Swiss Real Estate Funds and Climate-related Flood Exposure: Is Diversification the Key?

Under the current climate change scenarios, Switzerland's real estate sector faces important exposures to natural hazards, with floods alone causing over CHF 15 billion in damages over the past 50 years. Despite the rising urgency of climate risk management, research on Swiss Real Estate Funds (REFs) and their flood risk exposure remains limited. This study fills the gap by analyzing flood risks—specifically river and pluvial flooding—across REFs using two unique datasets: detailed portfolio holdings of over 9,000 properties and granular climate-oriented flood risk data. Findings show that while less than 6% of properties are at flood risk, exposure is unevenly distributed. Large funds maintain fairly low flood risk, but several smaller funds exhibit significant vulnerabilities. Swiss REFs maintain the bulk of their properties of Cantons like Zürich and Vaud investments with minimal flood exposure, while holdings in Genève, Basel, and Ticino face heightened risks. Regression analysis reveals that funds investing near their headquarters benefit from local knowledge, reducing flood risks, while geographically diversified portfolios outperform concentrated ones in mitigating climate exposure. These insights underscore the need for Swiss REFs to prioritize climate risk assessment in their long-term strategies. Proactive diversification, integration of climate scenarios and consideration of anti-flood mechanisms will be crucial to building resilient portfolios in an era of escalating climate challenges.