How climate change affects property returns and volatility: evidence from multiple asset classes

Fatma Alahouel

Journal of Property Investment & Finance, 2025, vol. 43, issue 6, 611-630

Abstract: PurposeTo deeply understand the impact of climate change, we examined the effects of both physical and transition risks on a diverse range of property and real estate investments, including REITs, non-Real Estate Investment Trust (REIT) property indices, green real estate, Shariah-compliant assets and bonds. We sought to determine whether the impact of climate risk is similar across these asset classes, how it affects investment prices and volatility and whether certain types of investments (Shariah-compliant and environmental, social and governance-focused) exhibit greater resilience or vulnerability.Design/methodology/approachWe used a quantile-on-quantile regression.FindingsTransition and physical risks generally have a detrimental effect on returns, especially for lower-performing assets across various indices, such as REITs and bonds. However, some high-performing segments within specific REIT indices and green real estate show a degree of resilience, even occasionally correlating positively with physical risk under certain conditions. Shariah-compliant investments exhibit distinct vulnerabilities in returns, especially at higher quantiles, yet they maintain a relative stability in volatility. When it comes to volatility, high transition risk often lessens low-to-moderate volatility but can amplify extreme volatility, particularly in REITs and certain Shariah-compliant indices. Typically, physical risk follows a comparable trend, causing instability in markets that are already prone to volatility, but its repercussions on Shariah-compliant properties are more subtle.Research limitations/implicationsThe implications of this study’s findings are significant for investors, portfolio managers and policymakers alike.Practical implicationsTo adeptly manage the changing dynamics of climate-related risks in the real estate market, investors are advised to integrate climate risk assessments into their portfolio construction and diversification strategies. At the same time, real estate companies must take proactive measures to address both transition and physical risks by investing in adaptation initiatives and developing comprehensive transition plans. Moreover, it is imperative to enhance market transparency and incorporate climate risks into asset pricing, which calls for improved data availability, standardized reporting, and increased investor awareness.Originality/valueTo our knowledge, this study is the first to analyze the differentiated effects of climate risks on a diverse property investment portfolio.

Keywords: Climate risks; Quantile-on-quantile regression; Property investment; Stochastic volatility (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jpifpp:jpif-04-2025-0047

DOI: 10.1108/JPIF-04-2025-0047

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