The industry is in prime position to move to conviction-based socially responsible investing – without compromising on returns. Nicol Dynes reports.
There has been a significant mindshift on impact investing within real estate. Events in the last year have contributed to the change of attitude, as more investors have taken socially responsible investment on board and seen its impact on communities and society.
“Investors still look for performance, but now they want performance with purpose,” says Nehla Krir, head of sustainability and CSR at BNP Paribas. “It is regulations-driven, but also conviction-based. We, as investment managers, need to push and combine all these elements, delivering performance as well as impact.”
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Impact investing suits real estate because buildings by their nature are rooted in the community and meant to be useful for people. “It has shot up to the forefront of investors’ consideration,” says Martin Zdravkov, head of UK residential and impact investing at Lasalle Investment Management. “During the pandemic there’s been a focus on not just evaluating problems, but also contributing solutions, without sacrificing returns.”
“I believe there has been real change in the industry,” confirms Michel van Oostvoorn, director, investments, at Hartelt Fund Management. “Investors in our funds really want that combination of social impact and financial returns and they believe it’s possible.”
The idea that impact investing means sacrificing returns is an “outdated thought”, he suggests: “We strongly believe that social returns drive financial returns. Over the long term, impact investing strategies outperform.”
‘Real estate is the ultimate impact asset class, because it’s a store of value and provides shelter to people.’
Michel van Oostvoorn, Hartelt Fund Management
In the healthcare sector in the Netherlands, for example, it has been shown that high satisfaction rates of residents and workers drive occupancy rates, which in turn drive financial returns as well.
“Investors are searching for volume and yield, but they also want to align their strategies with prevailing trends,” says Ron van Bloois, chair of the Senior Housing & Healthcare Association. “That’s why they are taking the social element into consideration more and more, to create a value chain between them and the user.”
Intentionality is key, because the whole strategy needs to be built around the social objectives to be reached. “Impact investing gives extra purpose and goes well beyond just incorporating ESG into the strategy, good as that is,” says Abigail Dean, global head of strategic insights at Nuveen. “You cannot retrofit an impact investing strategy. It’s a transformative investment, not just a positive one.”
Impact investing suits every real estate sector. “Real estate is the ultimate impact asset class, because it’s a store of value and provides shelter to people,” says Van Oostvoorn. “It provides long-term risk-adjusted returns, but it must be a long-term commitment. Exit is critical: you can’t flip an affordable housing project after five years.”
There has been a focus on residential, such as affordable housing or healthcare, but impact investing can be adapted to other asset classes, he adds. “It can be broadened to all sectors of real estate, for people work in buildings and buildings are in the community.”
Impact investing “can fit office or logistics as well as resi and it can fit into every strategy”, says BNP Paribas’s Krir.
‘It is regulations-driven, but also conviction-based. We, as investment managers, need to push and combine all these elements, delivering performance as well as impact.’
Nehla Krir, BNP Paribas
It is multi-faceted and encompasses many different aspects. “Job creation, renewable energy, infrastructure, green spaces, electric vehicles, these are all impact investing,” adds Dean. “It works across all real estate sectors,
but you need to specify the impact for each asset class.”
While it is conviction-based, it is also a form of future-proofing investments, ensuring they are resilient. “Social impact is more difficult to measure than the environmental impact,” says van Bloois. “Valuation of the S is still tricky, and it’s still not clear whether we’ll see it in rental levels or on the yield side.” Measuring the impact is the crucial but difficult next step, he adds. “The data don’t exist yet. We’re just starting to gather the information and correlation with value.”
Some benchmarking will be needed and indicators that enable meaningful comparisons between companies and competitors. “Measuring the E in ESG used to be hard, but now it’s much easier,” says LIM’s Zdravkov. “The next stage is measuring the S, because in order to manage it and to make a positive contribution to society you need to measure it first.”
It’s only a matter of time, he believes: “In five or 10 years we’ll have as clear a frame of reference for the S as we now have for the E.”
Impact investing can be adpated to all real estate sectors. British Land has delivered its first net zero building at 100 Liverpool Street, one of few in London (Charles Hosea/British Land)
Impact investing next after ESG
Now that ESG issues have finally become mainstream, impact investing is next. The emphasis so far has been on the E, with a focus on the role of real estate in reducing carbon emissions, but in future it will be more about the positive social impact that real estate can have.
“It is now standard for most investments to take ESG issues like the energy efficiency of a building into account, but they are always subordinate to the delivery of returns,” says Abigail Dean, global head of strategic insights at Nuveen. “Impact investing is different, because the environmental and social aspect are put on the same level as the financial returns and all investments have to meet those criteria.”
Real estate impact investing aims to combine the environmental and social aspects, in which a building can improve the public realm and the community and also have a lower impact on the environment.
“By its very nature real estate investment is an investment in the community,” adds Dean. “It can be an investment in directly socially useful buildings like education or affordable housing, or infrastructure that improves the public realm, or deliver indirect benefits by investing in economically deprived areas, creating jobs and contributing to regeneration.”
Real estate investors have a crucial role to play, she says, for example by contributing financing, expertise, developing partnerships and upgrading buildings to become more sustainable. “Environmental improvements lead to better health and wellbeing and mitigating climate change can help reduce income inequality.”
‘With impact investing, the environmental and social aspect are put on the same level as the financial returns and all investments have to meet those criteria.’
Abigail Dean, Nuveen
Impact investing is a specific investment style that requires three key elements that must be integrated. The first is intentionality, which means setting out clear objectives from the start. The second is additionality – meaning the positive impact the investment delivers would not have occurred otherwise. The third element, which underpins the other two, is measurement. Objectives need to be set out along with a plan of how they can be delivered and how it can be shown they have been delivered.
“Measurement is really important,” says Dean. “For example, in building affordable housing you can prove you have delivered the required number of units, but you must also establish the level of affordability, say no more than 30% of household income.”
Another key element of impact investing is responsible exit, she explains: “You need to think about what happens to the investment if it’s been sold and to ensure that the affordable housing is not turned into luxury flats.”
Disclosure and verification, strategy and goals, sourcing and due diligence, responsible exit, portfolio management and measurement and reporting are all crucial parts of managing for impact, which defines impact investing and drives financial returns.
“Deal prioritisation is key, choosing the ones that deliver the maximum impact as well as the maximum returns and validate that impact,” Dean says. “Look at the whole process. All investments have impact, but not all are impact investments.”