A new report from the Urban Land Institute (ULI) and Heitman LLC (Heitman) has highlighted the need for a greater understanding of the investment risks posed by climate change.

Based on insights from more than 25 investors and investment managers in Europe, North America, and Asia Pacific, Climate Risk and Real Estate Investment Decision-Making explores current methods for assessing and mitigating climate risk in real estate, while also outlining the proactive measures by Heitman and other leading firms to stay at the forefront of mitigation strategies and accurately price risk into investment decisions.

According to the report, real estate can be financially impacted by physical risks such as catastrophes, as well transitional risks such as regulatory changes, availability of resources and attractiveness of locations.

ULI Global Chief Executive Officer W. Edward Walter said the risks had the potential to cause higher operational costs and declining property values.

“Understanding and mitigating climate risk is a complex and evolving challenge for real estate investors,” he said.

“Risks such as sea-level rise and heat stress will increasingly highlight the vulnerability not only of individual assets and locations, but of entire metropolitan areas.  

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"Building for resilience, on a portfolio, property and citywide basis, is paramount to staying competitive.

"Factoring in climate change risk is the new normal for our industry.”

The report states that real estate industry as a whole has just begun the development of more advanced strategies to recognize, understand and manage risks, and for most part presently relies on insurance to cover the majority of the shorter term, financial oriented risks related to climate change.

That, along with the likelihood of future changes in insurance availability and costs, is prompting a growing number of investors and investment managers to explore new ways to build climate risks into their investment processes, including: 

• Mapping physical risk for current portfolios and potential acquisitions;
• Incorporating climate risk into due diligence and other investment decision-making processes;
• Incorporating additional physical adaptation and mitigation measures for assets at risk;
• Exploring a variety of strategies to mitigate risk, including portfolio diversification and investing directly in the mitigation measures for specific assets; and
• Engaging with policy makers on local resilience strategies.

Heitman Chief Executive Officer Maury Tognarellie said opportunities were emerging across the industry for investment managers and investors to better assess climate risk and navigate the potential impacts of climate change on assets and portfolios

“More accurate, forward-looking data on the risks associated with climate change are becoming available, positioning the industry to incorporate climate risks into how investments are underwritten and portfolios constructed," he said.

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"Ultimately, we hope this report will spur discussion among real estate industry participants with the end-goal of improving the investment outcomes for our clients and constituents.”

Climate Risk and Real Estate Investment Decision-Making was prepared through a collaborative effort between Heitman and ULI’s Center for Sustainability and Economic Performance.

The center provides leadership and support to real estate and land use professionals to invest in energy-efficient, healthy, resilient, and sustainable buildings and communities.

The report will be presented in Asia Pacific at the ULI Asia Pacific Leadership Convivium on March 4th in Shenzhen, China.

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