In the Netherlands, discussions between the public and private sector about climate risks take place at multiple levels, although whether or not this leads to effective joint decision-making processes is as yet unclear. On the municipal level, private stakeholders in the Netherlands would also like to know whether the Dutch cities have longer-term strategies for high-risk areas (e.g., for the next 25 years). This way, private investors can estimate the net risk around assets, and analyse their dependency on investments by public actors at the area level. The questions raised during the expert meeting point out that public and private stakeholder exchange on this topic is still at an early stage in the Netherlands.

However, there are clear ambitions to facilitate further interaction, built on shared recognition of untapped co-benefits. Private investors and lenders expressed a need to jointly reassess existing standards on flooding and other climate hazards. There is currently not much cooperation on existing asset and infrastructure maintenance plans, and there are untapped opportunities to further integrate physical climate risk management in this domain. Collaborations like this could lead to a combination of public and private investments and that enable society to tackle climate risk issues more effectively and efficiently.

Experts touched upon a very important issue: social equity in the context of climate adaptation. Apart from the physical impacts of climate change on our infrastructure and buildings, how do we deal with the impact these hazards, and our efforts to mitigate them in the built environment, will ultimately have on communities and individuals, including the most vulnerable in our society? This leads to questions of where and how real estate stakeholders should measure people-centred risks alongside asset-centric approaches, and how this data should be collected and connected.

As one example, experts mentioned that KNMI measures heat stress in Amsterdam with a sensor located at Schiphol airport. But what about measurements of heat stress in other urban areas, like those with older assets and more vulnerable populations? The group also reflected on variety types and degrees of vulnerability and adaptive capacities within Dutch cities. For example, high-income groups can more easily evacuate during emergencies or relocate after a disaster, but lower-income communities will have substantially fewer opportunities to do so. Finally, it is important to consider how real estate investment decisions related to climate risk intersect (inadvertently) with societal challenges, like rising housing affordability or housing quality issues. While it may be prudent for an investor to pull their investments from a high-risk area, will long-term residents in that area have access to resources to reduce their risks or relocate? Failure to address these challenges through integrated real estate and infrastructure strategies can become a significant and destabilizing factor in society, and requires further consideration in the research program and in the public domain.

The Final Word

Real estate climate risk assessment represents an important fast-developing domain of practice. Real estate industry experts expressed a shared interest in assessing how their portfolios and assets can be affected by the climate risks. Yet they tend to use divergent and at times incompatible assessment tools, based on a variety of underlying data, model approaches, scenarios, scales, and horizons of concern. The experts at the table agreed that this individualised assessment approach needs to be complemented by collective and potentially standardised approaches that public and private actors across the real estate value chain can build on. This would benefit investment decision-making greatly, allowing stakeholders to arrive at shared understandings of climate risks, and to identify integrated responses that deliver collective strategies that are effective and equitable.

More on Focal Point Meetings

Focal Point Meetings are expert exchanges that address specific thematic topics within the broader realm of real estate and infrastructure climate risk management. They are organised by the Red&Blue team to provide opportunities for reflective, “outside-in” dialogue between societal partners and researchers. This meeting included representatives from eighteen institutions participating in the Red&Blue program, including real estate investors, lenders, asset managers, and insurers, public sector representatives, climate science data providers, and academic researchers from climate science, engineering, urban development, and governance backgrounds. More information about Red&Blue program researchers and collaborators is available here.

Want to Dive Deeper?

The Urban Land Institute and Heitman’s real estate investment and climate risk series reflects on several of these issues in greater detail. The third and most recent report in the series, authored by Red&Blue Co-Lead Zac Taylor, outlines a process assessing complex real estate climate risks within the investment decision-making process. It is freely available here.

Acknowledgements

The authors would like to thank Bouwinvest experts Rutger de Koning and Robert Mens for their great support in co-convening this meeting, and for reviewing this report.

Authors: Abdi Mehvar, Tom Daamen, Zac Taylor, Ellen van Bueren