More investors including climate change in risk analysis

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printed 4/29/19 by Information Inc. Bethesda, MD
NEW YORK – April 29, 2019 – More real estate investors are taking into consideration the impact of climate change on their properties, according to a joint report from the Urban Land Institute and global investment management firm Heitman. The report is based on a series of interviews with institutional investors, investment managers, consultants and other stakeholders to identify how they’re factoring climate risks into their purchase decisions.

“The interviews revealed that while there is growing awareness of the impacts climate change could have on real estate investments, the industry has not yet developed a standardized response,” the report states. “At this early stage, investment managers view insurance as the primary means of financial protection against physical damage from climate events.

“However, insurance will not protect against a reduction in demand for assets in locations seen as vulnerable to climate risks.”

Rising sea levels, hurricanes, wildfires and floods have greatly affected several markets in recent years. In 2017, insurers paid out a record $135 billion globally in damages caused by storms and other natural disasters, according to the report.

Climate events and threats can lead to increased insurance, maintenance and operational costs and a possible decrease in property value, according to the report. More than $130 billion of U.S. real estate is in metro areas that rank in the top 10 percent of risk to sea level rises, according to research from Heitman and Four Twenty Seven, a climate risk analytics firm.

A few of the strategies institutional investors are taking to combat climate risks include:

  • Assessing the physical risks. Some real estate investment managers are completing mapping exercises to understand the current and future risks of climate change to their properties, such as sea level rises, flooding, heavy rainfall, extreme heat, wildfires and hurricanes. Risks unrelated to climate change, such as earthquakes and terrorism, are also factored into these models. As one investment manager told researchers: “We are doing this to be proactive. We want to be able to understand what the upper bound of the value impact is so we can adjust for it with our investment strategy.”
  • Adding protection. Some investors said they were exploring how climate mitigation strategies, such as seawalls, dikes, increased elevation and additional cooling systems, could help better protect their properties.
  • Evaluating insurance coverage. Many investors were proactively looking at their insurance to make sure they were protected. For example, they were looking at insurance partners to help anticipate rising premiums due to climate risks and the availability of coverage. They also told researchers they hoped that, in the future, insurance providers would reward those who are proactive in investing in mitigation efforts to better protect their properties against climate risks.
  • Assessing city-level responses. Investors may be more attracted to cities that are proactive in addressing climate change. Some investors told researchers they were evaluating the city government’s preparedness for climate change. “They are seeking markets where governments have the authority, function and funding to address climate risk, whether at the municipal-government level or through supportive national policies and practices,” according to the report.

Source: “Climate and Real Estate Investment,” Urban Land Institute (April 2019)

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3 Big Mistakes Buyers make:

  1. 1. NOT KNOWING THE NEIGHBORHOOD...ContinuedReal estate always has been and always will be a local business. Know your neighborhood is a cardinal rule in this business. A real estate professional knows what is going on in their local market area. Hire a knowledge, local professional. When we see folks wandering around with a notebook and a list of questions, we know they are the most likely to make a costly mistake. A PROFESSIONAL Realtor, (please note the word professional), can spend 15 minutes listening to your needs and wants, and probably rule out 90% of the local market options, and focus your attention, on the 3 or 4 or 5 communities that will meet your needs, and make sense from both a financial and lifestyle point of view. I am amazed at how many people from out of State, go it alone, end up buying in the wrong community, and come to regret it. I meet people like this everyday, and everyone single one of them will say to me: “I wish we had met you first.”
  2. 2. GETTING STUCK IN AN HOA NIGHTMARE...ContinuedHome owners association nightmares are the stuff of legend in our State. Do not buy the wrong property in the wrong community. A knowledgeable real estate professional can explain to you upfront, the ins and outs of the HOA regulations of the community you are considering, and help you avoid 99% of these potential pitfalls. This is another very costly mistake.
  3. 3. THINKING YOU DO NOT NEED A REALTOR WHEN BUYING A NEW HOME...ContinuedEverybody knows you need a Realtor to represent you, when buying a resale home. Many do not know, you also need a Realtor to represent you, when buying a new home. The new home sales person in the model home works for the Builder, not the Buyer. They are paid to look out for their employer’s interests, not yours. You will not save $1 by going it alone. You will lose money. A lot of money. One of our largest local builders reported 872 annual sales, of which, 762 were handled by Realtors representing the Buyer. That is 87% of the total. The Builder has already factored paying a finder’s fee into the price. The Builder will not rebate $1 of this money back to you. Builders laugh under their breath, when Buyers try this negotiating tactic, even though they will politely agree with you. Professional representation costs you $0, why would you fend for yourself, in a market you know almost nothing about? Buyers know less than 20% of what they actually need to know, to get a great deal. Having gone through the new home buying process hundreds of times with clients, we know all the pitfalls to avoid, and how to make the process go smoothly. Do not go it alone, get professional representation, it costs you $0. Not doing this is the most costly of the 3 mistakes. But everyone has heard the old saying, you can lead a horse to water. We are in the business of helping our customers solve a problem. Our ability to do that, is the sole reason we have a thriving business. We are here to help you through the entire process, and get a great deal.

4 Big Mistakes Investors make:
  1. INCOME... ContinuedThe rental income does not justify the $/sq. ft. purchase price.
  2. EXPENSES... Continued The monthly expenses are too high, relative to the property type and rental income produced.
  3. CAP RATE... Continued The capitalization rate is too low to justify the investment.
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