The Impact of Extreme Weather Events on Property Portfolio Management

Property portfolio management encompasses the strategic oversight and administration of a collection of properties owned by individuals or organisations. The goal is to optimise the value and performance of the portfolio, which may consist of residential, commercial, or industrial properties. While this may not sound as exciting as a more volatile means of making money, it is still a growing market, with a valuation of more than $22 billion. Various factors, such as location, tenant occupancy rates and other market conditions, influence a property portfolio's value. However, one factor that is increasingly making waves in the realm of property management is extreme weather events.

 

Extreme weather events, such as floods, wildfires, hurricanes, and storms, can potentially disrupt property portfolios significantly and pose substantial risks to their value. The impacts can be far-reaching, encompassing structural damage, financial losses, increased insurance costs, and even reputational harm. Just in 2022 alone, such extreme weather events caused more than $280 billion worth of property damage. In fact, depending on your property location, you might even have to completely write off your investment, considering how it is almost guaranteed that nearly 200 million people will lose their beachfront properties by 2100.

 

Public Perception

 

While it is easy to laugh away concerns about climate change, especially when the projections are talking about things 75 years down the line, it can still disproportionately impact the mindset of the investor, who already invests based on intuition. As a result, perceptions and beliefs have an impact on the pricing of properties exposed to climate risks. These things have even been proven through studies showing that experiences, scientific knowledge, and confidence in governments and insurers shape owner beliefs.

 

Baldauf et al. (2020) found a variation of over 7 per cent in transaction prices between "believer" and "denier" neighbourhoods, indicating an influence of beliefs on pricing. Bernstein et al. (2019) observed that investors, being more risk-informed, discounted values more in response to sea-level rise (SLR) risk. Bakkensen and Barrage (2017, revised 2021) found that climate beliefs and perceptions of future policy measures and government action influenced property overvaluation due to coastal flooding risk.

 

The Middle East Factor

 

When considering the impact of extreme weather events on property portfolio management in the Middle East, there are several unique factors to consider:

 

Water Scarcity: The Middle East is known for its arid and semi-arid climate, characterised by limited water resources. Extreme weather events such as droughts can exacerbate water scarcity, affecting both residential and commercial properties. Property managers need to implement water conservation measures and consider the availability of water sources when planning and managing properties in the region.

 

Desertification: The expansion of desert areas due to climate change is a significant concern, especially in the Middle East, which is already an arid area. Desertification can negatively impact property values, especially in areas prone to sandstorms and wind erosion. Property managers should implement appropriate landscaping techniques and protective measures to minimise the effects of desertification on their properties.

 

Heatwaves: The Middle East experiences scorching heatwaves, with temperatures often exceeding 45°C. These extreme temperatures can pose significant challenges for property management. Buildings and infrastructure may suffer from heat-related damage while cooling systems need to be in place to ensure the comfort and safety of the residents. Property managers should consider energy-efficient cooling solutions and adequate insulation to mitigate the impact of heat waves.

 

Water-related Risks: While the Middle East is primarily a desert region, it is not immune to water-related risks. Flash floods caused by heavy rainfall or sudden water bursts can occur, particularly in mountainous areas. These floods can lead to property damage, including foundations, walls, and electrical systems. Property managers should implement effective drainage systems and have evacuation plans in place to mitigate the risks associated with flash floods.

 

Dust and Sandstorms: Dust and sandstorms are frequent occurrences in the Middle East, particularly during the summer months. These storms can cause property damage, including broken windows, exterior damage, and air quality issues. Property managers should invest in proper air filtration systems and maintain proactive maintenance practices to minimise the impact of dust and sandstorms on their properties.

 

Infrastructure Resilience: Given the unique climate challenges in the Middle East, property managers need to prioritise infrastructure resilience. This includes ensuring robust building materials, implementing appropriate design standards, and incorporating climate resilience measures into construction and renovation projects. It is vital to consider the long-term impact of extreme weather events when managing and developing properties in the region.

 

Other Relevant Factors

 

In addition to the impact on the buyers and the response from the government, there are also other business-related factors that can influence the value of property portfolios in regions that are more prone to natural disasters.

 

Impact on Business Operations: Extreme weather events can disrupt business operations, leading to significant financial losses. Damage to properties from events like hurricanes or floods can force retail stores or office buildings to close for extended periods, resulting in revenue loss and decreased productivity. Property management companies must swiftly address repairs and restoration to minimise business interruption and maintain their reputation.

 

Escalating Insurance Expenses: Following extreme weather events, insurance companies may raise premiums for properties located in affected areas. This places a financial burden on property managers, who may have to absorb these increased costs or pass them onto tenants through higher rental fees. Property managers should carefully assess their insurance policies, ensuring sufficient coverage for weather-related risks to mitigate the impact on their finances.

 

Compliance with Regulations: Extreme weather events can trigger additional regulatory requirements for property managers. For instance, if a flood contaminates a property's water supply, adherence to water quality regulations becomes imperative. Property managers need to stay informed about relevant regulations and promptly implement necessary measures to ensure compliance, avoiding potential penalties and reputational damage.

 

Maintaining Reputation: The response and actions of property management companies during and after extreme weather events greatly influence their reputation. Neglecting property maintenance during such events can be viewed as responsiveness or incompetence by tenants and stakeholders. Effective communication with tenants, timely repairs, and diligent restoration efforts are essential to uphold the reputation of property management companies and maintain positive relationships with tenants and stakeholders.

 

By addressing these factors proactively, property management companies can mitigate the negative impact of extreme weather events on business operations, finances, regulatory compliance, and reputation. Prioritizing resilience, prompt action and open communication will contribute to the overall success and resilience of property portfolios in the face of challenging weather conditions.