Real estate investors should adopt active acquisition screening and portfolio monitoring across their investment strategies as risks from river and sea flooding, combined with urban heat islands (UHI) are predicted to impact capital values and annual returns, according to research from AEW.

French markets are most vulnerable, with double the European country risk of river floods. Across sectors, residential is most exposed, with Lyon the most at-risk city due to its location at the confluence of the Rhone and Saone rivers.

AEW, which partnered with Munich Re and The Climate Company to compile the data, estimates that the average annual expected loss for sea level rise is 1.3 basis points (bps) across 47 of 196 market segments analysed.

The Netherlands is the most exposed country to sea level rise. Rotterdam and Amsterdam have estimated sea level rise losses at above 2 bps per annum. Dublin, Copenhagen and The Hague complete the top five European cities most exposed to sea level rise.

The study found that the annual expected losses for both river flood and sea level rise combined came in at a modest 0.8 bps pa across the 196 markets covered.

This is due to 38 of the 196 segments having no exposure to either and the combined average, 10 markets exposed to sea level rise only and 111 markets affected by river flood risk only and 37 by both. Average annual losses to prime capital values per year stand at 1.7bps.

Additionally, the research found that prime office and residential sectors are most exposed to urban heat islands - which occur when a city experiences much warmer temperatures (up to 12°C) than surrounding areas as a result of urbanisation, waste heat emissions and air pollution. The most affected markets are Rome, Paris CBD, Barcelona, Toulouse, Munich, Milan, Madrid and Berlin.

Hans Vrensen, managing director and head of research and strategy at AEW in Europe, said: “After an in-depth analysis of river flood and sea level rise risks across 196 European markets, we conclude that the combined average annual expected loss from both risks is a relatively modest 0.8bps of prime capital value per annum. This is partly due to 38 of 196 markets not being affected by either risk, which brings down the overall average loss.

“However, this market average loss estimate does not reflect micro-locations or individual building characteristics and hides some extreme market results. Some segments show high risks at near 12bps per annum, such as Lyon prime residential, which is expected to be the most at-risk market to river flooding. This means that investors should consider adopting an active screening or monitoring approach.

“More work is still needed to resolve inconsistencies between existing data sources as well as uncovering data to help estimate the risks from urban heat islands and subsidence. This is when building foundations are damaged by clay soils affected by droughts – possibly the most expensive physical climate risk.” 

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