Developing adaptively: The role and capacities of private sector developers and financing in urban climate change adaptation
Adaptation Research Grants Program
Executive summary from final report:
The urban environment is particularly exposed to climate change impacts due to a range of geographic and social factors. For example, cities are often located on floodplains or near the ocean; areas that are vulnerable to floods and sea level rise. Cities are also dependent on the import of resources from external regions, which may be exposed to additional impacts, such as drought, bushfire or social unrest. However, the built environment is spatially fixed; and urban infrastructure, such as buildings, roads and rail, cannot easily or cost effectively be relocated to less vulnerable locations.
Urban development relates to climate change in at least three important ways. First, the product of development—the built environment—has climate impacts through the materials used; and the design and location of developments. Second, the nature of the developer’s products and the resulting built environments—such as its location and scale—influence the degree to which users are exposed to climate change hazards. Third, climate change presents direct and indirect challenges and hazards to which developers will need to adapt.
The future environments built through property development activity will strongly shape future urban capacity to respond and adapt to climate change impacts. The current and future development decisions and the flows of investment that follow from these decisions have the potential to significantly influence the national capacity to adapt to climate change. Therefore, improving the knowledge of the capacity and weaknesses of private urban development and financing institutions in the area of climate change is a critical imperative within a wider policy of responsive climate change adaptation. Ignoring the private development sector and its institutional complexities would be to ignore a major potential source of improved adaptive activity.
This study aims to investigate the institutional capacity of the private urban development sector in South East Queensland (SEQ), Australia, to respond to the task of climate change adaptation and in turn, investigate the role of private financial institutions in funding climate adaptive urban development. To do so, it used a desktop literature review, an online questionnaire survey, and a series of semi-structured interviews and focus groups with developers, consultants, State and Local Government staff, architects, solicitors, planners and financiers.
A total of 62 people responded to the online survey; and 21 interviews and 3 focus groups (9 participants) were held. Developer firms were diverse, ranging from large ASX-listed companies to small family firms; these also included two developers representing quasi-government corporations. Likewise, consultancies were widely diverse, ranging from multinational engineering firms to one person practices; two of which also specialised in climate change adaptation. Two financiers, two architects, a solicitor, and State and Local Government representatives were also interviewed.
The results of this research demonstrated that the adaptive capacity of the urban property development industry is dependent on a combination of complex and interconnected factors. The most important factors determining adaptive capacity were economic resources, financing and market conditions; government regulation and industry self-regulation; firm size and structure; the type and spatiotemporal scale of developments; and the concepts of leadership and legacy. These factors could be broadly characterised under the following categories; participant characteristics, internal attributes, development characteristics, regulation, and economic and market characteristics.
The size and company structure of developers was significant. Larger developers with a range of diverse products had more flexibility to introduce adaptive measures, as they were less dependent on bank funding, and could also afford to employ or contract specialist consultants. Such firms were also conscious of their enduring legacy, and intended their development products to showcase their brand. However, some smaller developers were also driven to produce high quality products, and this motivation largely depended on personal attitude.
Economic conditions and finance were highly significant. In the post Global Financial Crisis (GFC) environment, market conditions and the availability of finance largely dictated the type of development produced, particularly for smaller firms. Previously, SEQ developers had profited from the region’s high population growth. However, after the GFC, the demand for property, particularly units, had plummeted. The GFC had had a major impact on the development industry, with many firms going out of business, or moving to other ventures.
The GFC also negatively impacted on the financial sector. During the post GFC period, financiers began to impose a range of increasingly onerous conditions on development loans, requiring a high percentage of pre-sales (often greater than 75%), more stringent reporting requirements, and a higher proportion of equity. Thus, all respondents reported difficulty in obtaining bank finance for developments; with some developers seeking alternative funding sources, such as high net worth individuals, or even international private equity.
The economic situation also influenced how developers marketed their products. Pre GFC, many firms had used “green” sustainability features to differentiate their products from their many competitors. However, post GFC, purchasers were significantly more price conscious, with the result that the “nice to have green measures” were omitted.
However, commercial developers continued to incorporate sustainability features into buildings, in response to tenant demand, reduced operating costs and government subsidies. There was little demand for sustainability features from the residential market, unless these incurred no additional cost. To a limited extent, the retirement sector wanted some sustainability features; this was driven by the desire to reduce costs, particularly energy costs. Thus, market demand served as both a driver and a barrier to adaptive capacity.
The time, scale and type of development were also major determinants of adaptive capacity. In general, the larger the development, and the longer the development time frames, the more likely it was that developers were concerned about the potential risks of climate change, and would implement adaptive measures. The converse was true for smaller developments with shorter time frames. For these, the developer’s main goal was to complete the development as quickly as possible, in order to reimburse bank loans. Lending policies exacerbated this, as banks were not prepared to loan money to developers for longer than a maximum of two years.
The regulatory environment was generally seen as a barrier to adaptive capacity, with a plethora of complex, confusing and inflexible regulation from all levels of government. However, the Building Code of Australia (BCA) was viewed by many as the regulatory avenue with the most potential for compelling climate change adaptation. For example, past climate events, such as Darwin’s Cyclone Tracey (1974) had resulted in rapid changes to the BCA, to which all developers have to adhere.
Other potentially important avenues for adaptation were attitudes and knowledge. A number of respondents expressed confusion and scepticism regarding climate change, and the potential impacts. They associated climate change primarily with sea level rise, and saw this happening, if at all, in the distant future, and thus, posing minimal risk. Despite this, many commented on the need to incorporate environmentally sustainable features into developments, particularly if there was a market demand for them.
Developers also regularly used industry-specific certification schemes such as Green Star and EnviroDevelopment. To some extent, the development industry appears willing to adapt to climate change, but the risks need to be better communicated.
Further, the insurance industry has the potential to drive adaptive capacity. In North Queensland, extreme weather events, such as Cyclone Yasi (2011) had resulted in large premium rises, particularly for strata titled units. Developers reported great difficulty in selling these properties, as the Body Corporate fees were extremely high due to the insurance costs. However, unless insurers link premiums to the introduction of adaptive measures, price rises are likely to be maladaptive, resulting in properties with inadequate or no insurance.
While all of the above factors could be drivers or barriers to adaptation, combining these into a rating scale of adaptive capacity would be unproductive. These factors are all interconnected, and a high “score” on one factor, may mean a low “score” on another. Moreover, adaptive capacity is not fixed; it is flexible, dynamic, multidimensional and dependent on a number of interrelated factors.
Therefore, one potentially useful way of capturing adaptive capacity is to use a systems approach; by focussing on how the firm and its development products interact with the broader social, economic, environmental and political environment in which it operates (Smith et al., 2008). In this manner, the property development industry is viewed as a dynamic player in a complex environment, which can and does change in response to the interaction of multiple, and interrelated factors.
In conclusion, this research has identified some important drivers of adaptive capacity for the urban property development industry: such as the size and structure of a developer; industry self-regulation schemes; the insurance industry; and the flexibility of the BCA to incorporate adaptive measures. Other potentially important drivers could include encouraging demand for sustainable features in the residential market; perhaps by quantifying long term savings or subsidising developers, as in the commercial sector. Further, if financiers could tie loan conditions and/or the insurance industry could link premiums to the provision of adaptive measures; this could serve as a major driver. Finally, the desire by developers to be recognised as professionals, in combination with brand and legacy, are also important.
More research is needed on many of these, particularly on the potential for the financial and insurance sectors to drive adaptation. At present, both these industries are serving more as agents of maladaptation; with financiers putting time pressure on developers, and insurers raising premiums without requiring adaptive changes.
Social, Economic & Institutional Dimensions
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