5 Key Takeaways from our Fireside Chat Webinar, "The Impact of Environmental Changes on the Property Risk Market”
Last week, LineSlip hosted a Fireside Chat webinar, “The Impact of Environmental Changes on the Property Risk Market,” to celebrate the launch of LineSlip Real Estate. LineSlip’s CEO and founder, Leo Bernstein, spoke with Paul Wasserman, Managing Director and Head of Real Estate Portfolio Management at KKR & Co. Inc. Leo and Paul had an insightful discussion on how environmental changes are impacting the property risk market, investment strategies, mitigating the increasing costs of weather-related risks, and more.
Some of the themes focused on were:
How to approach risk management in the face of increasingly frequent and severe weather-related events.
How environmental factors impact property values and investment strategies—today and in the future.
What data, systems, and processes can be used to mitigate climate-related property risks.
Here are some key takeaways from the event:
1. Weather-related risks should be part of a larger ESG strategy.
As weather-related risks are becoming more frequent and severe, it’s essential to not look at weather-related risks in a vacuum but rather as part of a larger environmental, social, and corporate governance (ESG) strategy.
One pillar of a strong ESG strategy involves fully understanding the property risk, including ensuring a property has no serious deferred maintenance or engineering concerns.
Ensuring that your replacement cost assumptions for your properties are updated and realistic is key. In the past several years, we have seen rampant commodity and labor cost inflation, which has made many replacements cost estimates stale.
Having up-to-date data, in an easily understandable format, is essential to manage these risks.
“It’s essential not to look at weather-related risks in a vacuum but rather as part of a larger environmental, social, and corporate governance (ESG) strategy.” — Paul Wasserman, Managing Director and Head of Real Estate Portfolio Management, KKR & CO. Inc.
2. Make your assets resilient.
Before making new investments, it’s best to come up with mitigation strategies for all your assets. These mitigation strategies should address how you will protect your organization against climate and weather-related risks. Once you add the assets to your portfolio, consider how you can make your assets resilient, whether that’s installing shatter-proof windows or adding additional roofing components. Whatever mitigation strategies and property hardening methods you choose, you must add those considerations to your underwriting process.
3. Data is an opportunity but also a problem!
Undeniably, there’s so much you can do with data, but having accurate data can be a challenge. In the real estate industry, the data presented is not always correct. And to make matters worse, these data are not always organized.
Here are some important data to consider:
Accurate engineering and other physical and Construction, Occupancy, Protection, and Exposure (COPE) data
Loss histories of assets
Details for asset portfolio risk metrics
Once you aggregate these data, your internal stakeholders and insurance partners will gain a better sense of the risk profile of the assets. Having the data readily available to present will help these different parties feel more confident taking on the investment into the portfolio, allowing you to better position your assets.
Be intentional about collecting the data underwriting the assets.
“Be intentional about collecting the data underwriting the assets.” — Paul Wasserman, Managing Director and Head of Real Estate Portfolio Management, KKR & CO. Inc.
4. Lean on your brokers.
In the face of a hard market, lean heavily on your brokers. In many ways, they’re an extension of your team and should be embedded with your deals and asset management teams in whatever ways possible. Communicate regularly with your broker partners and treat them fairly. Insurance is becoming more costly, complex, and nuanced; let them guide and advise you about what’s happening in the market. It’s a vital partnership.
5. Incorporating climate risk into your underwriting will help you improve risk-adjusted returns.
Historically, weather-related risks were not considered in the asset valuation and return expectations on a given investment. Now, considering weather-related risks in your asset management plan is critical to ensuring that you are not surprised by an unexpected loss.
You can still own properties in areas that are prone to certain types of weather-related risks. However, given that the frequency and severity of weather-related risks are increasing, a strong understanding of those risks is recommended. For example, understanding decarbonization, asset selection, risk mitigation, and hardening the resilience of assets goes hand-in-hand to add value to your assets in the long-term.
From this event, we learned that real estate investing companies need to carefully consider their investment strategies as environmental and weather-related risks are becoming more prevalent now and in the years to come. These risks play a huge part in taking on new investments and assets into a portfolio. We hope that our Real Estate Fireside Chat webinar provides you with insights on how to approach property risks and investment strategies.
To download a recording of the webinar, click here.
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