Navigating Challenges to Address the Climate Risks for UK Real Estate

Introduction

The landscape of real estate development is undergoing a transformative shift, as climate risk emerges as a paramount concern for Real Estate Developers worldwide. McKinsey's insightful report, "Climate Risk and the Opportunity for Real Estate" (2022), has set the stage for a fundamental recalibration of priorities within the industry. Building upon this insight, the research conducted by UN Environment Programme and Henley Business School in 2021 underscores the tangible threats to property valuations that real estate developers, due to climate risk factors including flooding and hurricanes rising sea levels and wildfires. The implications of these challenges are immense, necessitating a proactive and adaptive approach to climate resilience. In this article, we aim to evaluate the magnitude of physical and transitional risks associated with climate change, investigate the potential root causes for the lack of action as well as propose solutions.

UK Physical Risks Outlook

Real Estate Developers are now increasingly more concerned about climate risks due to the potential impact of the physical risks quickly mounting. These risks tend to have a direct impact on the physical asset health. Yet the climate risks tend to affect more vulnerable countries, the UK faces mounting challenges. Here are some of the most prominent statistics:

Flooding: The Environmental Agency (2009) underscores that more than 5 million properties in the UK are at risk of flooding. This staggering figure is accompanied by an annual cost of damages exceeding £1 billion, as estimated by CIA Landlords (2022). Of these properties, a significant 1 million are deemed to be under considerable risk, according to research by the London School of Economics.
Rising Sea Levels: A report by BBC (2022) paints a concerning picture, predicting that by 2050, a staggering 200,000 coastal properties could face abandonment due to the relentless advance of rising sea levels. The ramifications of this phenomenon are not limited to the properties themselves; entire communities and the real estate market are placed under duress.
Extreme Heat: The UK Climate Risk report (2021) adds another dimension to the predicament, projecting a tripling of overheating deaths by 2050, driven by more frequent and intense heatwaves lasting 10-20 days.

This means that the climate risks require urgent action not only to protect the planet and people but also to protect assets.

UK Transitional Risks Outlook

The physical risks urge the rest of the ecosystem to respond as well, with the Government quicker releasing more stringent regulations; insurers incorporating climate risk in the insurance modelling; banks undertaking risk analysis considering climate risk as a core consideration; and tenants demanding adequate living conditions. We have summarised the core statistics that underpin that below:

Valuation: According to the Bank of England's research in 2022, there is about £5,000 per property valuation reduction due to floods which adds up to substantial amounts on the scale. The projected losses for the banks and insurers resulting from climate risks amount to eye-watering £330BN by 2050 according to Knight Frank (2022), which serves as a stark reminder of the economic toll of climate vulnerabilities.
Insurance: According to the Association of British Insurers in 2020 alone there were around £1.3BN paid out in storm-related insurance claims. Concurrently, the Bank of England's records revealed £ 0.3BN in flood-related claims during the same period, painting a picture of escalating risks and financial implications.
Regulatory Compliance:. The Government has released around 20 changes to Building Regulations in 2022 which underscores the complexity and the rate of change. As the government integrates new standards such as The Future Homes Standard, the pace is expected to accelerate.
Tenant Preferences: According to Knight Frank (2021) an overwhelming 71% of UK homebuyers now prioritise environmental sustainability when making property decisions, creating a compelling shift in demand. The tenants are less likely to purchase less resilient homes that are less inefficient homes, overheat and more prone to flooding.
The prospect of properties becoming un-lettable, un-insurable, and un-investible underscores the urgency of mounting rapid and adaptive responses to climate risks. McKinsey's projections (2022) loom large: a potential 40% reduction in annual returns by 2030 serves as a stark reminder of the severe financial consequences of inaction.

Hurdles to Fast and Adaptive Response

A fast and adaptive response is key to reducing the impact of climate risks and exploiting opportunities. Our research at InForecast shows that this is currently precluded by constantly growing tools and standards (carbon, waste, social value, health etc.) that operate in silos misleading to data fragmentation. The ESG Data fragmentation compels companies to resort to manual processes and spreadsheets. This approach results in poor data quality and operational inefficiencies, leading to increased costs and diminished performance visibility.

The ramifications of this approach are far-reaching. Data fragmentation demands labour-intensive tracking of performance against diverse standards, leading to increased workload and potential errors. Furthermore, poor data quality hampers the visibility of performance, especially at the portfolio level. As highlighted by CBRE (2023) poor data is one of the major challenges for Real Estate Developers to achieve ESG goals. The repercussions are significant, including delayed interventions, higher costs, and potential project delays, as companies struggle to meet ESG goals.

Our Response

That has inspired us to create an InForecast solution that addresses this challenge head-on. Our project management sustainability compliance software for Real Estate Developers provides real-time portfolio benchmarking across any standard, regulation or internal policy. This enables developers to quickly spot underperforming areas for timely climate mitigation actions to meet any requirements by orchestrating the whole process while saving major time on consultancy fees and eliminating late & costly interventions. Standard-agnostic one-click deployment of requirements by discipline & stage enables unprecedented productivity gains and minimises mistakes.

Here is how we aim to bring the industry to the forefront of sustainable development:

Advancing Asset Resilience: InForecast facilitates a proactive approach to asset resilience, ensuring a holistic, complete, and timely response to climate change, best practices, and regulatory mandates.
Minimising Risk: Identifying and addressing underperforming areas becomes efficient and instantaneous with InForecast. Developers can effortlessly check performance against targets, mitigate missed actions, and ensure accountability.
Maximising Labor Productivity: InForecast eliminates the need for labour-intensive coordination, reducing the time and errors associated with setting and tracking targets. The software effectively eliminates the burden of tracking new regulations, bolstering productivity through automated reporting.

Amidst the growing amount of sustainability standards, tools and regulations, InForecast emerges as an essential tool for real estate developers. The imperative of embracing climate resilience is not merely about mitigating risks but also seizing opportunities to build future-proof resilience. By integrating cutting-edge technology with proactive strategies, InForecast empowers the real estate industry to thrive in the face of adversity, ensuring that each development is not only a safe haven but also an exemplar of sustainability.