Clearing the waters: Introducing a flood risk modelling tool for real estate
As evidence of climate change grows stronger by the day, real estate investors are becoming more aware of the potential risks of flooding to their property portfolios. A swathe of commercial tools and services have emerged to help real estate investors and managers get a handle on these risks, both in terms of the amount of damage that could occur in the future and the likely impact on asset values.
However, users across the industry are also now starting to recognise some of the pitfalls of adopting what are essentially ‘black box’ solutions. Because of the large number of input variables required and the relative complexity of estimating future flood damage, different models can produce widely different results, mainly due to variations in data assumptions and analysis structures.
Recognising the importance of flood risks for the future fabric of Europe’s cities as well as its financial ecosystem, the EU is looking to tackle this data minefield under the umbrella of REACHOUT, a research and innovation project it has set up to advance user-oriented climate services. One part of this is developing a tool called REACT, which aims to bring greater transparency and understanding to flood risk modelling.
INREV IQ spoke to two of the leading experts in REACT, Thijs Endendijk, the developer of the tool from the Institute for Environmental Studies (IVM) from VU Amsterdam,and Lucas Wouters, Responsible Investment specialist at APG, the Dutch pension fund investor. Thijs explained that the main objective of the new tool is to allow users to enter their own assumptions rather than adopt those already built into the model, which in some cases is completely opaque. ‘The tool uses relatively simple inputs, but the major advantage is that you can see everything, because the whole structure is laid out in Excel,’ he says. ‘You feed in the address of each asset together with the flood maps that you want to use – although we do also provide recommendations of EU-authorised mapping – as well as information on the flood prevention measures surrounding each property. The model is then able to generate outputs on Expected Annual Damage for each asset and across portfolios, under a number of different climate scenarios.’
APG has been one of the first organisations to actively test REACT. ‘Here at APG, we have been looking at assessing flood risk for a number of years and have come to realise how much the outputs from commercial providers can vary,’ explains Lucas. ‘We found the new tool to have a huge advantage in its comparative transparency – in effect, you can see what’s going on under the bonnet, which gives you a much clearer picture of how your assumptions feed through into the results. The fact that it is open access and allows for the use of EU-standard flood mapping, also means that other users should be able to generate industry-comparable results in the future. At the same time, the simplicity of the inputs should encourage a wide range of investors and managers to use it, not just the biggest ones who can devote lots of resources to this kind of research.’
‘The overall conclusions in our case study, which included a central forecast of increased flood risk for a set of random assets up to 80% by 2080, did not really come as a surprise,’ Lucas continues, ‘but it was the potential for drilling down into the results based on geography, different climate change scenarios and the effectiveness of flood defences that we found so illuminating. So for example, even though most of the Netherlands is low-lying, the risks of flooding are less than in many other places because of the high standards of protection in place. Not all of the black-box type models reach this conclusion, even if it may seem intuitively likely.’
Now that leading market players have seen how REACT can be utilised, thoughts turn to the future. ‘In the context of financial reporting, transparency of climate risks is clearly set to move up the EU’s regulatory agenda in the next few years,’ says Thijs. ‘This means that the see-through nature of the tool will become increasingly important for real estate investors and managers. In the meantime, we have presented the tool to financial organisations at two Science Practice Labs in Amsterdam. One of the conclusions of these meetings was that we now need to build a community of practitioners who can advance the take-up of the tool, which led to engaging with international real estate bodies like INREV. We will also be holding another Science Lab meeting next year in Paris, to help build awareness and understanding among a wider international audience.’
Interested in learning more? You can read APG’s case study on the REACT flood risk tool.
