Abstract

This study aims to analyze the impact of physical climate risks on the Canadian real estate market. Building upon the framework established by Duprey et al. (2021), we define and utilize a Multi-hazard Exposure Average Index (MHE) to measure the intensity and frequency of natural disaster exposure for each of the 1658 Forward Sortation Areas (FSA) in Canada. We examine the effects of the Average MHE on the operating and equity performance of Canadian Real Estate Investment Trusts (REITs). Our findings reveal that REITs with properties facing heightened exposure to climate change physical risks report lower rental revenues and operating expenses. Additionally, our analysis indicates no significant relationship between the exposure of property portfolios to physical climate risks and abnormal stock returns, suggesting that the effects of climate risks are already integrated into market valuations. We further develop our study by exploring the interactions between the MHE Average Index and the main property types within REIT portfolios, where we observe statistically significant effects. This paper contributes to the understanding of how environmental factors are reshaping the financial dynamics of Canadian real estate investments, highlighting the importance of considering climate risks in investment decisions and property management.