Majority of REITs Will Experience Water Scarcity by 2030, BlackRock Says

Properties built in the Southwest, as well as abroad in places such as Australia, Hong Kong, and Malaysia, will have to compete more for water resources in the next decade, report finds.

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.

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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.

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Tags: BlackRock, Climate Change, environmental social and governance investing, ESG, sustainable investing, water, water scarcity

A new report from Fitch Ratings warns that the economic impact of the COVID-19 recession will be felt for years, as it expects the largest advanced economies will stay 3% to 4% below their pre-pandemic trend path by the middle of this decade. And that’s if we’re lucky, because the forecast is based on an optimistic assumption.

Fitch said the updated gross domestic product (GDP) growth projections through 2025 for the 10 advanced countries covered in its Global Economic Outlook are approximately 0.6 percentage points below its previous five-year projections. For example, it cut is forecast for US productive potential growth to 1.4% from 1.9%, lowered the UK’s forecast to 0.9% from 1.6%, and dropped the eurozone’s to 0.7% from 1.2%.

But that’s only if there’s no setback in the fight against COVID-19 and countries aren’t forced to lock down again, which may be unlikely as the number of cases and deaths worldwide continue to climb. In the report, Fitch said “a reasonable base-case working assumption for the purpose of economic analysis is that the health crisis gradually eases over time, with renewed nationwide lockdowns avoided and virus containment sought through more targeted responses.”

However, that assumption may be facing a threat. Earlier this week, UK Prime Minister Boris Johnson said Europe is starting to see signs of a second wave of the coronavirus, while the head of Germany’s public health agency said it could already be in a second wave. And Belgium Prime Minister Sophie Wilmes warned of a potential second lockdown. Meanwhile, the number of COVID-19 deaths in the US recently topped 150,000 with no signs of abating.

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Rosy assumptions aside, Fitch’s downgrade stems from expecting a combination of rising long-term unemployment and sharply falling business investment. It said the “jobs shock” is likely to cause many workers to struggle to quickly get back into the workforce, which would result in detachment from the labor market. Fitch noted that large increases in unemployment after the global financial crisis in 2008 and 2009 led to a sharp increase in long-term unemployment. It also said that labor-market dislocation will see a sustained reduction in average working hours and possibly lower workforce participation rates.

“The sharp falls in business investment that we are anticipating will also lead to lower growth in the capital stock,” Fitch said in the report. “A weaker outlook for capital accumulation accounts for about half of the revision to potential growth, with the rest explained by the anticipated reduction in labor input as unemployment rises and average hours worked fall on a sustained basis.”

Despite using the optimistic assumption that there will be no return to the lockdowns, Fitch acknowledges that the “risks surrounding these projections are very large.” However, it also said it thinks the discovery of a vaccine could save the day.

“Repeated surges in new infection rates … could cause a sluggish recovery as economic re-opening is delayed,” according to the report. “On the other hand, medical breakthroughs, which see widespread dissemination of vaccines or anti-viral treatments, could prompt a discrete easing of social distancing restrictions and behaviors, which, in turn, result in a rapid normalization of economic activity.”