Real estate investors preparing for rising tides and eroding coastal shorelines would also do well to watch for the effects that extreme water scarcity will have on their properties.
According to a recent report from BlackRock, the amount of global real estate investment trust (REIT) properties subject to water shortages will double to 60% in 2030. The asset manager reviewed 84,000 global properties mapped to 590 publicly listed REITs.
Some regions will be hurt more than others, the analysts wrote. Almost all real estate investment properties in Australia, Hong Kong, Japan, Malaysia, and the Philippines will feel the effects, they said. Some countries, like Japan, will see their REIT market water stress exposure increase to 80% in the next decade.
Meanwhile, in the US, about two-thirds of REIT properties will deal with extreme water scarcity in the next decade, particularly in the Southwest. Competition for water supply will be focused in states such as Arizona, New Mexico, and Utah. In California, where 85% of the population lives by the coast, residents are alternately contending with both wet seasons and droughts. Rising temperatures from climate change evaporate groundwater faster, resulting in less frequent but more severe downpours.
In the short term, REIT investments are expected to be little impacted, especially given that risks around water shortages can be mitigated, analysts wrote. But regulatory issues around sustainability in the long term will require that buildings work to improve their environmental footprint and manage their water resources better to be attractive to both investors and tenants.
“We have high conviction that water stress is a key component of climate risks that are set to grow increasingly financially material over time,” analysts wrote. “This suggests the time to integrate them into investment processes is now.”
That extends to businesses with exposure to risks along these fault lines. Thermal power plants that require water for cooling and farmlands that need irrigation will be a problem for companies that deal in these areas. That could require higher capital expenditures, as well as adherence to greater compliance standards.