How real estate investing can make a real social impact
How real estate investing can make a real social impact
Traditionally, investors in real estate have shied away from deprived areas and focused on big city centres and affluent towns. Demand for space (as distinct from need) is typically stronger and there is an established investment market of buyers and sellers.
However, while most investors will continue to concentrate on maximising financial returns, we believe there has been a fundamental shift, accelerated by Covid-19, towards strategies which generate a positive social and environmental impact. The perceived conflict between fiduciary duty and sustainable investment reflects a historical view that social benefits and investment returns are drawn from the same, finite pot.
If that was ever true, the equation has changed. The value of companies or assets is increasingly tied to the social benefit they provide. Pension funds and asset managers’ fiduciary duties increasingly require them to incorporate sustainability and positive social impact into investment strategies as a result.
Any assessment of material investment risks must include ESG factors, as well as conventional financial risks. Indeed, the distinction between the two is becoming blurred. Governments are raising energy efficiency standards and starting to ban equipment which generates carbon emissions (e.g. gas boilers).
Occupiers increasingly favour buildings which are sustainable and promote health and wellbeing (e.g. high quality air conditioning, cycle stores). Real estate which has positive social and environmental features is less likely to suffer from obsolescence and is more likely to retain its value over time.
So how can real estate investors make a positive social impact?
One clear priority is to build new housing, particularly social housing for people on low incomes. At present, housing associations rely on a mix of government grants, bank borrowing, bond issues and profits from building homes–for-sale to fund new social and affordable housing.
However, profits from house sales could fall sharply if house prices were to fall in the future. There is also a limit to how much debt housing associations can take on and still retain a triple A credit rating. Housing associations had average gearing of 51% in 2019.
An alternative route is for private investors to build new social or affordable housing, and then lease the homes to a housing association to manage on a day-to-day basis. Schroders has already used this model to invest in social supported housing for adults with learning disabilities.
The investor could either own the whole scheme or a part thereof, with a mechanism for the housing association to increase its share over time. A variation on the same theme would be for investors to partner with local authorities and fund the construction of new homes on land which they own.
The government’s decision to abolish the housing revenue account borrowing cap in 2018 has removed one of the main obstacles to local authorities building more homes.
Another major challenge facing deprived areas is town centre regeneration. While the growth in online shopping and increase in vacant shops is a national phenomenon, the problem tends to be more acute in deprived neighbourhoods.
In part this is for the obvious reason that people in deprived areas have less money to spend, but it also because house prices and commercial values are often too low to make it viable for developers to convert empty retail schemes into other uses.
There is a much greater chance that a vacant department store in Guildford, or Harrogate will be re-developed into apartments, social housing, retirement housing, etc., than a similar building in Clacton, or Wolverhampton. The government has announced a number of policies to help regenerate town centres in less affluent areas (e.g. Future High Streets Fund, Levelling Up Fund, Shared Prosperity Fund), but they will not succeed without private investment.
Real estate investors can also help communities in deprived areas in other ways. Employment is one method. An increase in jobs through the private sector provision of office, retail and industrial space at a zero, or discounted rent to local start-up businesses, charities and other non-profit groups would provide a new form of local income.
Another idea would be for housing or commercial schemes to incorporate new public spaces, or gardens. There is a strong link between people’s physical and mental health. In addition, developers could insist that building contractors employ a certain proportion of local people and provide appropriate training for those who were unemployed.
The key starting point for all these initiatives, whether it is new housing, commercial space, or a GP surgery, is to find out what concerns the local population and stakeholders have and what solutions would solve these.
Balancing financial and social returns
“Doing the right thing” does not automatically mean a lower financial return. For example, the payback period on installing LED lighting is typically between 1-3 years. However, in other instances such as charging lower rents to local start-ups, or using land to build social housing rather than homes for sale, there is a clear opportunity cost.
The size of the trade-off will vary from project to project and so too will the mix between income and capital growth and the timing of returns.
Social and affordable housing will tend to deliver stable financial returns, mainly composed of income. Regeneration projects should generate higher returns, but they can take a decade, or longer to come to fruition and initially, may involve a lot of risk and little, or no income.
The regeneration of Kings Cross in London has been a great success, but Argent, who developed the scheme, attended over 300 public meetings and invested £100 million in infrastructure before receiving any income.
In conclusion, there is a real need to invest more in less affluent areas and Covid-19 is likely to have increased inequality. A growing number of investors regard social impact as an important element of their strategies, and will gravitate towards it rather than see it as a burden.
We believe it is possible to build a UK real estate portfolio which will deliver a positive real return, both in a financial sense and in terms of making a practical contribution to society and the environment.
Our full paper, which explores urban economics in the UK, including regional inequalities, is available below.