If there is a single characteristic that defines the current real estate investment cycle, it would undoubtedly be the sense of upheaval. The confluence of numerous market shocks–what one might call geopolitical and economic “polycrisis”–technological innovation, increased regulatory complexity, and the imminence of climate change have created an investment landscape that has presented LPs with particularly daunting challenges. However, like any downturn, it has also offered GPs and LPs an opportunity to outperform their peers through finessing their management.

In an institutional investor’s wider portfolio, real estate has become a much more nuanced asset class than amere proxy for fixed income with an illiquidity premium. Acquiring a core asset in a prime location, collecting rental income, and assuming an exit price higher than the entry price no longer constitutes an investment strategy. Value must be actively created through leasing initiatives, capex, repositioning, and refinancing, which requires a more hands-on and resource-intensive approach from both GPs and LPs. At the same time, they have to have the processes and tools in place necessary to mitigate an increasingly complex set of risks and ensure that the real estate portfolio is resilient to financial, regulatory, and physical climate risk, all whilst complying with regulatory and reporting requirements. Physical climate risk, in particular, is central to valuations, as natural disasters with an immediate impact on operating costs and rentability–flooding, heat waves, and wildfires–become increasingly common.

Insurance companies, for whom the concept of risk mitigation as a differentiator is an inherent part of the business model, are particularly well positioned to design resilient portfolios. The combination of robust underwriting capabilities, access to data, and embedded corporate governance has created a competitive advantage with a measurable financial impact on their investments. Critical to value creation and protection is not just the availability of data but how it is used to actively forecast future events and the longer-term impact. RogerBaumann MRICS, COO and Head of Product Development for Global Real Estate at Zurich Insurance Group, has overseen the integration of the Zurich Resilience Solutions climate risk analysis platform into the investment process, an initiative that allows the firm to better assess future insurability, availability of financing, and obsolescence risk both for individual properties and the wider portfolio.

“The holy grail of forecasting is being able to underwrite the impacts of future extreme weather events, even in locations where they may not be occurring right now, on operating costs and rentability, and include that in valuations,” Baumann says. “In portfolio construction and management, it isn’t sufficient to look at past events. We need to look at multiple scenarios that could play out in any given location over the next 50 to 75 years and assign a quantitative value to, for example,the probability of not being able to insure an asset because there will be highly disruptive flood events in 2030, 2035, and 2040. How much higher will the cost of financing be in a location where the institutional lenders will be unwilling to offer debt because of heatwaves disrupting business operations and private debt funds are our only options?”

For large institutions, it is vital to have the systems that allow asset and fund managers to do this at scale. Zurich manages a €20bn real estate portfolio comprising more than 1,000 individual assets across the residential, office, logistics, and retail sectors in different jurisdictions, and being able to assess climate risk in a way that is standardised, transparent, and easily communicable is key. “Using Zurich Resilience Solutions to truly leverage our data has a direct financial impact on our investments because we use our forecasting to make decisions around both spending on adaptation measures and our internal resources and bandwidth,”Baumann says. “Climate risk is a critical part of the asset acquisition process, and ultimately, we expect to use our climate impact intelligence to make decisions around strategic disposals as well.”

For smaller GPs, the challenge of the changing market landscape is different: although they do not need to manage such large and complex portfolios, their investors expect the same calibre when it comes to investment and portfolio decisions, as well as the same quality and comprehensiveness of reporting. The upfront cost of a resource like Zurich Resilience Solutions may seem prohibitive, but it is becoming clear that a certain level of sophistication is the basic requirement to being competitive in the investment management space, and in the current market environment, it simply takes more effort to generate the kind of returns seen in previous cycles. Though that is a message that is unlikely to be received with enthusiasm, in the new normal, it will be the firms who take the time, effort,and money to analyse their operations and strategies and invest in increasing the sophistication, accuracy, and efficiency that will see their portfolios perform well and remain resilient.