Bank of England Deputy Governor highlights climate risks for commercial property

Sarah Breeden, Deputy Governor for Financial Stability at the Bank of England highlighted how climate change is creating risks to price and financial stability for commercial property.

Breeden was giving the annual Chapman Barrigan lecture which honours inspiring women in real estate. She focused on the impact of the environment on the commercial property sector, saying: “These risks from a changing climate are not hypothetical or somewhere far off in the distance.”

She noted that even though the UK has fewer extreme weather events than some other nations, rising temperatures and increased risks from storms and flooding are growing. Breeden highlighted possible risks from this such as broad asset repricing resulting from a ‘trigger climate event”.

Rapid repricing of commercial property assets if markets start to price in severe climate risk, or a disorderly transition following acute physical disasters. Breeden noted that. “Even gradual repricing could result in short bouts of rapid price movements”.

The market has already seen an increase in rental values for properties that demonstrate robust environmental credentials. Breeden noted that the ‘green premium’ indicates how climate risks are starting to be priced in, but she added that further assessment of risk: “May lead properties that are more exposed to sever weather events or that do not live up to sustainability standards to face a heavier discount.”

Her speech also highlighted the increased costs of insurance for flooding. While domestic properties are somewhat protected through the Flood Re initiative, there is no such protection for commercial properties.

Breedon’s conclusion was that investment for adaptation and mitigation is crucial. She noted the government’s current (unconfirmed) plans to raise the minimum EPC requirement to B by 2030. However 83% of commercial buildings in UK cities fall below that standard, leaving many at risk of becoming stranded or ‘zombie’ properties without the necessary funding for refurbishment and improvement.