As we await the arrival of Storm Frank there is growing concern that flood related issues could focus future UK real estate investment on a smaller marketplace. When you see the sights of cities such as York literally underwater this does not give the best impression to real estate investors looking for long-term returns. If they can pretty much guarantee that over the next 20, 30 or 50 years there will be at least one major flooding of their property will they look elsewhere?
We only need to look at a city such as Carlisle with some residents now looking towards their third flooding in less than a month. When you bear in mind the additional cost, even if initially covered by insurance, this could decimate long-term returns.
More focused markets
It seems almost inevitable that markets will become more focused throughout the UK with investors looking to cross off areas of potential flooding from their list of investment targets. This will increase demand for a smaller group of properties and has the potential to add a significant premium to the cost of areas of the country with minimal or no flood risk. As unfair as this may sound, the fact is that investors may well be happy to pay a premium to alleviate flood related costs in the longer term.
While we await the launch of a specific flood insurance company in the UK, which will be partly funded by the insurance industry and act like a type of collective risk vehicle, there is no doubt that costs for those at risk of flooding will increase. In years gone by the government passed regulations which effectively forced insurance companies to maintain insurance going forward even in the event of an increased risk of flooding. All the insurance companies did was increase premiums, while abiding by regulations, to such a level as they were either unaffordable or unrealistic for their customers.
While it would be wrong to suggest that potential flooding issues have not been taken into account by property investors in years gone by, there is no doubt that these risks will be more prominent going forward. We will see an array of risk assessments for areas of the UK over the coming weeks, months and years and these will to a certain extent dictate the shape of the future UK property market. It is all good and well suggesting these flood related issues we see today happen very rarely but even once every 10, 20, 30 or 50 years could literally decimate the value of an investment.
The areas throughout the UK which are at increased risk of flooding in years to come could see reduced investment from property investors. We will also see flood risk premiums factored into investment return calculations which will focus more interest upon those areas at minimum risk of flooding. It will be interesting to see how the UK property market reacts to the ongoing flood issues and whether indeed we do see a very different shape in years to come.