Hurricane Florence

Hurricane Florence could swamp asset values

Thursday, September 13, 2018

Valuation analysts are underscoring the case for factoring climate risk into investment and asset management decisions as Hurricane Florence moves in the direction of more than 5,500 properties that real estate investment trusts (REITs) own. In addition, data engineering and interpretation specialists with the proptech firm, GeoPhy, tally 2,900 properties and loans in the storm’s path that are collateral for commercial mortgage-backed securities (CMBS).

As the U.S. National Ocean and Atmospheric Agency (NOAA) monitors the approaching storm, Ali Ayoub and Nils Kok scrutinized 94 REITs with holdings located in the areas flagged for storm surge and other severe weather fallout to calculate the number of assets exposed and the percentage of each portfolio those assets represent. For CMBS deals, they looked at the number of assets exposed, the percentage of each loan’s collateral they represent and the appraised value of the properties.

“Consider the threat of Hurricane Florence a ‘clear and present danger’ for investors and lenders to the real estate sector,” they warn in a Sept. 12 posting.

Lessons soon to be learned may reinforce the duo’s advisory earlier this year, in which they drew on flood risk data from the U.S. Federal Emergency Management Agency (FEMA) and the Climate Impact Lab’s predictive modelling of the economic repercussions from climate change. Across the portfolios of 131 REITs potentially vulnerable to flooding, approximately 5 per cent of assets are in settings FEMA classifies as high-risk.

“The value-at-risk is, of course, much higher,” Kok and Ayoub noted.

Asset managers awaiting Hurricane Florence may not have a lot of room left to manoeuvre — “When it comes to natural disasters, buildings, once constructed, are much like sitting ducks,” Kok and Ayoub concede — but they argue that investors could and should be better informed. For example, loan delinquency can be a consequence of natural disasters as commercial tenants default or find themselves displaced, while rating agencies typically give climate risk or resiliency fairly rudimentary weighting.

“Hurricane Florence should be of particular interest to CMBS investors,” Kok and Ayoub assert. “While investors stay attuned to daily news about interest rates, employment figures and the latest on the continuing trade war saga, financial markets are less apt to reflect on the pending impact that climate events may have on asset values.”

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