27 April 2022
How to factor climate risk into property investment
Arming yourself with the right data is critical according to our co-founder, Mickael Roger
We know there’s a lot to think about when you decide to invest in property. That’s why we created the PropHero digital platform. Our mission is to make property investing simple, transparent, stress-free and more profitable.
To choose the right investment property for you, you need to understand how your return could be impacted by things like price fluctuations, interest rate rises, periods of tenant vacancy and oversupply of similar rental housing stock.
PropHero’s models already do all that hard work for you.
But there’s an issue that hasn’t traditionally been considered, and it’s something that real estate investors can no longer afford to ignore, so we’ve been working hard to factor it into our analysis.
It’s the climate.
As extreme climate events become more commonplace, they pose an ever increasing risk to property investors. So what do you need to know? And how can PropHero’s data-driven approach help your due diligence?
Climate change is accelerating – fast
“If you own real estate in vulnerable areas, you should be aware that the past is becoming an unreliable indicator of the future. Events that may have taken place every 100 years are now likely to happen every 10 years – and that changes everything.”
The latest report of the United Nations Intergovernmental Panel on Climate Change has shown how the incidence and intensity of extreme weather events are likely to accelerate alarmingly over the coming years. Much faster, in fact, than we had originally anticipated.
While implications for our health, lifestyle and livelihoods have been well documented, recent studies go further to expose the high risks to infrastructure, buildings and homes if climate change continues unchecked.
And as heatwaves, droughts, wildfires and floods become more frequent and extreme, real estate investors need to proactively take climate change threats into account when making decisions about purchasing a property.
Why insurance isn’t the answer
“The truth of the matter is that the best insurance you can get yourself is to buy in the right area.”
You might think it’s logical to look at insurance as an answer to the problem. However, when it comes to climate risk, you can’t just “insure” the problem away.
As extreme climate events hit certain regions with more frequency and force, the cost of insurance is already eye-wateringly high. The growing burden of claims for insurance companies could cause future premiums to soar to levels that totally outweigh the benefits of investment.
In reality, even if you do have insurance, there’s a lot of time and hassle involved in rebuilding or renovating after an adverse event. Your property may be uninhabitable in the short term and, for investors, that means a loss of rental yield.
Unfortunately, some properties may even become uninsurable.
Looking at climate risk as a variable in your investment strategy
“While some regions and suburbs are likely to become riskier, others within relatively safe zones are likely to withstand many of the worst effects of climate events and provide an opportunity for property investors.”
While the news might seem grim, there is a definite silver lining for real estate investors.
Climate change shouldn’t put you off property investing, rather it should instead be something to consider when planning your investment strategy.
Climate will naturally affect some areas and suburbs more than others. When you know “which is which”, you can make an informed choice.
And looked at from this viewpoint, proactively buying in climate-safe areas could do more than limit risk – it could actually provide a better return for savvy investors.
This clearly presents a distinct opportunity for property owners. As people make choices about where to buy and rent, they will look for locations that are protected from climate risks.
Investing now in areas that are less likely to be affected by climate change will give you a headstart in building a future-proof property portfolio.
PropHero helps you weigh the risks and make the right decision
“Any investment, including property, comes with risks attached. What’s certain is that it will remain an effective way to build wealth – even in the face of climate change impacts.”
As a data-driven company, every property PropHero selects has been considered through the lens of over 200 key variables. Collectively, they help identify the investments that best support each client’s particular investment focus.
Importantly, our team works with insurance and data providers to perform extensive mapping of areas most at risk from adverse weather events and we’ve made it a priority to include several climate-related variables in the mix of factors we apply to select the best properties.
From there, we go further by adding an additional buffer to guard clients not only from investments that could be at risk now, but also those that will be at risk in the next 10 or 20 years.
Our data-led approach delivers confidence.
We believe the conscious decision not to invest in many areas that pose a risk to our clients will ultimately benefit them in the long term.
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