Flooding the market

Another year and more major flooding across swaths of Central Europe. The floods that struck the region (and in particular Poland) in 1997 were referred to at the time as the '1,000-year flood'; in turn, those that devastated Prague and other Czech, German and Austrian cities in 2002 became known as the '500-year flood'. However, the stark fact is that these are no longer freak occurrences. It is becoming clear that these calamities are increasing in both frequency and magnitude. After the latest deluge, some have even been prompted to ask whether we need to move our settlements away from the flood plains completely. But for developers and their potential tenants, the question that arises is whether it is still worth investing in some of the riverside areas designated for commercial development in cities susceptible to floods. One of these is Karlín in Prague, a post-industrial district that was being busily revitalised into a modern commercial and residential area when it was submerged by up to three metres of water in 2002. Nevertheless, once the clean-up was completed, projects restarted and investors returned with office projects - and these included such major players as HB Reavis, Skanska and Immorent. In 2008, Sekyra (now part of Hamilton & Co.) won the tender to buy Rohanský Ostrov, an especially vulnerable part of the district that juts out into the river, for around CZK 1.69 bln - one of the most expensive land purchases the region has ever seen. If Karlín had been devastated by the flood waters again this year - and thankfully, due to the city's improved flood defences it didn't - it could have been entirely written off by investors.

Taking a rain check - literally
"Recently investors, nervous about the amount of development in the district, have been taking a watching brief about Karlín, standing back and looking at the risk of over-supply," says James Chapman, a partner of Cushman & Wakefield in the Czech Republic and head of capital markets. "If it had flooded again it would have provided one more reason not to invest there. However, since the flood we can see that we don't merely have a flood protection system in theory, but that actually works. So perhaps the June floods will turn out to be the spark that improves the image of Karlín," he suggests. So far flood precautions have been left to local and central government, but in response to the increased flood-risk the EU is currently implementing a pan-European floods policy. In October 2007, the EU Parliament and Council passed the Floods Directive on the assessment and management of flood risks. This obliges member states to make detailed flood risk assessments of their territories and draw up risk management plans by the end of 2015, which are to be updated every six years. The areas most at risk should be known by the end of this year, since this is when national water management authorities are obliged by the directive to issue maps specifying the flood zones. In Poland a preliminary selection of the areas to be covered by the maps was provided in 2011 by the Polish national water management authority. For example, in Warsaw the area covered applies to around a third of the city, including Praga Południe, Praga Północ, Lower Mokotów and Wilanów. Mathematical models are to be created to determine the extent of the risk in all these areas, precisely indicating those that fall into the high risk category. The results will then be taken into account in drawing up zoning plans for the country and each of its provinces, as well as for local zoning plans and the specific decisions for the locations of developments.
"Everybody will have access to these maps as they will be made public. When an investor wants to buy land it will be possible to firstly check what the risk of flooding is and base any decision made on that," explains Michał Milewski, a spokesman for the Polish Ministry of the Environment. These plans, which will also cover zoning and land development issues, should be ready by the end of 2015 and are to be updated every six years.

Real and unreal risks
Once all these measures are in place, will they be enough to keep in check both the flood waters and the fears of the wider real estate sector? James Chapman of Cushman & Wakefield is convinced that they are already having a positive influence on confidence: "I think the current EU flooding directive shows clear recognition that something has to be done about the increased flooding, and this itself is communicating a positive message, in that action plans are being drawn up to protect ourselves from this problem," claims Mr Chapman. "From a risk point of view, having seen a potential flooding event prevented and the fact that such extreme events passed without too much damage, insurers can see that the risk is no longer just hypothetical - we now have real evidence," he adds. There is, however, a wider moral issue entailed by putting our trust in city flood barriers instead of moving development away from rivers. Such defences tend to shift the problem further downstream to less strategically important towns and villages without the same flood protection. According to James Chapman, this "seems to be more of an issue for residential development. But there appears to be less concern about that than for major business centres with commercial development."

Take me to the river
"In my personal opinion, there is an inherent human desire to be near water, as can be seen from the fact that all our major cities are located on rivers," says Cushman & Wakefield's partner. "Rivers have always been the source of many essential features of our lives - washing, trade, power - and I don't see any movement away from that and relocate onto higher ground. I do hope that the evidence of what happened this year will give investors a lot more comfort - now we have concrete evidence. If we look at Tokyo, Mexico City and Los Angeles, these are cities where earthquakes are a regular occurrence, perhaps more than floods are here. Have they stopped developing in such cities? No. They have found ways to adapt. Europe has had a big wake-up call in recent years and is now taking adaptive measures. People are accepting that there is a risk of major flooding happening and are making sure that their buildings are protected against it," concludes James Chapman.

With a contribution from Rafał Ostrowski