Material risks for real estate include rainfall-induced flooding and extreme heat events, leading to higher repair costs.
Climate change poses serious risks for real estate in Singapore, potentially causing a 46% rise in physical damage losses by 2030 due to flooding.
The material risks for real estate are rainfall-induced flooding and extreme heat events, says Entela Benz, founder and CEO of Asia-based climate-tech company Intensel. Benz’s firm conducted an analysis of 25 assets spread across Singapore, and warns that a “worst-case scenario” of a 3.3°C to 5.7°C rise in temperatures by 2100 will bring a 58% rise in physical damage losses due to flooding by mid-century.
Even on a “best-case” pathway, we may see a 17% increase in losses by 2030 due to the increased severity of flooding, says Benz to The Edge Singapore.
The scenario assumes no mitigation or resilience measures are taken.
About 23% of the global population is directly exposed to flooding of more than 0.15m, according to a 2020 World Bank report. By 2100, mean sea level around Singapore is projected to rise by up to 1m, based on projections by the Intergovernmental Panel on Climate Change (IPCC).
But sea levels could rise up to 4m or 5m if compounding effects are taken into account, says national water agency PUB. These include daily tidal activity, land subsidence and storm surges. On average, Singapore experiences two to four storm surges each year.
In March, PUB launched a $125 million research programme dedicated to strengthening Singapore’s coastal protection and flood management capabilities. But beyond government, the market today has yet to price in these risks, says Benz. “More firms, including real estate companies and developers, should be conducting climate risk analysis on their portfolio in order to de-risk their portfolios, or to create new products and instruments that price risks accordingly.”
Physical climate risks, like extreme weather events, and chronic risks, such as sea level rise, are a concern for real estate owners, says Benz, who holds a PhD in financial asset management and engineering from the Swiss Finance Institute.
Acute hazards such as extreme precipitation and winds may result in actual physical damages to property. In addition to costs incurred from repair works, property downtime will lead to reduced occupancy and rental income. In the longer term, chronic hazards like extreme heat may impose additional maintenance and operational costs, [such as] higher cooling demand and construction delays, says Benz.
Losses emerging owing to physical risks will exceed US$56 trillion in 2050 and wipe off 14% of GDP under 3.2°C increase in global temperatures, according to a 2021 Swiss Re report. Even in a net-zero world, we will still see losses of around 4%-5% of GDP by 2050.
Developers could face additional costs should they decide to undertake flood protection within their buildings or retrofit their cooling systems, she adds. “However, it will be challenging to say how valuations may be affected as these ultimately depend on any mitigation measures taken and the market ultimately pricing-in these risks.”
For example, annual costs to repair damages to properties in the US are projected to rise 25% from 2022 to 2052, according to research by First Street Foundation released in 2021.
With increased risk of floods, asset owners will increasingly find it more challenging to make a profit on properties, secure insurance coverage and secure bank loans at at-risk locations, says Benz. “For example, properties along the coast of Florida or along the Sun Belt in the US [are] potentially overvalued and may soon find themselves uninsurable as investors and insurers gradually raise premiums or stop offering products. Rising insurance costs may negatively affect the affordability of housing in some regions.”
Compared to properties in other coastal cities, such as those along the coasts of Vietnam, properties in Singapore are more likely to be able to mitigate and withstand the effects of any inundation, says Benz, thanks to advanced drainage monitoring systems, infrastructure and capacity. “However, beyond Singapore, building in mitigation and resilience plans would be an urgent task for many properties throughout Southeast Asia.”
To avoid stranded assets that may become uninsurable, real estate owners “urgently” need to undertake climate risk assessments to identify the impact of multiple hazards on their properties, says Benz, a former fixed income strategist at UBS Investment Bank.
Asset owners should take stock of their existing building-level information and close any data gaps, she adds. Some key questions for owners to consider in any analysis are: what are the most prevalent physical risks across my portfolio; how much of my portfolio is located in areas of high physical risk; what damages and losses might result; what are potential losses in revenues or impacts on valuation; and what mitigation or risk management practices have been taken and will be required?