Climate risks and their implications for commercial property valuations

Abstract

PurposeThe authors outline a framework that captures the channels through which physical climate risks could affect cash flows and pricing of income-producing real estate. This facilitates detailed consideration of how the future performance of real estate investments could be affected by such risks.Design/methodology/approachThis is a literature-based investigation that draws on work commissioned by UNEP-FI (Clayton et al., 2021a, b). It extends this work to consider in more detail the channels through which climate risks may impact property performance and the implications for the valuation community.FindingsRecent empirical studies have identified more instances where pricing is reflecting both current and anticipated climate risks. Market valuations cannot properly incorporate climate risk without clear evidence that it is priced by market participants, but valuers can advise clients on the potential for future impacts.Research limitations/implicationsWhile inferences can be made from studies of residential real estate, more research on commercial real estate pricing and climate risk is required to assist valuers and their clients, as well as other stakeholders in the real estate market.Practical implicationsDifferences between a Market Value and an Investment Value context are considered, and how valuers could and should account for climate risk in each setting is discussed with reference to existing professional standards and guidance.Originality/valueThe article synthesises a wide range of literature to produce a framework for the channels by which real estate values could be influenced by climate risk.