Misclassifying flood risk in England might have resulted in mispricing commercial real estate by as much as £15bn-£31bn, according to new research by CBRE. To put that in context, £31bn is roughly half the value of all City of London Offices (£63bn).

The findings in Understanding Flood Risk indicate that for investors concerned about flooding, basing decisions on Environment Agency (EA) maps may unnecessarily limit their investment options, missing or mispricing opportunities as a result. CBRE found carrying out more detailed site-specific flood risk analysis opens up new areas to investment and informs risk management strategies.

Investors look at the flood risk of an asset, so they can take precautionary asset management steps or influence investment decisions. The risk of flooding to the UK’s commercial property sector is set to increase, as studies into climate change suggest sea levels could rise by 80cm by 2100, and there will be increased river flooding in 85% of UK cities between 2050 and 2100.

Maps of flood risk zones for England produced by the EA cover most areas at risk. The EA generally produces flood modelling and mapping at a catchment scale, which means that the actual food risk at a site-specific scale may be different.

CBRE's Environmental Consultancy undertakes detailed site-specific flood risk analysis for clients. CBRE examined the differences in site-level flood risk versus the estimates produced by the EA.

Across England results show a large disparity between the two approaches. CBRE found 62% of sites have a flood risk lower than determined by the EA. In some cases, the EA significantly overestimates local flooding risk. 21% of properties were classified as Flood Zone 3 by the EA (high risk) but our results showed a very low risk. A further 32% was classified as high risk by the EA flood maps but were determined to be of low risk by CBRE.

Regionally, there was little deviation from national-level average. The South (London, South East, South West and Eastern regions) shows a similar pattern to the national results with 62% having a flood risk lower than that determined by the EA flood maps.

Results elsewhere showed slightly more divergence: in the Midlands 72% of properties were found to have a flood risk lower than that stated by the EA flood maps, and for the North (North West, North East, Yorkshire & Humberside) the proportion was 56%.

Tim Fay from CBRE’s Environmental Consultancy said:

“Across England we’re keenly aware of the risks flooding presents, having seen the damage to buildings during periods of extreme weather. As a public agency, the EA must by necessity adopt a precautionary principle, and it leaves the onus on developers and investors to carry out site-specific assessments. Our comparison of asset-level flood risk as determined by the EA's maps and more bespoke site-specific analysis shows that there can be real value for commercial real estate owners and investors in investigating and understanding the true level of flood risk at their assets.

 “Properties in an area designated as at a high risk of flooding could, for example, be more difficult to let and could attract only a small pool of investors. Having a more detailed understanding of flood risk at a site-level can help owners and investors manage flood and insurance risk across their portfolio and help make more informed decisions.”

Read the report here: Understanding Flood Risk: Unlocking real estate investment potential