Risk Assessment in Property Valuation

A developer has just publicly said councils should never have allowed him to develop the land he bought. It’s an unusual statement! but a revealing one. The project progressed through approvals, only for the developer to later argue that the site was fundamentally unsuitable once future flood and climate-related constraints became clear. Those constraints weren’t abstract. They centred on flood exposure and the long-term viability of the site under changing conditions, with direct implications for development feasibility, cost, and risk ultimately borne by people who purchase the homes. This isn’t just a planning dispute. It’s a case study in how physical climate risk and land economics intersect (often only after a purchase decision has already been made). In both NZ and Australia, climate risk is now a consideration in how land and long-lived assets are disclosed. Under New Zealand’s Climate-related Disclosures regime and Australia’s mandatory climate reporting standards, organisations are required to: ➡️ Identify physical climate risks ➡️ Explain how those risks influence planning, valuation and investment decisions ➡️ Demonstrate consideration of risk over the full life of land and infrastructure assets What this means in practice: -Land that appears developable today may face limits tomorrow as flood risk, water availability and insurance settings evolve - Due diligence needs to be spatial, forward-looking and defensible - not just legal, and not just based on historic 1-in-100-year flood maps! For investors, developers, architects and property owners, cases like this underline the value of testing land suitability before capital is committed. Land decisions last decades. The Lever Room

𝗧𝗮𝘅 𝗥𝗲𝗮𝘀𝘀𝗲𝘀𝘀𝗺𝗲𝗻𝘁 𝗮𝘁 𝗥𝗲𝘃𝗲𝗿𝘀𝗶𝗼𝗻 𝗳𝗼𝗿 𝗖𝗥𝗘 𝗣𝗿𝗼𝗽𝗲𝗿𝘁𝗶𝗲𝘀   A tax reassessment occurs when a taxing authority updates a property’s assessed value, typically after a change in ownership, to reflect current market value. This reassessed value becomes the basis for future property tax bills. In California, Proposition 13 limits annual increases in assessed value to a maximum of 2% per year, regardless of how much market value grows. As a result, long-held properties often carry tax bases that are well below current market value. That’s fine for modeling current operations, but it can create issues at exit. When a property is sold, it changes hands. In many cases, that sale typically triggers a reassessment, meaning the buyer inherits a new tax basis rather than the seller’s historical one. This matters directly for reversion (exit) value. In a financial model, reversion value is usually calculated by applying a direct cap rate to forward NOI. If property taxes are carried forward based on in-place assessments instead of market value, NOI is overstated and so is value. This same logic shows up on the debt side. When lenders underwrite loans, they evaluate the asset as if they may need to take ownership in a downside scenario. Appraisals are based on market value, and taxes are often underwritten as if the property were reassessed, even in refinance scenarios. This reduces lender risk regardless of whether taxes are immediately reset. 𝗜𝗹𝗹𝘂𝘀𝘁𝗿𝗮𝘁𝗶𝗼𝗻 Assume two identical income statements for a 175-unit apartment complex acquired years ago and now worth significantly more. The only difference between the two statements is property taxes. One reflects in-place taxes of $639,311, while the other reflects reassessed taxes of $1,033,200. That $393,889 difference flows directly through to NOI, resulting in a 7.8% difference in value using a 5.50% exit cap rate. Under typical loan terms (5.25% interest rate, 30-year amortization, 1.25x DSCR), loan proceeds supported by in-place taxes would be approximately $4.8 million higher than when underwriting reassessed taxes. Reversion assumptions drive a meaningful portion of total return in most models. If taxes aren’t reassessed at exit, NOI is overstated, value is overstated, and risk is understated. If a deal only works because in-place taxes are carried forward at reversion, that’s a signal worth paying attention to. My site is where I share how I think about commercial real estate capital. You can subscribe there for occasional updates. More here: https://lnkd.in/gTxXM7uu

📘 Just released: RICS Valuation Guideline 2026 on ESG & sustainability in property valuation. The key message is powerful, No more ESG narratives! Sustainability only matters in valuation when it is measurable and impacts value. Valuers must now consider: ⚡ Real energy use (kWh/m²) 🌍 Real CO₂ emissions (kgCO₂/m²) 💶 OPEX, capex & transition risk 🏢 Green leases & efficiency income 📊 Comparable ESG performance ⚠️ Stranding & regulatory exposure At the same time: 🏭 ETS 2 puts a price on CO₂ 🤖 Banks use AI to assess asset risk RICS + IVS now provide the framework to turn operational performance into valuation input. Sustainability has moved from: ➡️ reporting topic ➡️ to cash-flow resilience & value protection 👉 Ask me for our latest white paper on how ETS 2 and AI risk assessment will impact property value and cost of finance, just fill in "whitepaper" in the comments. #RICS #Valuation #ETS2 #ESG #RealEstate #GreenPremium #workcloud24

The RiskFootprint™ helps inform more comprehensive, risk-adjusted real estate investment decisions, ensuring that owners and investors are aware of all relevant challenges and can plan accordingly. When reviewing the RiskFootprint™ report as part of real estate due diligence, the process typically involves: 1. Risk Identification: Understanding what specific risks are identified in the report, such as floods, natural hazards (e.g., wind, wildfires, earthquakes), and future climate impacts. The RiskFootprint™ is a comprehensive, exposure assessment that fulfills Step One of the new ASTM Property Resilience Assessment standard. 2. Risk Analysis: Analyzing the severity and likelihood of these risks, especially those that may affect long-term property value or operational costs. For example, the RiskFootprint™ report might highlight areas prone to flooding or proximity to high-risk zones. The RiskFootprint™ provides specific building vulnerabilities and values-at-risk (Expected Annual Losses or EALs). The optional, RiskFootprint™ Damage/Loss report fulfills Step Two of the new ASTM Property Resilience Assessment standard. 3. Risk Mitigation: Evaluating if the building’s construction standards are sufficient to withstand natural disasters and how RiskFootprint™ identified risks can be mitigated. This also involves identification of feasible resilience measures and costs, assessing whether the property is adequately insured, and, if lack of community resilience could affect the property’s value over time. The RiskFootprint™ PRA fulfills Step Three of the new ASTM Property Resilience Assessment standard. 4. Impact on Investment Strategy: Understanding how these risks could affect the property’s income potential, capital appreciation, and overall portfolio strategy. Investors may decide to adjust their investment parameters, such as price, expected returns, or exit strategy, based on the RiskFootprint™. For further information or to purchase a RiskFootprint™ report go to RiskFootprint dot com.

This recent report from Global Association of Risk Professionals (GARP) is making the rounds and creating a lot of buzz. In it, outputs from 13 established climate risk vendors are compared (#Iris from Class 3 Technologies is too new to be included but we'll be game for the next one!) for a portfolio of global properties. The dispersion in the results, for an individual property, are stark but unsurprising. For the same location, some models predict no flooding while others predict several meters, cyclonic wind speeds can vary from Cat 1 to Cat 5, and damage and loss predictions are all over the map! This report validates what we already know, that model outcomes will vary amongst providers, causing confusion for consumers. But it doesn't really get to the root cause. I think there are a few primary drivers for the divergence that are important to be aware of: 1. Spatial resolution of the hazard - especially for hyperlocal hazards like flooding - varies widely amongst providers. And none are really meant to be site-specific, you would need very specific details on drainage and grading for that. 2. The treatment of properties as locations with buffer zones rather than as actual buildings with physical footprints can lead to inaccuracies. For instance, some providers mistakenly placed properties in the middle of the North Sea due to reliance on geolocations without verifying address/property. 3. Almost all providers use historical claims-based damage functions that were developed to serve the insurance industry where average loss estimates across portfolios of thousands of buildings are sufficient to price insurance exposure but a very blunt instrument to characterize risk at an individual building. 4. Some of the hazard models are just plain wrong - I'm not sure how you can explain the enormous variance in wind speed for example, since wind is not a hyperlocal phenomenon like flood or wildfire. What we need is clarity to cut through the noise. All risk assessments are not created equal. That's why we developed the #RiskClass Taxonomy when I was at Arup, which outlines criteria to qualify for a given Risk Class. The truth is, a couple providers on this list are much more sophisticated than others, while the vast majority were purpose built for minimum reporting requirements (Class 0), which frankly tolerate low accuracy. It's like comparing apples and oranges. Wouldn't it be nice to categorize them based on what Risk Class they can provide? Because where most of these vendors stop is where the hard questions start. If you can't be confident in your risk in the first place, how can you be confident in your resilience strategy? For that, the market needs to move towards Class 2 and 3 level assessments, which the current solutions just don't support. #Iris #resilience #confidence #accuracy https://lnkd.in/gud35BYR