Climate resilient alpha in listed real estate allocations
As climate related risk considerations move higher up on most agendas, investors might want to gain exposure to listed real estate allocations that are aligned with their strategic climate goals and at the same time offer consistent opportunities for excess returns.
One way investors can structure their allocations efficiently to achieve their climate and investment goals is by identifying climate related tail risks in assets owned by listed real estate companies and ‘tilting away’ or reducing holdings of those companies in their portfolios. In doing so, it is important to understand that climate risks as they relate to real estate assets and any potential financial damage or loss that may arise as a result of those events are predominantly concentrated to the tails (in some cases extreme tails) of climate risk distributions.
Further, individual hazards such as floods, hurricanes, extreme weather present different risks and are subject to different distributions. Therefore investors need to consider climate risks in the context of both probabilities of an event occurring (non-zero event) and conditional on that, the implications in terms of tail risks on a company’s assets. Once those parameters are established, i.e. individual companies’ tail risk exposures to individual hazards, which presents some level of constraint in the investment process, it can be combined with an alpha generating process, be it fundamental active management or systematic such as factor driven process.
Scientific climate risk assessment
Klimetrics is a physical climate risk assessment SaaS for real assets such as real estate and infrastructure. It is based on state of the art scientific CMIP climate models and other sources and high resolution satellite DEM (Digital Elevation Models) which are satellite mapping representation of the Earth’s surface and can include buildings, infrastructure, and vegetation, so called DSM (Digital Surface Models). Klimetrics uses a high resolution 1 arc second, 30x30m DSM.
www.klimetrics.com
Klimetrics provides TCFD aligned scientifically based assessment of tail risks for individual company’s exposure to each individual climate hazard including risk severity categories based on global hazard distributions and aggregate conditional risks of portfolios.
This assessment process provides consistent global risk profile for real estate companies and can be applied for climate resilient allocations.
Consistent alpha generation
In the case of factor based options, the Kania Global Real Estate CAI Index is a smart-beta index based on factors relevant to real estate and real estate securities, not general equity market factors, and has delivered consistent, systematic and repeatable live alpha in excess of +430bps across 1-, 3-, and 5-year periods. (for information about why real estate factors are key to consistent alpha generation see the following Get your Fact(or)s right, how investors can boost alpha in their REITs allocations — Kania Advisors and Consistency, consistency, consistency in REITs alpha generation — Kania Advisors ). It provides exposure to global real estate companies that exhibit economic growth at conservative risk profile. Further it is structured to provide full alpha generation capacity by ensuring a 50% active share to benchmark at all times. The index rebalances semi-annually. The significant and consistent alpha across time periods and market conditions reflects the importance of gaining exposure to specific factors that drive the performance of real estate and real estate securities when allocating to listed real estate.
Combining consistent alpha generation with scientific climate risk assessment can provide investors with actionable options to benefit from attractive returns from listed real estate allocations that are also aligned with their strategic climate goals.
For information further information, please contact info@kaniaadvisors.com
About Kania Advisors
Kania Advisors is an independent research and advisory firm focused exclusively on institutional real assets allocations and investment programmes. We provide advice and solutions to improve outcomes in real assets investment programmes. We conduct detailed industry research and custom studies typically focused on quantitative analysis and provide insights which form a critical part of a client's decision process.