New report highlights wider range of options for investors seeking good outcomes and good returns in UK and European real estate.
Impact investment in real estate is not simply growing rapidly but is changing its shape all the time. Not the least of these developments is the shifting profile of the market, from one dominated by charitable institutions and public sector bodies to one that accommodates harder-headed investors looking for top-class returns alongside positive outcomes.
According to a 2022 survey sponsored by Big Society Capital, more than half the UK’s pension funds hold impact investments of some sort. Investment consultancy bfinance last year surveyed more than 250 asset owners worldwide representing more than US$7 trillion in assets.
It found that 35% own impact investments in equities, up from 12% three years earlier, and that there was similar spectacular growth in holdings of impact real estate, at 31%, up from 15%.
Intersection of investment and politics
Bfinance, which produced a report on impact investing in real estate this month, noted: “Plenty of governments are pursuing ‘net zero’ targets or facing socio-economic problems after years of soaring inequality. Both of these challenges are sharpened by today’s economic climate.
“In few places is the intersection of investment and politics more evident than in the rapidly developing world of impact real estate.”
The report draws on the consultancy’s manager selection work for a UK local government pension scheme, which revealed around 50 strategies available from managers offering impact via real estate investments in Europe and the UK.
Broadly speaking, impact real estate devolves into two categories: a housing strategy and one that is non-housing focused. The former includes properties in the discounted or affordable private rented sector, multi-tenure social and affordable housing and supported housing for the most vulnerable people.
The latter takes in spatially-targeted commercial and residential developments in under-served areas, healthcare-dedicated funds such as elderly care homes or treatment facilities and infrastructure investments in assets involving, for example, education, childcare, transport and other public facilities.
A neighbourhood transformed
But does all this doubtless well-meaning activity lead to good investment results? Absolutely, according to Sophie Van Oosterom, Global Head of Real Estate at Schroders. “There’s evidence to suggest that, through social impact investing, real estate investors can meaningfully contribute to a healthier and fairer society, while also securing compelling returns.”
She cites as an example the re-development of King’s Cross in London. “Twenty-five years ago, this was a deprived area with multiple social problems. Now, thanks to public and private investment, it is a thriving neighbourhood with new housing, bars, restaurants, the University of Arts London and offices let to well-known IT companies.”
Van Oosterom adds: “Investors who committed early in the scheme have enjoyed strong returns. Prime office capital values in King’s Cross have risen by 200% since 2000, against a central London average of 125% and residential prices have overtaken neighbouring areas.”
An independent study published in 2017 highlighted economic and social benefits including a 65% increase in ‘knowledge’ employment in local area over 5 years (compared to London average of 22%), as well as boosts to the local economy and employment during and after construction.
In addition, 36% of homes delivered by the project are classed as affordable, with 17% social rent or supported housing, and 19% affordable and shared ownership (compared to an average of 25% affordable across inner London boroughs).
According to bfinance, core and core-plus impact real estate strategies are targeting overall returns of 5-10% annually net of fees and yields from 2-6%. These expectations are broadly in line with conventional real estate strategies, but returns can be affected by factors such as forward funding, specialisation and the level of leverage used.
While there are more opportunities for asset owners to seek a positive impact from real-estate investment, there are hazards attached as well, not least the chance of an abrupt change on the world scene.
“We were working on the second stage of our analysis of impact real estate in the early part of this year when the geo-political picture changed markedly. It became important to know if leverage was being used in the funds, at what level, fixed or floating,” recalled Nikki Howard, Associate, Private Markets at bfinance.
Other risks in this sector, said bfinance, include energy efficiency (many properties with performance ratings below A or B “will effectively become stranded assets from 2027”), counter-party risk, taking in local authorities, government-backed bodies and charities, and inflation and interest-rate risk at a time of economic turbulence.
A key potential risk is that the regulatory and political climate may change. “Government backing is a key dimension of impact real estate investment in many countries, and the UK is no exception in this regard – particularly when it comes to housing and care facilities.”
The report added: “As such, shifts in policy can hugely affect the value of assets.”