Climate change resulted in financial impact for 58% of S-Reits: survey
Nearly half have increased their capital expenditure on resilience measures such as floodgates
[SINGAPORE] Close to 60 per cent of real estate investments trusts (Reits) in Singapore faced direct financial impacts on their assets as a result of extreme climate events over the past three years, according to a survey conducted by property consultancy Knight Frank and the Reit Association of Singapore (REITAS).
Among those that experienced climate-related impacts, 58 per cent said they incurred increased expenses from having to cool or heat their buildings as a result of temperature changes.
In addition, 47 per cent increased their capital expenditure on resilience measures, such as floodgates, to adapt to future risk. Meanwhile, 42 per cent incurred capital outlays to replace assets that were damaged from climate events, such as typhoons.
The survey, which examined the sustainability reports of 40 Singapore Reits (S-Reits) and polled 33 Reit managers, also found that 26 per cent had insurance premiums increasing due to extreme climate events where their assets are located.
“These findings show that climate risks are generating tangible financial costs, from higher operating expenses to capital investments in preventive and corrective measures, as well as escalating insurance premiums in vulnerable areas,” wrote Knight Frank and REITAS in a report on Thursday (Oct 9).
Climate-related risks and opportunities
The report’s assessment showed the most prevalent risks cited by S-Reits in their sustainability reports were extreme heat events (70 per cent); rainfall and flash floods (68 per cent); and typhoon and severe wind events (55 per cent).
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While 98 per cent of S-Reits have started measuring their physical risks through qualitative assessments, only 20 per cent have disclosed their short-term to long-term physical risk severity.
“This highlights the need for greater maturity in climate risk assessments, and a shift beyond high-level benchmarking towards more robust, data-driven evaluation in the real estate sector,” Knight Frank and REITAS noted.
As for transition risks, the three most commonly cited were carbon price or tax movements (70 per cent); changes in expectations from external stakeholders (63 per cent); and green building regulatory and policy changes (60 per cent).
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Similar to physical risks, only a small percentage of S-Reits (18 per cent) disclosed their short-term to long-term severity; the majority made qualitative assessments.
S-Reits also identified opportunities that could arise out of the transition towards a low-carbon economy. Investments and green financing opportunities (60 per cent), improved efficiency and technology driving savings in operational expenses (50 per cent), and an increase in demand for low-carbon products and services (25 per cent) were the most prevalent.
While the vast majority of S-Reits have incorporated environmental, social and governance (ESG) objectives or initiatives into their asset management strategies, most have not yet implemented these plans downstream.
For most S-Reits, renewable energy accounts for less than 20 per cent of their assets’ total energy consumption, with only a minority achieving high penetration levels.
Renewable energy adoption
Knight Frank and REITAS said the early-stage adoption of renewable energy among S-Reits suggests “a significant opportunity to better align decarbonisation ambitions with current energy sourcing practices”.
Even though 91 per cent of respondents have developed renewable energy investment strategies, such as on-site generation using solar panels, relatively few have adopted off-site procurement solutions.
These include power purchase agreements, renewable energy certificates, or direct capital investment in renewable energy assets.
Challenges
Nearly four-fifths of respondents – 79 per cent – cited constraints from building design, location or regulatory restrictions as the main challenge in efforts towards meeting their net-zero ambitions.
Seven in 10 pointed to their ability to balance long-term decarbonisation plans with short-term dividend expectations, and 55 per cent cited tenant resistance to green initiatives.
Knight Frank and REITAS said that working with property managers well-versed in sustainable practices, aligning daily operations with regulatory policies, future-proofing assets by developing climate transition plans, as well as strengthening tenant engagement were some avenues to mitigate these challenges.
Nevertheless, they also noted that 70 per cent of S-Reits are expecting a green premium for ESG-compliant buildings or a brown discount for non-compliant ones.
“This anticipated market repricing strengthens the case for decarbonisation, helping managers bridge the gap between near-term DPU (distribution per unit) pressures and long-term value creation.”
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