Impact investing: Beyond the financial return
Impact investing in real estate is gaining momentum. Rachel Fixsen looks at today’s market strategies
Under pressure from socially and environmentally-minded stakeholders – and keen to avoid being left behind in a changing world – institutional investors are being drawn to impact investment with its image as a turbo-charged form of environmental, social and governance (ESG) investment.
While impact investing is linked to areas of ethics, it does have clear differences from ESG. Impact investing, according to the UK National Advisory Board on Impact Investing, focuses on one or more issues, with an intention to make a positive social or environmental impact.
The spotlight has mainly shone on bond issues so far, but real estate is beginning to come under the glare.
Simon Chisholm, investment director at Resonance, says: “For us, [impact investing] is an investment which has an intentional and measurable positive social impact, as well as a good financial return.” The firm, set up in the UK 15 years ago to invest in social enterprises, runs three property funds: two in a series of Real Lettings Property Funds focused on London, and the National Homelessness Fund.
“Much impact investing in real estate to date has focused on positive environmental impact – energy efficiency, and so on – but we are focusing here on positive social impact,” he says.
In that area, Chisholm says there is a spectrum of impact that ranges from the traditional financing of social housing – via housing associations, for example – through to more innovative approaches of investing in the private property market, but still linked to social enterprise models.
An example of this is Resonance’s National Homelessness Property Fund. The financing market for the social housing sector, particularly through bond issues by housing associations, has been established over decades, and is now an efficient, large-scale flow of capital into that sector. “However, the growth of a wider impact investment market in property has only started to establish in the last five to 10 years,” he says.
There are now impact funds focusing on both residential and commercial property, Chisholm says. Some of these are run by specialist impact investment managers, others are impact initiatives from mainstream managers.
Chisholm sees many reasons why the impact investing trend is taking hold in the property sector. “Firstly, there is great interest in impact investment overall, since the past decades have shown the need to better align investment with environmental and social outcomes – and what happens when we don’t,” he says.
“Secondly, there is clear opportunity for positive social impact through real estate investment – the need for both residential and commercial property to scale up social enterprise models is huge and still largely unmet.”
Lastly, says Chisholm, as a result, there is increasing diversity, track record and scale to the opportunities investors have in this area, and property is an asset class they are already comfortable with.
Resonance launched the first of its Real Lettings Property Funds in 2013, and the funds cover four UK cities – London, Bristol, Oxford and Milton Keynes – and have a total of £155m (€176m) of investment. The funds invest in diversified portfolios of single housing units in target cities, using traditional limited partnership property fund structures.
All of the properties are leased to the charity St Mungo’s, which guarantees rent and condition of properties. “So, investors get yield and capital appreciation on a diversified residential property portfolio at scale, and the homelessness charity gets a reliable flow of the right type of property to house tenants ready for independent living, who are otherwise stuck in expensive and unsuitable hostel and B&B accommodation,” Chisholm says.
The firm is expanding the current homelessness property funds this year, both in London and in new UK cities. “We’re also looking to launch similar property funds which meet social needs beyond homelessness, where we see good examples of social enterprise and a strong economic model,” Chisholm says.
“Given the scale and track record now in place, these funds are generating increased interest from institutional investors, including local government pension schemes,” he says.
Options for impact investors
Social housing REITs are a growing sector that can offer access to impact investments, having a social element through their provision of financing for housing associations.
Civitas describes itself as the first REIT dedicated to investing exclusively in existing portfolios of built social homes in England and Wales.
Andrew Dawber, director of Civitas Housing Advisors, says impact investing is embedded within its investment model. “From an environmental perspective, we ensure that properties are as energy efficient as possible, while our high standards of governance around investment decisions and the management of our portfolio ensures that we focus on the needs of the tenants,” he says.
“From a social impact perspective, we have specific social objectives, including increasing the number of social homes, enhancing quality and value for money.”
Dawber sees impact investing as a trend driven by underlying investors wanting to better understand how their money is being applied and its impact. “As an industry, we have moved away from simply avoiding investments that are perceived as being harmful, to proactively seeking out opportunities to achieve a positive result,” he says.
Dawber says the challenge for impact investing is often how to achieve scale and economic returns, as well as social impact. “Many small-scale projects exist that achieve very high social impact, but with very low economic returns and on a basis that is hard to scale,” he says.
“Civitas has created a national footprint and invested over £400m to achieve scale, social benefit and also fair levels of return that suit pension fund investors, while being much lower than a typical private equity investor would seek.” In November 2016, it raised £350m in an IPO.
Cheyne Capital runs the Cheyne Social Property Impact Fund, which has £100m of capital raised from high-net-worth individuals and institutional investors such as pension funds. The seed investor is Big Society Capital, a social investment company funded by money recovered from dormant English bank accounts under a 2008 Act.
Cheyne Capital says the fund aims to invest £900m to increase the capacity of the charities and social enterprises providing services such as supported housing for people with disabilities, affordable housing for those on low incomes, elderly care and specialised housing for people experiencing homelessness.
Bridges Fund Management, a specialist fund manager that focuses on sustainable and impact investment, has been running UK and US property impact funds for several years.
Since 2002 it has raised more than £900m to invest in SMEs, properties and social-sector organisations that help to tackle problems in the areas of health and wellbeing, education and skills, sustainable living and underserved markets.
In February, Bridges Evergreen Holdings – its long-term investment vehicle – launched a new property venture called The Ethical Housing Company to create a portfolio of affordable homes for rent in Teesside.
Debbie Hobbs, head of sustainability at LGIM Real Assets, says changing demands from institutional investors are giving impetus to her firm’s drive towards impact social value measurement and investment within real estate. LGIM’s latest stakeholder engagement exercise, conducted by an independent adviser, showed that external investors wanted to start looking at the environmental and social return alongside the economic return of investments.
“They want to differentiate investments based on the environment and social benefits,” says Hobbs. “We’re moving from a situation where we were working to mitigate environmental and social risks, and then concentrating on corporate social responsibility, to today when we have to show a positive impact above the norm alongside what we’re doing financially.”
As far as responsible investing within real estate goes, Hobbs cites LGIM’s membership of the Better Building Partnership in the UK, which is a grouping of large commercial property owners aiming to work together to improve the sustainability of existing commercial building stock.
“We’re seeing a trend towards investors requiring us to report on the environmental and social impact of our investments,” she says. She says ESG impacts are not the same as impact investing, which specifically targets companies and organisations that intentionally create a positive social benefit, either as a primary or secondary purpose.
But just how can the social value of real estate be gauged? A new property development by Legal & General Real Assets at 245 Hammersmith Road, London, was the subject of a case study two years ago in the report ‘Measuring Social Value of Offices’ by Guy Battle, chief executive of the firm The Social Value Portal.
Hobbs says the report has helped clarify ideas. “It has been encouraging all our designers and contractors to look at the kind of social value they can add in a building project, including job creation, apprentice schemes, working with community groups, having schools in to show them what jobs are available,” she says. “For us it’s about embedding impact into everything we do. It’s important to set criteria so that we influence a whole range of people within our sphere. It’s not just the construction, but also how you manage the asset.
“This is where the market is moving. A lot of people have been talking for some time now about how you should measure social values, We have all been measuring environmental benefits and can distinguish achievements above the norm, so the trick for social value is to ask: what are we doing above the norm? We can only claim it’s an impact when we’re doing better than the average.”
Transparency is important, even though in practical terms this is a “big ask” of the firm’s suppliers. Hence, Hobbs says, LGIM is looking at how it can transparently report on social as well as environmental issues.
Although impact investing has obvious appeal to asset owners looking to push their ESG agenda forward on behalf of stakeholders, there are also inherent financial benefits to be had.
Chisholm, for example, notes that the impact focus of Resonance’s Real Lettings Property Funds actually makes its investment strategy more attractive financially.
“For example, in order to fully integrate tenants into their communities, the fund buys a more diversified portfolio of single units than a traditional resi fund, which typically focuses on large blocks and takes greater asset concentration risk,” he says.
“The fund is also incentivised to cherry-pick good stock in locations with good transport locations, since that is essential for tenants to make progress, but also leads to a portfolio with good appreciation potential.”
Q&A: Expansion with impact
Lisa Davis is executive director at PGIM Real Estate. PGIM Real Estate recently hired an affordable housing specialist as the fund manager plans to expand its ‘impact-oriented’ real estate investment activities
What will your role at PGIM RE entail?
I will be responsible for leading our impact-oriented real estate investment initiatives focused on affordable housing and transformative developments in the US.
Why is PGIM creating this new position and how important is impact investing for PGIM?
Impact investing in real estate is an investment philosophy which has been gaining interest among investors seeking social or environmental objectives alongside competitive market returns. This demand aligns with PGIM Real Estate’s long-standing commitment to responsible investing and identifying opportunities that positively impact the people and businesses in the local communities in which we invest. It is also a great way to diversify your real estate portfolio and benefit from some of the defensive, less cyclical nature of affordable housing and transformative development.
What is the key to successful impact investing in real estate?
For impact investing to be successful it requires best-in-class-asset management across the lifecycle of the investment. Achieving impact is not only about intentionally identifying projects with positive impacts – although that is certainly important – but also about managing those investments to successful financial outcomes.
With real assets this requires best-in-class risk analysis and asset management, careful portfolio construction and balancing, strong exit plans and flexibility to adapt to changes in the market and investment environment. A common question from those new to impact investment is whether it is possible to achieve both market-rate, risk-adjusted returns and positive community impacts. This increases the pressure on managers of real assets with impact considerations to outperform the market, and put teams and systems in place that allow us to do that.
The good news is that impact investing is attracting very-high-quality, next-generation talent. Millennials are trending towards jobs with meaning and purpose, and impact investing can provide those opportunities within the financial sector.
Does impact investing require the real estate industry to think in a different way – and is the industry capable of doing this?
Impact investing requires the real estate industry to think about the long-term impacts of investments, and look for opportunities that achieve multiple objectives – not just financial and positive social and environmental impact, but at the nexus of both. It requires us to look at how we do business and who we do business with, and hold ourselves to a standard of excellence that we believe will enhance performance over time.