Stranded Commercial Real Estate Assets: The Flooding Challenge in the UK

The United Kingdom faces a growing challenge that threatens its economy: flooding.

Stranded assets are investments that have become obsolete or non-performing due to external changes and especially environmental factors like flooding. With the increasing frequency and intensity of flooding due to climate change, more commercial assets are at significant risk of becoming stranded.

This blog delves into the impact of flooding on commercial assets in the UK, the underlying causes, and solutions available.

The Growing Threat of Flooding

Large parts of the UK have experienced several severe flooding events in recent years and one of the ten wettest winters on record in this recent year reported by the Met Office¹. These have devastating impacts on businesses and effect investor returns.

Flooding leads to stranded commercial assets in several ways:

1. Physical Damage: Extensive damage to buildings, machinery, and inventory can be prohibitive for SMEs or render other real estate sectors such as sites in hospitality, care homes or logistics completely inoperable.
2. Operational Disruption: Businesses face prolonged closures during and after floods, leading to significant financial losses. This disruption affects supply chains, employee productivity, customer relationships and investor confidence.
3. Decreased Property Values: Properties in flood-prone areas decline in value, deterring investors and lenders.
4. Insurance Challenges: High-risk areas face increased premiums or un-insurability, stranding assets further.

Underlying Causes

Several factors contribute to the increased risk of flooding in the UK:

• Climate Change: Rising global temperatures lead to more extreme weather patterns, including heavy rainfall and storms, which increase the frequency and severity of floods.
• Urbanisation: Expansion creating impermeable area, increasing runoff.
• Ageing Infrastructure: Outdated flood defences and drainage need significant investment or upgrading.
• Poor Land Management: Inadequate land-use planning and deforestation can exacerbate flooding by reducing the land’s natural ability to absorb water.

Case Studies: Impact on Commercial Assets

1. Carlisle Floods (2016): Floods in Carlisle led to significant damage to commercial properties, including businesses and manufacturing plants. The economic impact was severe, with many businesses struggling to recover even years later.  Flooding of the McVities biscuit factory resulted in 50m+ of insurance costs and a 6 month recovery period².

2. Butlins (2023): The holiday resort owner is currently in a £60m dispute with insurance companies after their largest resort in Minehead was flooded resulting in major impacts on their ability to operate³.

Mitigation Strategies

To help combat the possibility of stranded commercial assets due to flooding, a number of approaches are available:

• Identify the risk: Screen portfolio and new acquisitions to identify current and future flood risk to support risk management strategies and business planning.
• Resilience Planning: Encouraging businesses to develop resilience plans, including insurance coverage, emergency response strategies, and contingency planning, can mitigate the financial impact when flooding occurs.
• Investment in Flood Defences: Enhancing flood defence infrastructure, such as barriers, levees, and drainage systems, is crucial. The government and private sector need to collaborate on funding these improvements as well as asset owners.
• Sustainable Urban Planning: Promote green infrastructure and sustainable land-use practices to improve drainage and slow down the movement of water.
• Policy and Regulation: Strengthening regulations around building in flood-prone areas and encouraging the use of flood-resistant construction materials and techniques can reduce vulnerability.
• Early Warning Systems: Improving flood prediction and early warning systems can give businesses more time to prepare and minimise damage.

Commercial Assets at Risk in the UK

The UK has around 1.6m commercial properties. These assets are a key part of the economic development of the UK and are relied upon by millions for their day-to-day livelihoods but are also, crucial to the billions of investments made by investors globally. Asset managers need to carefully understand the potential affects that flooding can have on creating a stranded asset.

The key cause of becoming a stranded asset from flood risk would be long term un-insurability, largely driven by a worsening flood situation from climate change. Un-insurability is likely to occur where the average annual damages become excessive^4,5,6,7.

At GeoSmart we have calculated the typical annual damages from flooding for every property in the UK. We have ranked every property on a scale from 0 to 100 both now, and in a future climate change induced scenario, allowing comparison of risk between different locations and within a portfolio.

Annual damage calculations depend on flood frequency, duration, depth and type of flooding. Losses are calculated on a 5m² grid which is quantified for the site, then scaled to create a relative index for comparing risk severity across multiple sites.

UK Climate projections (UKCP18) produced by the MET Office¹ use different carbon emission scenarios known as Representative Concentration Pathways (RCPs) to predict a range of climate effects, which are updated periodically. GeoSmart has modelled the impacts of different RCP scenarios over the future timescale of potential investments. Changes to the proportion of ‘at risk’ commercial properties are shown below, assuming a representative worst case high emissions scenario (RCP 8.5).

A key point is the increase, from 1% currently to 4% of properties in the 2080’s, in the very high risk category which may have difficulty in obtaining insurance, with the potential to be un-insurable in the long term and therefore result in a high chance of entering a stranded state. We have identified around 10,000 properties, doubling to 20,000 by 2050 and doubling again to over 40,000 by 2080 potentially in this category. Average Annual Damages for these properties may increase by over a factor of 10 by 2080.

Conclusion

The threat of flooding in the UK poses a significant risk to commercial assets, potentially stranding them and leading to substantial losses. Addressing this challenge requires a concerted effort from investors, lenders and insurers to invest in the right technology and data, infrastructure, sustainable practices, and develop comprehensive resilience plans.

Action needs to be taken now to identify these risky assets and take action to prevent them from becoming stranded in the future through flood mitigation and careful risk management.

Geosmart’s proprietary flood data and consulting services is geared for asset managers, insurers and lenders and can help you take action now to manage and mitigate flood risks across all transactions including acquisitions, disposals and existing portfolios. Find out more by visiting us at: GeoSmart for Asset Managers or get in touch directly below:

References

1. https://www.metoffice.gov.uk/research/climate/maps-and-data/summaries/index
2. https://www.in-cumbria.com/news/17252467.firms-50m-insurance-bill/
3. https://www.telegraph.co.uk/business/2024/04/29/butlins-sues-aviva-definition-storm-floods-somerset/
4. https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2014/02/WP144-Flood-insurance-in-England.pdf
5. https://assets.publishing.service.gov.uk/media/5a74c78de5274a3f93b48beb/04-947-flooding-summary.pdf
6. https://floodflash.co/2022-commercial-risk-report/
7. https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2014/02/WP144-Flood-insurance-in-England.pdf