How Asia’s real estate investors are addressing physical risk
Real estate portfolios in Asia are increasingly vulnerable to climate change, what steps are investors taking to mitigate the risks?
In September 2023, Hong Kong witnessed its heaviest downpour in 140 years. The rainstorm associated with Typhoon Haikui caused loss of life and damaged property and infrastructure. It prompted a “black rainstorm warning” – the highest warning level issued by authorities. Which stayed in place for over 16 hours – the longest duration in history.
The event served as a reminder that when it comes to the physical risks of climate change – Asia is at the frontlines. From coastal flooding and tropical cyclones to extreme heat and rising sea levels – a plethora of physical risks surround the region in the present and in the future.
As Asia is facing the brunt of physical climate impact, so too are the region’s real estate investments. Reports published by REITs and developers across the region offer insights into how Asia’s real estate investors are identifying and mitigating the financial impact of physical risk
The financial footprint of physical risk
For REITs across Asia, physical risk is undeniably financially material. Materiality proceeds from expected revenue losses and increases in costs of adaptation if natural disasters and extreme weather events become more frequent.
To address physical risks, real estate investments need to be resilient. Resilience, however, is a costly endeavour. REITs across Asia are expecting a higher capital expenditure bill in the near future.
“Higher costs may be incurred to weatherproof the assets and business”, says AIMS APAC – a Singaporean REIT.
High costs of flood control infrastructure, an example of such weatherproofing, is a common theme across REIT risk assessments.
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An assessment by CapitaLand Investment – another Singaporean REIT – found that some properties are located in coastal and high flood risk regions. Consequently, the company expects a significant increase in capital expenditure to address physical risks.
Similar assessments were undertaken by Prosperity – a Hong Kong based REIT.
“Tropical cyclones are found to be the physical climate risk with relatively more impact across the Prosperity REIT’s portfolio, with the main financial impact arising from additional costs to restore assets due to damage caused by extreme weather event”, the company concluded.
In addition to higher capital expenditure, REITs are expecting higher insurance premiums over the long run.
C.K. Asset Holdings, another Hong Kong based REIT’s physical risk assessment reads:
“There may be a higher frequency and severity of extreme weather events, which could potentially damage the Group’s assets or result in increased expenses for insurance premiums”.
Most REITS expect an increase in insurance premiums in the long run. However, this expectation is dependent on the degree of temperature rise under different scenarios.
Financing adaptation
A few REITs are incorporating adaptation finance into their conversations with global capital markets. Take for instance, Keppel - a Singaporean REIT. Keppel’s $9.2 billion portfolio is geographically diverse and includes assets across Singapore, South Korea, Japan and Australia.
In June 2024, the trust published a green financing framework. It establishes a guideline for raising and using capital from global bond markets. The proceeds, the trust says, will be used for investments that “sustain, improve and/or enhance properties”.
The list of eligible projects includes adaptation infrastructure such as enhanced drainage systems, water level sensors and building elevation.
Scenario planning
The linchpin of physical risk assessment in Asia is scenario planning. On average, REITs across the region are preparing for three scenarios: 4℃, 2℃ or 1.5℃. The financial impact of physical risk differs in each case.
Each scenario refers to the expected limit of global warming in the long run (usually by 2050). REITs tend to agree that the blend of physical and transition risks changes under each scenario with physical risk becoming more material under the 4℃ scenario.
For Japan’s Comforia Residential REIT – which owns 165 residential properties primarily located in Tokyo – the 4℃ scenario significantly increases the financial impact of physical risk:
“Under the 4℃ scenario, in which little progress will be made in decarbonisation, CRR expects damage to its proprietary properties due to increased severity of extreme weather events and resultant increases in repair expenses”, the company says.
The implication being that the financial impact of physical risks on real estate portfolios in Asia is linked, perhaps unsurprisingly, to the pace of Asia’s decarbonisation.
For Asia's REITs, physical risk is financial risk. As extreme weather events become more severe and frequent, only in Asia but beyond it, how Asia's real estate financiers address physical risk may well set a precedent of global significance.
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