This time of the year could not be more different and unexpected compared to the same period last year. In contrast to the prevailing hot weather in Nairobi over the past 2 months, heavy rains were the more abundant condition then. And when the downpour subsided, a number of home owners and property developers were left with a good deal of expenses in form of repairs and maintenance, and for some real estate companies, court cases.
A more recent phenomenon, the cyclone Idai, which has been termed the worst natural disaster in Sub-Saharan Africa in recent times did much worse and on a larger scale. It will take years to rebuild not only livelihoods but the property destroyed. The culprit in both cases however was something beyond the control of affected parties, but impactfull enough for them to review earlier decisions as well as what the future holds. This is climate change.
The periods of heavy rainfall experienced in Nairobi last year and other extreme weather events in different parts of the world adds another layer to the risks to ROI. Investors are now also more exposed to the elements of nature, and these are expected to be more pronounced as the effects of climate change continue to show.
This is the theme of a new study carried out by US-based Urban Land Institute (ULI) to evaluate the impact of climate change on real estate investments. The report found that the threat to asset valuation resulting from climate change has never been more real but the greater concern is the complexity of climate risk and its mitigation.
“Understanding and mitigating climate risk is a complex and evolving challenge for real estate investors,” said ULI’s CEO, Edward Walter. “Risks such as sea level rise and heat stress will increasingly highlight the vulnerability not only of individual assets and locations, but of entire metropolitan areas.”
Investors respond by changing how they deploy capital based on the potential risks. The report says that capital flow is expected to follow locations and assets perceived as more secure from climate risks while high-risk assets will eventually see a mark down in price by the markets.
According to the report, some of the strategies investors are using to future proof their investments under the prevailing circumstances include mapping physical risk for current portfolios and potential acquisitions, incorporating climate risk into due diligence and other investment decision-making processes, portfolio diversification and insurance among others.