According to the CDP, which runs one of the most widely-used global environmental disclosure systems, four out of five of the world’s cities faced significant climate-related hazards in 2022, from extreme heat and heavy rainfall to drought and flooding.
Among other factors, climate change is a major aggravator in both the scale and frequency of these events, increasingly causing more damage to people’s lives, livelihoods and investments.
Considering the scale of the risks posed, leaving water management to chance is an increasingly risky proposition.
In this instalment, we will look at why water is an essential element for a forward-looking real estate management strategy, especially as resilience against extreme weather events is becoming a critical concern.
We will discuss how these evolving risks are being managed and what the future of water in real estate looks like.
State of play: increased risk, increasing damage
According to the United Nations Environmental Programme, more than 90 per cent of global disasters in the past 20 years have been water-related. The World Economic Forum reports that the number of annual disasters from 1970 to 2019 increased fivefold. Meanwhile the cost of the extreme disasters has risen by almost eight times (inflation-adjusted) since the 1970s.
These events will continue to affect the availability and quality of water, increase uncertainty over food availability, manufacturing, labour and investments and have impacts on global economies.
Water is arguably the biggest risk factor to our health and survival – causing property damage and loss of life – and is a major influence on human migration.
Then there is the simple fact that water is vital to nearly every ecosystem on Earth and our sustenance. An average person can survive for no longer than three days without it.
Water risk to real estate
In 2021, flooding cost the global economy more than $82 billion in damage – nearly a third of total losses from physical disasters – according to reinsuring agency Swiss Re.
Beyond the obvious physical damage to properties and livelihoods, there are several knock-on financial effects. In addition to the time required for recovery from the blight and displacement, previously-affected areas become less attractive to buyers and renters. Properties may also be subject to increased insurance premiums and inspection requirements.
Global economic damage from natural disasters, Flood
Source: EM-DAT, CRED / Université catholique de Louvain, Brussels (Belgium)
At the other end of the spectrum, droughts have a similarly debilitating effect on people’s quality of life and, consequently, real estate values. As people cannot survive without water, a real estate market without a secure supply of water is destined to be left behind. World Bank research shows that people are five times as likely to move following drought conditions as they are after floods or periods of excess water.
Thriving real estate markets enable communities to thrive in turn. Neither can sustainably exist in a water-stressed environment.
The increasing risk posed by water insecurity on real estate markets is something that governments, developers and investors need to examine carefully to avoid loss of capital and community, as well as stranded assets.
Water crises: impact and solutions
A number of recent crises highlight the interrelation between water and the health of urban environments, and the importance of holistic water management as part of a sustainable real estate strategy.
In Sydney, Australia, three years of drought followed by severe flooding have damaged crops, roads, homes and businesses. The city introduced a number of initiatives including managing stormwater, minimising local flood risk and increasing use of recycled and non-potable water for non-sanitary uses. A key part of implementation is awareness-raising through a programme to change people’s attitudes towards the value of water and water usage.
In 2018, Cape Town, South Africa came within days of losing its ability to provide water to its residents due to a prolonged drought without a contingency or water supply improvement plan. To alleviate the risk of reservoirs dropping to a level unable to supply any of the city’s taps (the so-called Day Zero scenario), the city imposed bans on outdoor and non-essential use of water and introduced even more stringent rationing.
The crisis brought the value of water, and the fragility of the city and all it encompasses, including real estate, to the fore. Collective efforts to conserve water did help. However, it was the heavy rains that fell in the winter of 2018 that averted the risk of the city running out of water. For other cities that may be evaluating a similar scenario, a water action plan should be a more appealing alternative to leaving things to chance.
The Colorado River, US supplies water to 40 million people and, through a network of hydroelectric dams, provides electricity to more than 780,000 households per year. In addition to policy mishaps and prolonged drought, explosive growth of the urban areas dependent on the river for water has led to increased demand and rapidly falling river levels. Many high-value real estate markets rely on the Colorado River for water and their continued prosperity depends on securing the water supply.
Looking forward
Effective water management to secure both water quality and quantity is essential for the continued prosperity of our communities, including urban centres and high-value real estate markets.
As water-related extreme events increase in frequency and severity, having a sustainable and integrated water management plan in place to protect our people and built assets should be a priority for real estate professionals and investors. Water security is a matter of survival; it is not optional.
