Climate risk used to sit mainly in the ESG section of an investment report. That is now changing.

For investors, lenders and developers, the relevant questions are now much more practical: How exposed is the asset? What additional capex may be required? Will insurance remain available on acceptable terms? And how might a future buyer price the same risk?

Physical risks such as flooding, extreme heat, storms, drought and wildfire can affect real estate performance well before they become dramatic events. They can increase operating and maintenance costs, reduce tenant comfort, disrupt access, complicate insurance and influence financing and exit.

In other words, climate risk is no longer separate from the investment case. It is becoming part of the underwriting.

The building is only one part of the exposure

Climate assessments often focus on the physical condition and technical performance of the building itself. That is necessary, but it is not enough.

An asset may be well designed and structurally sound while remaining dependent on infrastructure that is far less resilient. Local drainage may be inadequate. Access roads may be vulnerable to flooding. The electricity grid may struggle during periods of peak demand. Emergency access may be limited, or the surrounding area may intensify heat rather than reduce it. These risks affect different asset classes in different ways.

For hotels, residential schemes and mixed-use developments, overheating and water availability can influence both operating costs and the quality of the user experience.

For logistics and industrial assets, heat, power supply and transport disruption can affect daily operations.

For offices and retail properties, accessibility, indoor comfort and reliable building services all have a direct relationship with occupier demand.

An asset cannot be assessed properly without understanding the wider system it depends on.

Insurance can no longer be treated as a standard assumption

Insurance is often included in an underwriting model as a predictable operating cost. That assumption deserves more scrutiny.

For an exposed asset, the key question is not only how much the current premium costs. Investors and lenders also need to understand which risks are covered, which exclusions apply, what deductibles may be required and whether similar coverage is likely to remain available over the investment period.

A project may appear attractive before insurance and resilience costs are tested properly. The economics can look different once higher premiums, exclusions, deductibles and additional protective measures are included.

This is particularly relevant in markets where historical data is incomplete, coverage varies significantly between insurers or climate exposure is not yet consistently reflected in transaction pricing.

For lenders, this is more than an operating-cost issue. Weak or uncertain insurance coverage can affect the security of the loan, the stability of cash flow and the asset’s ability to recover after a major disruption.

Resilience measures need to be reflected in capex early

Climate resilience does not always require a major redesign. In some cases, the necessary measures may be relatively straightforward: improved shading, better drainage, upgraded cooling, more efficient façades, revised landscaping or stronger water-management systems.

In other cases, the implications can be more substantial. The project may require additional power capacity, backup systems, more extensive fire protection, changes to site levels or upgrades to external infrastructure.

The timing also matters. When resilience requirements are identified early, they can be incorporated into design, permitting, cost planning and financing. When they are identified after acquisition or late in development, they often become more expensive and more difficult to implement.

A resilience measure that appears costly during the design stage may still be considerably cheaper than correcting the same weakness once the asset is operational.

Today’s acceptable risk may become tomorrow’s liquidity problem

An asset does not need to be uninsurable or physically damaged for climate exposure to affect its value. A more immediate risk is that future buyers, lenders or insurers apply stricter standards than those used when the asset was acquired or developed.

An asset that is acceptable today may face more detailed due diligence, higher insurance costs, additional capex requirements or a narrower buyer pool at exit. Weak documentation can make that problem worse, particularly where the investor cannot demonstrate how the risk was assessed or what mitigation measures were implemented.

This does not mean that every asset with some climate exposure should be avoided. Most locations carry some form of physical risk. The relevant distinction is between an exposure that is understood, priced and managed, and one that has simply been overlooked.

A credible investment case should clearly explain the nature of the risk, the measures already in place, any additional investment required and the residual exposure that remains.

What should be tested during underwriting?

Climate-risk analysis becomes useful when it answers questions that affect the investment model:

• Which physical risks are most relevant to the site and asset?
• Are they reflected in the design, development budget and operating assumptions?
• Is the surrounding infrastructure resilient enough to support the asset?
• What insurance is available, under what conditions and at what cost?
• Could future regulation or stricter lender and buyer requirements affect liquidity?
• Is there enough technical documentation to support financing, insurance and a future sale?

The purpose is to connect the findings with the decisions being made on design, capex, valuation, financing and exit.

Climate resilience is becoming a value question

Investors need to understand how physical risk may affect the numbers. That includes development cost, ongoing capex, operating expenditure, insurance, debt terms, tenant demand and exit liquidity. In some cases, the impact may be limited, while in others, it may materially change whether the investment works.

This is particularly important across SEE and CEE, where the quality of infrastructure, available data and condition of existing buildings can vary significantly even between nearby locations.

The strongest underwriting is therefore unlikely to come from looking at climate risk in isolation. It comes from connecting exposure with technical due diligence, feasibility, valuation, insurance and financing assumptions.

At Adriatic Advisors, we help investors, developers and lenders assess real estate opportunities through a practical risk and delivery perspective. This includes identifying factors that may affect bankability, long-term asset performance and exit readiness.

If you are reviewing an existing asset or development project, we would be happy to discuss it with you.