Flooding and UK commercial property investment: what is the risk?

Abstract

Purpose – This paper aims to examine the approach of UK institutional funds to considering flood risk to property investments in the light of their fiduciary duty, the widespread floods in 2007 and 2010 and the predicted increase in future incidence due to climate change. It explores the due diligence process and the challenges to investment decision-making and to property valuation. The case is made for further research to establish the extent of UK investment property potentially at risk from flooding, the degree of risk exposure and the way the risk is translated into valuations. Design/methodology/approach – A comprehensive literature review informed the design of interviews with senior managers in major investment funds, their professional advisers and other stakeholder representatives, including environmental consultants, valuers, solicitors, lenders and the insurance industry. Case studies illustrate how the due diligence process is used to identify risks, inform purchase decisions and devise mitigation and management actions. Findings – Property represents about 4 per cent of investments managed in the UK, but there is no clear picture of where and how much could be at risk of flooding. There is a common false assumption among investors that risk levels are unlikely to change and a reluctance to expose an otherwise hidden problem. Originality/value – Property is an important diversification asset in investment portfolios, underpinning individual pension, insurance and savings plans. Prior research indicated flood risk to commercial investment property was under-researched; a need for awareness raising; and for guidance relevant to investors and their professional advisers.