This week has seen climate change and, in particular, extreme heat push the other myriad concerns facing the UK to one side.
While the real estate industry has been grappling for some time with its need to reverse the massive impact it has on the country's carbon emissions, the destruction to buildings, including the more than 40 destroyed by fire in London alone, and the havoc caused to the transport network by this week's record-breaking temperatures will have brought the imminent risks faced by property owners into sharp relief.
There is clear consensus that such record temperatures are going to be increasingly common, and that the UK is not prepared in many areas, especially property. XDI 1000, which provides an independent analysis of the physical climate risk to more than 1,300 listed companies on eight major stock exchanges, has recently predicted a threefold increase in commercial property damage from climate related risks by 2050.
According to a report for Researchandmarkets.com, gross written premiums in the UK commercial property insurance market grew 15.9% to reach a record of nearly £7 billion in 2020. This growth was attributed to a significant hardening of rates in the market, while demand for policies experienced a slight increase. The claims market was particularly affected by weather-related claims as storms Ciara, Dennis and Jorge hit the UK.
Savills Earth director Chris Cummings says the last two days have proven – if anyone was in any doubt – that excessive heat events increase the physical, liability and transitional risks faced by UK property.
"The impact of heat stress upon building materials and systems that are designed to lower maximum temperatures has the potential to damage or compromise existing structures, bringing physical risk to an asset’s value," Cummings says.
Donna Rourke, ESG director at BNP Paribas Real Estate, says climate change is often seen as a problem for the future but this week has shown that "we are dealing with its impacts now".
"This just compounds the need for investment into a sustainable built environment, where cities, towns and infrastructure can continue to function," she adds.
Rourke says the focus must remain on mitigation through improving energy efficiency of buildings and minimising the carbon emissions of development. "Investment in portfolio improvement and technology solutions is crucial."
Savills' Cummings points out that homes in the UK have historically been built to retain heat, and have only relatively recently begun to address overheating.
Insurer Zurich UK this week again warned that the UK's permitted development rights revolution of recent years, which has seen swathes of offices converted to homes, has had the effect of creating homes vulnerable to extreme heat, thanks to poor ventilation.
Zurich says that the removal of planning regulation on conversions means the glass curtain walls and floor-to-ceiling windows popular in office buildings have often been retained and they are notoriously bad at keeping out heat. These houses also tend to be located in heavily developed commercial areas, which suffer more from over heating.
Paul Redington, Zurich's major loss property claims manager, says developers need to ensure that retrofitted buildings are designed with increased ventilation and shading to keep temperatures down. In a statement he said: "Building more affordable housing is a priority but we must avoid creating swathes of homes unfit for a rapidly warming world.”
Office-wise while prime air-conditioned offices provide relief for those who can brave public transport to get to them, Cummings says the majority of people’s workplaces across the country are not built to the same specification and as a result are exposed to heat stresses that could create a liability risk for owners and operators.
Cummings says Savills judges the "stranding potential" of an asset based on what point in time it will become an unviable or untenable proposition for an occupier or investor due to transitional macro-events.
"Alongside carbon emissions and energy efficiency targets, the resilience of an asset to climate events, such as the recent heatwave, could be one of the triggers which renders a building stranded."
The Bank of England has previously outlined the risks that climate change poses to financial stability under the heading of "physical", "transitional" and "liability".
Breaking down these three risks as they relate to real estate, Savills says the physical risk is the easiest to immediately understand, covering the economic costs of natural disasters caused by climate change. Floods, storms and extreme temperatures damage buildings with increased flooding typically the dominant concern in the country, particularly for homes on floodplains and low-lying coastal towns.
Savills points out that even if the temperature only rises by the unavoidable 1.5°C, UK sea levels will keep rising, and so measures will have to be taken to protect property from damage.
Savills explains transitional risks as those that occur in the move towards a cleaner, greener economy, as businesses face major changes in asset values and business costs. In real estate, this revolves around the green credentials of the buildings.
It has been more and more clear that occupier and investor demand is focusing on the most sustainable assets, with the term "stranded assets" increasingly adopted for buildings that don’t meet the desired criteria or government regulations.
Savills describes liability risk as the least known risk area. It relates to who should be held responsible for climate change issues.
If a business fails to adequately declare climate risk exposure and suffers a loss as a consequence, investors might claim against that business and in real estate that means that accurate reporting is therefore crucial. An increasing number of real estate investors are using the Global Real Estate Sustainability Benchmark to compare results and make improvements while the Task Force on Climate-related Financial Disclosures has also seen an increase in adoption.
In terms of adaptation to this week's issues, BNPPRE's Rourke says there are some immediate quick wins in urban areas. "Increasing shade through the planting of trees, which is also good for air quality is one. In New York, the city has coated over 10 million square feet of its rooftops in white in recent years, creating ‘cool roofs’ which reflect heat rather than absorbing it. This has resulted in lower internal temperatures (the UN has suggested a building could be up to 7 degrees cooler with a cool roof), reducing energy use for air-conditioning and, therefore, cutting back on carbon emissions."
Rourke says it is too early to call how this year’s events will impact the risk evaluation of buildings in the UK, particularly in London and the South East, but the "increased likelihood of fire events will need to be taken into account".
The good news is UK real estate is co-ordinating with government to tackle climate change with often world-leading initiatives.
Last month, the British Property Federation formally launched its Net Zero Pledge to pull together the industry to tackle carbon emissions from the built environment and achieve net-zero by 2050.
The BPF again highlighted that the built environment accounts for up to 40% of global greenhouse gas emissions. It said its wide range of members mean it is uniquely placed to bring them together to support each other to speed up change. Members can sign-up to the Pledge on the BPF website and will be expected to measure and report publicly on progress.
The pledge aims to support all companies in the UK property sector in sharing ideas, best-practice and learnings in real-time to accelerate the pace of change and drive innovation. The campaign specifically aims to support smaller members by leveraging the BPF’s reach across the real estate industry.
Guy Grainger, new president of the BPF and global head of sustainability services and ESG at JLL, says there needs to be radical collaboration to deliver on net zero.
"The onus is on every single organisation to commit to tackling the climate crisis. This means signing up to verifiable targets and reporting publicly as well as working together to share best practice and help each other."
Grainger says during his 12 months as BPF president he wants to see all of its members "working together to start or accelerate their journey to net zero".
Savills says that while understanding the risks and responding may seem intimidating, the positive is real estate investors are used to measuring economic risk, market risk and credit risk.
"Understanding the different risks real estate assets are exposed to can only help investors to position themselves in the best place to reap the potential rewards of a green portfolio."
BNPPRE's Rourke suggests it is apt that yesterday (19 July) saw a court ruling declare the UK government’s current net zero strategy is unlawful just as the UK recorded its highest-ever temperature.
"The ruling highlighted that the strategy doesn’t explain how targets will be met and that parliament and the public have been left uniformed about performance against those targets. In revising the strategy to address this, the new Prime Minister has an opportunity to provide the bold and transformational leadership needed to protect people and the built environment from climate change in the future."