Flood protection and land value creation – Not all resilience investments are created equal

Is disaster risk management’s sole purpose to reduce damages from natural hazards or is it a more fundamental requirement for growth and development?

Consider an urban location that is close to many jobs and services but is subjected to frequent floods. A few households may decide to settle there for accessibility, but they will unlikely invest much in their dwellings given the annual destructions. Most households will likely prefer to stay away, even if they have to spend more time and money in a daily commute.

Now, if the flood risk disappears because of investments in flood protection, more households will likely choose to settle in the area and invest more in their dwellings, since it is less likely that floods will wash away their assets. Investments in disaster risk management (DRM) makes the location previously prone to flooding safer and more attractive to live in, increasing the willingness of households and businesses to invest. This should translate into increased land values, more productivity, higher economic output, and, therefore, higher incomes and better lives.

We believe DRM investments are essential for growth and development estimates of land value creation potential can help support arguments for interventions for at least two reasons.

• First, putting a dollar value on these wider economic benefits helps make the case for resilience investments, because they better capture the benefits of these interventions. In short, a more complete cost-benefit analysis will give governments reasons to intervene earlier.
• Second, estimating increases in land values triggered by DRM interventions opens up the possibility of land value capture to retrospectively recoup the initial investment costs or help finance other public priorities, such as health or education.

What can urban simulation models bring to the table?

In our  paper recently published with support from the Global Facility for Disaster Reduction and Recovery (GFDRR), we investigate land value creation potential from flood protection investments. Using Buenos Aires as a case study, we use a simple urban economics model in both a theoretical and applied setting, and look at a real-world investment to illustrate the model’s relevance.

Urban economics models bring two main advantages for these estimations. First, they can be used ex-ante, without having to wait for the investments to happen and the housing and land markets to adjust, and without requiring costly data collection. Second, they document both the land value changes in the locations where the interventions happen, as well as the entire urban area. They can account for general equilibrium effects where land values shift as a result of changes in the relative attractiveness of different parts of the city. For these reasons, urban simulation models are useful complements to classical statistical methods, such as hedonic pricing or other ex-post methodologies.

Figure 1: Illustration of how flood protection investments in central Buenos Aires (CABA) reduce the area flooded by centennial flood events. Source: Urban Infrastructure Directorate, Autonomous City of Buenos Aires.[1]

Figure 2: Distribution of land value changes due to resilience investments across the urban area of Buenos Aires

Not shying away from uncertainties

One drawback of urban simulation models is that they involve significant uncertainties and have important limits. To uncover the robustness of our estimates we tested more pessimistic flood damage functions, modified the modelling framework to allow for in-migration as a result of reduced flood risks and tested the impact of parameter value changes in a systematic way.

This systematic uncertainty exploration revealed three key takeaways.

• First, the quality (and vulnerability) of the buildings (how much damage does a given flood-depth entail to buildings?) is a key to our estimation. With more fragile buildings, the land value created by flood protection increases by as much as five times. This suggests that our results may be even more relevant for lower-income cities, where building quality tends to be lower.  
• Second, we checked that our results are robust for a wide range of parameters and are not dependent on a very careful calibration. This reinforces our view that the findings presented here are valid in Buenos Aires, but also in many other contexts and for many other cities.  
• Finally, and most importantly, we find that in-migration as a result of reduced flood risks would increase land value creation potential dramatically. In other words, the ability of a city to attract and host a larger population is a key factor to take into account, and long-term value creation (including in-migration) is likely to be much larger than short-term value creation.

Table 1: Aggregate impacts of the flood protection investments on land values, household utility and population in polar modelling setting and for the two sets of damage estimates from floods used in this study

Real-world relevance: simplified framework for quick estimates

Can these results be used to inform flood management investments in other places? Yes! We know that even a simple urban economics framework may be out of reach for practitioners working for a municipality, or for an analyst working in a water or risk management agency. Conscious of these challenges, we have developed reduced-form expressions of our model that only need a subset of the initial data requirement to be deployed to provide rough (but robust) land value creation potential estimates from DRM investments.

These simplified methods will make it possible for project developers to better explain and quantify the value of investing in disaster risk management, but also to explore innovative financing options that use some of the land value created by the project to pay the significant upfront cost of this type of projects. By doing so, we also hope to contribute to a new mindset among risk managers, from a defensive approach focused on avoiding damages to a more ambitious framing that put risk management at the core of a development strategy.  

[1] The flood maps’ quality differs within and outside CABA boundaries. Within, the hydraulic model is regularly calibrated and validated, whereas outside, the maps are simpler approximations based on topography only.