The Impact of Climate Change of Real Estate Investments

Climate Change Threat to Pakistan

Pakistan is one of the most vulnerable countries to climate change associated risks. According to German Watch, Pakistan has been ranked globally in the top ten countries most affected by climate change in the past 20 years. This is due to Pakistan’s geographical location, as the country is host to deserts, mountains, rivers and has proximity to the Arabian sea. In addition, five rivers expose the country to the threat of flooding and turbulent rain patterns. According to Pakistan Economic Survey, the country lost 0.53 per cent per unit of its GDP to climate change-induced losses worth 3792.52 USD million from 1999 to 2018. According to Asian Development Bank (ADB), in order to mitigate the global cost of climate-change-related degradation, the global economy needs 7 to 14 billion USD per year. Considering the economic damage caused by climate change, it is no surprise that the real estate and allied sectors will also be severely affected by this phenomenon.

 

Real estate sector and the Eminent Threat it Faces from Climate Change

Globally, real estate is the largest asset class with respect to the amount of money invested. However, compared to other assets like stocks, bonds, gold, and crypto, real estate is most vulnerable to climate change-related disasters. The risk of floods, fire, and other natural disasters threatens the global housing and residential real estate sector. In the United States alone, a single hurricane wiped off thousands of houses and residential buildings in a matter of hours. Environmental experts believe that climate change is increasing the risk of natural disasters like floods, hurricanes, storms, and cyclones.

 

Global Properties Facing Climate-Change Related Risks

According to the Taskforce on Climate-Related Financial Disclosures (TCFD), an estimated 35% of real estate worldwide is exposed to climate hazards. An analysis of these properties shows that 17% of properties are exposed to inland flood risk. In addition, 6% are subjected to sea level rise and coastal flooding and 12% face the risk of hurricanes and typhoons.

 

Impact of Climate Change on Property Buying Behaviour

Increasing Investor Awareness

Climate change is gradually becoming a multi-dimensional issue encompassing all socio-economic aspects of the environment. The debate regarding climate change has increased awareness amongst potential real estate investors regarding climate-related risks. Various sources of information like government reports and third-party surveys measure climate-change related risks faced by properties globally.

For instance, in coastal cities like Chicago and Karachi, real estate investors are internalizing information regarding rising sea levels to make forward-looking assessments about the value of a given property. Although it will take some time for mainstream investors to understand how much a property is at risk from a climate-related disaster, if successful, it will lead to the creation of a distinct class of residential/commercial stranded assets. Therefore, risk classification will become a priority for real estate investors.

 

Buyers and sellers discount high-risk properties

Buyers and sellers are discounting those real estate properties that face a higher risk of climate-related disasters like floods, tsunamis, and cyclones. High-risk properties are unpopular amongst real estate investors as they run the risk of increased insurance costs, borrowing costs, uninsured losses, and productivity losses. As a result, more and more real estate investors and home buyers seek ratings and reports for any potential property they tend to buy. With increasing investor knowledge related to climate-change-related disasters, real estate developers now aim to provide their clients with climate risk assessment reports. These reports will allow investors to be aware of the extent of risk a particular property faces from climate-change-related disasters in the near future.

 

Transparency Regarding Climate-Risk Disclosure

Globally, real estate investors are demanding transparency from local governments regarding climate-related risks and disclosure of their potential costs. Investors have also realized that robust Environmental and Social Governance (ESG) compliance regulations for buildings have become necessary to deal with climate-related disasters and risks. To implement ESG regulations globally and in Pakistan, climate-related data needs to be automated and centralized for accurate and effective decision making. Experts believe that the disbursement of climate-related data will be an important indicator in determining the success of a real estate company

 

How can Pakistan’s Real Estate Sector Become Climate-Change Resilient?

With Pakistan’s real estate sector being an important economic growth engine, protecting this national asset from the hazardous impacts of climate change should be the priority of the government. Governments and real estate developers need to collaborate and implement potential solutions to this looming crisis. The real estate sector must encourage climate-risk assessment of properties to protect potential investors from undue distress in the future. The state institutions can also play a pivotal role in centralizing climate-related data to help investors and real estate companies make accurate and effective decisions.