As climate change renders more properties uninsurable, Australian developers and investors will be compelled to embrace stringent environmental, social and governance standards.
Multi-year droughts, bushfires that result in cities and regions becoming smoke-choked for weeks and once-in-a-century floods that seem to be happening more like once a decade, or more.
Australia’s latest bout of east coast flooding, which saw Brisbane, Sydney, and a roll call of regional towns from the Sunshine Coast to the Central Coast inundated, is the latest in what’s starting to feel like a continuous stream of extreme weather events.
As residents complete the great mop-up, insurance companies continue to count the cost. Analysts have warned that the final bill could be as high as $3 billion, a figure that may push premiums for next year up by a further 10 per cent, according to an Australian Financial Review report.
The scale of the devastation prompted federal disaster recovery chief Shane Stone to call for an end to floodplain development, and for some homes that went under this time round to not be rebuilt.
Meanwhile, new research from CoreLogic released in late March found that increasing storm surges, coastal erosion and flooding had put an extraordinary $25 billion worth of residential property at risk.
“Coastal risk has far reaching implications for the country’s property market and its supporting financial sector, including property valuations, home loan viability and insurance premiums,” CoreLogic head of consulting and risk management Pierre Wiart told the Sydney Morning Herald.
Staring down the telescope
At this point, there can be no doubt that insurers are pondering their industry’s 64-dollar question: at what point does it make sense to not merely jack up the premiums for properties in these high-risk zones but, rather, to declare them uninsurable at any price?
Think that sounds extreme, or a long way from where we’re at now? Well, insurers and their highly paid actuaries are already taking long views. Their job is to understand both the status quo and the circumstances we’re likely to be experiencing 20 and 30 years down the track.
That intelligence is used to determine how premiums are calculated and what they will and won’t cover – and those decisions can have an extraordinary impact on both the residential and commercial property markets.
In fact, whether or not a building is insurable may well be the key determinant of its value in a few years’ time; far more important than its aspect, amenities or, in the case of commercial properties, its portfolio of tenants.
Because what can’t be insured can’t be financed, and properties that can’t be financed must, inevitably, have a deep-cut discount factored in.
Elevating the importance of ESG compliance
That’s why I expect to see ESG compliance begin to assume an extraordinary importance for the Australian property sector, and quickly too.
Over in the old country, where I’m currently working as head of Forbury’s UK office, it already has.
Properties in the UK must be demonstrated to be sustainable and environmentally sound before debt and equity partners will even consider reaching for the chequebook. As a result, no development or acquisition team, however skeleton, is complete without an ESG expert, or several, who can steer potential developments and purchases through the complex ESG audit process.
It’s time consuming, expensive and unavoidable, and it narrows target properties down to those which have a hope of complying with the listed requirements and which are, as a result, a safer bet for investors, financiers and insurers.
As the system becomes increasingly entrenched, I anticipate the emergence of a two-track market. It’s likely to comprise blue-chip properties that made the grade and have valuations that reflect that fact, and also those that fall short, which will be marked down accordingly when they’re bought and sold.
On the horizon and moving fast
We’re not at this point in Australia yet, but I believe we will be and soon. As natural disasters continue to buffet the country, it’s only a matter of time. If you’re in the property game, it makes sense to start thinking now about how ESG will affect your buying, selling and investment decisions.
Peter Rose is the chief revenue officer and director of Forbury.