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