The climate risk of property investing
6 min read
There’s a property risk you probably haven’t thought about.
Well…maybe after the severe floods we’ve just experienced so far this year and Cyclone Alfred, you are thinking about it now.
Sure you’ve likely given thought to the impact of climate change on weather, our lifestyles, and what kind of future our kids will inherit.
But have you ever considered climate change in the context of your property investments?
It goes without saying that property investors should investigate the risks as well as the rewards of any potential investment.
It’s always a smart move to understand the current and potential risks before you put your hard-earned cash and financial future on the line.
But what about the risks you can’t predict?
As investors are slowly discovering, climate change risks can have a huge impact on the performance and profitability of your property investments, and they’re only set to get worse.
The common risks on every investor’s radar
Most seasoned investors are aware of the common risks that can impact their property portfolio.
Peaks and troughs in the Australian economy and geopolitical issues can affect all kinds of investments, the property included.
Within the economy, the property market itself is full of risks.
Prices fluctuate, and local supply and demand move through unpredictable cycles.
Then, there’s the risk of vacancy.
Having your investment property sitting empty, while you’re still paying out for the mortgage, council rates, and real estate fees is every investor’s nightmare.
And of course, there’s the ever-pressing risk that the RBA will raise interest rates from their current historic lows or the risk (recently realised) that APRA will change the rules when it comes to getting access to finance.
These risks are already on most investors’ radars.
But this list is certainly not exhaustive.
Climate change: a genuine threat to property investors
There’s no solid scientific consensus that climate change is happening, and along with it, extreme weather events are likely to become more frequent.
Most of us know and understand this, which is why we’re diligent with our recycling and composting.
But what we don’t tend to think about is how the climate crisis could affect our investments.
For instance: climate risk could make many properties uninsurable in the future, or the insurance premiums could be so expensive that they drain cash flow.
It’s actually already happening for many investors.
Many parts of Australia are prone to bushfires, and this risk is predicted to intensify as the planet warms up.
In certain parts of the country, such as Far North Queensland, cyclones pose a huge risk, making properties very difficult and expensive to insure.
Low-lying areas can be flood risks, particularly certain areas of Brisbane and its surroundings.
And what about those waterfront properties in NSW, where the ground is literally disappearing beneath homes?
What insurance company in their right mind would underwrite those?
What does the future hold?
Perhaps the most concerning climate risks of all are the ones nobody saw coming.
Your investment property might be safe and insurable now… but what if it becomes uninsurable in the future?
Or, maybe you’ll still be able to insure your rental property, but the panel of providers will shrink dramatically, and the cost will go through the roof?
Analysis firm Climate Risk predicts that the number of properties in Australia that are uninsurable, or unaffordable to insure, will reach almost 450,000 within the next 30 years.
By 2100, that figure is expected to be more than 700,000.
Another point to consider is that if your property ends up in an insurance red zone, you may struggle to attract tenants.
Big business will probably move away from the area due to the risk, limiting employment opportunities for your tenants.
And renters, like landlords, follow the news.
Why would they want to live in a property when there’s a very real chance their belongings, and even their lives, could be at stake?
An uninsurable property is also likely to be an unsellable property.
Investors could face the prospect of selling their portfolio off at a huge loss, and walking away with nothing much to show for it.
Nobody will want to buy your flood or fire-prone home, and even if they did, there’s a good chance they wouldn’t be able to secure the finance to do so.
What could this mean for the wider property market?
All of these climate change risks could have a flow-on effect on property prices, with the RBA warning dwelling values in 254 high-risk suburbs could fall as a result of climate change.
They suggest that Brisbane and the Gold Coast could feel the effects as early as 2050, while large areas of metropolitan Melbourne, Sydney, and Perth may also be affected.
I don’t share all of this to be a ‘negative nelly’ or to scare you about the potential risks of being a property owner.
In fact, it’s the opposite.
I was trying to make you aware of a potential problem that you may not have even thought of so you can make better-informed investment decisions.
Some suburbs are likely to become riskier as time goes on.
Others are located in relatively ‘safe’ zones, which aren’t as likely to be impacted by climate change.
While I’ve always said the location will do around 80% of the heavy lifting of your investment property’s capital growth performance, clearly having a property in the wrong location will damage its long-term growth potential.
