Natural Hazard Exposure and REIT Equity Risk

Bing Zhu and Franz Fuerst

ERES from European Real Estate Society (ERES)

Abstract: This paper investigates if exposure to natural hazards in its underlying assets affects the equity risk of a real estate fund. In a panel dataset of 139 distinct Real Estate Investment Trusts (REITs) over the period of 2004 to 2021, we find that REITs with a higher natural hazard exposure show a higher market beta. This finding persists even when possible endogenous market selection is taken into account, using historical hurricanes as a natural experiment and an instrumental variables approach. The increased systematic risk is explained by the increased cost of debt and reduced rental income. Assets in more resilient communities, more green buildings in the portfolio, and higher ESG performance are all shown to attenuate the impact of natural hazard risk on the market beta of a REIT. Investors seeking to lower their exposure to climate risk can use the proposed metrics at various levels of spatial aggregation to gauge the resilience of their investments.

Keywords: Asset Pricing Model; Market Beta; Natural Hazard Risk; REITs (search for similar items in EconPapers)
JEL-codes: R3 (search for similar items in EconPapers)
Date: 2023-01-01
New Economics Papers: this item is included in nep-env, nep-rmg and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:arz:wpaper:eres2023_64

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