Climate Change and Property Prices
By SAMI Fellow, Colin Fletcher
With the publication of the Stern Report, the issue of climate change has attracted
increasing international attention and press “column inches”. Climate change now appears to have attracted
the attention of politicians. Indeed the main UK political parties are all apparently vying for
“green leadership” even if, judging from the limited environmental taxation and other measures
announced in the Pre-Budget Report, the “Prime Minister in Waiting” is being pulled along somewhat
reluctantly.
Over the past two years SAMI Consulting, along with others, has been
analysing expert opinion on climate change and studying the potential ramifications.
We have developed alternative scenarios as to how events might unfold. The work suggests that it is
highly likely that both business and individuals will start to feel the effects and consequences of
climate change long before changing weather patterns fully manifest themselves. Indeed, a number of
behavioural, tax, legislative and other changes could be with us in the relatively near future,
brought about by heightened government awareness and public pressure, perhaps reinforced by
isolated extreme weather events such as flooding and severe storms, which may or may not be a
direct result of climate change.
The possible form and implications of such changes on particular sectors and facets
of economic activity have been discussed in the media. However, while issues of design, energy efficiency
and overall sustainability have been discussed in relation to property and the built environment in general,
much less appears to have been said about the potential implications for property and infrastructure
asset prices.
The effects of climate change on prices of property, of particular types or
in particular locations, could be marked and sudden. What people think may happen has the potential
to drive changes in property values as much as what has actually happened to date. For example,
A relatively modest environmental tax hike or legislative change affecting property
could be seen as the precursor to likely enactment of much more severe measures of a similar type,
in turn resulting in pronounced shifts in the perceived desirability and marketability of particular
properties with inevitable consequences for values.
An isolated flooding disaster may heighten insurers’ concerns about,
and attitudes towards, flood risk, leading to sharply higher insurance premiums, or even possibly
withdrawal of insurance cover in certain areas or circumstances – once again with adverse consequences
for property values. To take but one example, one cannot but question how physically secure the properties
and infrastructure in the Thames Gateway area will prove to be, and what may be the implications for
long-term property values, given that the Thames Gateway development area broadly coincides with the
Environment Agency’s floodplain map.
The implications of sudden or unexpected market shifts in property values can be
substantial, as experience in previous property cycles has all too clearly demonstrated. Property
comprises a significant element in many personal and corporate investment portfolios and balance sheets.
The problems caused by falls in housing values and negative equity are internationally well documented,
not only for the individual but for banking systems, pension funds, for consumer spending, and for
the performance of economies as a whole. At the corporate level, property comprises a significant
element in many companies’ operational asset bases, and once again, a sudden fall in property values
can cause breaching of banking covenants and considerable financial problems for an organisation.
Not all companies will necessarily be exposed to such risks. However,
an appreciation of the potential problems that may lie ahead and the organisation’s own particular
exposure should enable mitigating action to be taken before the financial viability of the organisation
is threatened. SAMI Consulting is well placed to assist in this task. For more information, email us at
climatechange@samiconsulting.co.uk.
December 2006
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