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Vietnam

Climate change – threat or opportunity for real estate investors?

“After the last major flood event in Brisbane, some buildings were unable to operate for up to two weeks. The cost to the building owner and tenants was huge.”


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A much discussed topic on the global agenda, there is a general consensus that our planet’s weather patterns are shifting. But can opportunity be borne from the threat and can real estate investors harness climate change to improve the resilience of their assets and businesses?

While awareness of the issue is growing, it seems that many are still unprepared – it was recently reported that only five percent of European pension schemes have considered the investment risk posed by climate change. The study, by Mercer, polled more than 1200 institutional investors across 13 European countries, with assets totalling €1.1 trillion. Although engagement with the issue is still low, the number of schemes addressing environmental, social and governance issues is on the rise. For those that are, nearly a third are driven by financial materiality, while reputational risk drives another 20 percent.

And, as severe weather events –flooding, heatwaves, storms and cyclones, fires – are increasing in both frequency and intensity, JLL’s Australian Director of Sustainability, Simone Concha, says that commercial real estate investors will be particularly exposed to the threat.

“The main risk posed by heatwaves is mechanical system capacity. For example, shopping centres are a place of refuge and people are encouraged to go to their local shopping centre during heatwaves, but what happens when too many people flock there at once? What happens if the air conditioning isn’t designed to operate under such extreme conditions?” she asks.

“After the last major flood event in Brisbane, some buildings were unable to operate for up to two weeks. The cost to the building owner and tenants was huge.”

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Climate change has the ability to impacts real estate investors on multiple levels – consider the cost to recover from a natural disaster, the time a building is non-operational, and the insurance costs to insure the building against increasingly extreme weather events.

While the threat of climate change to physical assets is very real, Matthew Clifford, Head of JLL’s Asia Pacific Energy & Sustainability Services, believes that the industry must also increase its awareness of reputational risk.

“While no one wants to look like a slouch in terms of climate change risk awareness, I suspect many investors are still more focused on the potential for physical impacts,” Clifford says. “In a way, that makes sense – property is a physical business, based on bricks and mortar – and it’s easier to plan for floods, extreme heat, or power shortages than it is to assess the impacts of something less tangible like reputational risk.”

“However, property is also heavily dependent on investor confidence, and anything which could undermine that confidence should be addressed. Mature investors are assessing and acting on both – physical and reputational risks.”

Concha agrees, saying early movers in this field – including Stockland, Charter Hall and Lend Lease – have all performed resilience assessments and created ‘climate adaptation plans’ for their real estate portfolios.

“It is a risk mitigation strategy, so they identify the risks and plan how and when to allocate capital expenditure to minimise those risks,” Concha says. “They also develop emergency disaster plans to more safely and efficiently return to operations in the wake of a disaster.”

JLL’s team advises investors to overcome their reluctance or scepticism about the impact of climate change and move to address it sooner rather than later.

“The key to action on this topic is giving investors very tangible advice on the steps to take in the immediate term,” Clifford says. “It’s useful to think about potential impacts in 20-50 years, but there are also near-term issues which demand a clear plan and an instantaneous response. Sadly, these extreme events are becoming more common, so the need to plan and act early is even more pronounced”

Concha says investors should be asking for Resilience Assessments or Climate Adaptation Plans for buildings they currently invest in, or plan to invest in.

Clifford agrees. “To me, the key is to see this as an opportunity, not something you are forced to do by the threat of regulation or fear of reputational risk,” he says. “Climate change risk assessments and action plans should be no different to any other risk assessment done across a property business – a chance to identify weaknesses in the current approach, and to improve this.”

“This is a common-sense approach that is more likely to yield better investment results over the long-term.”

And there is evidence that early adopters of this approach have been rewarded by the market.

“Earlier this year, Hammerson pledged to become ‘net positive’, a first for any real estate firm globally,” Clifford says. “Closer to home, we’ve seen organisations like AMP make strong pledges around climate change, and they were rewarded with large, direct investments from like-minded investors.”

“The benefits of addressing climate change may vary by organisation, but it’s clear that the first movers are well and truly moving. Now it’s a matter of whether the rest of the pack wants to move too, or risk being left behind.”

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