This article is sponsored by CBRE Investment Management
Perhaps like no other area of investing, affordable housing has a direct, long-term impact on quality of life for families and their communities, and the current geopolitical and economic pressures have only heightened that. Hannah Marshall, fund manager for a European residential impact strategy at CBRE Investment Management, discusses how to achieve both impact and financial returns in this area.
How can you satisfy institutional investors’ demands for social impact without sacrificing financial returns?
You need to keep in mind the definition of impact investing: investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return, and that last part is really important. It has been our experience that impact investments lead to superior risk-adjusted returns.
In the context of residential real estate, the investments are sustainable over the longer run, so the capital expenditures are reduced. If the rents are affordable and the well-being of the tenants is at the center of your impact strategy, then that should translate into lower void periods and lower expenditures, and that in turn improves the financial performance of the investment.
Different investors are in different stages of what they are seeking from this investment space. Dutch investors are probably at the forefront of impact investing, as a generalization. There are exceptions to that rule, and I am not suggesting that capital hasn’t come from elsewhere, but I think it is becoming more widespread, and there is a desire by investors to have an impact within the region or country in which they operate.
We have been having conversations with investors to think about that, and about how they develop an impact strategy for what they want to do. It is probably one of the areas that we have seen the most interest in over the last couple of years, because it is sustainable for the long term in every sense: sustainable returns, sustainable building, sustainable solutions.
Four years ago, we still had to do some educational work with some institutional investors in explaining the concept of investing for impact plus the financial return. But now, most investors are up to speed.
How can you measure the social impact of your investments?
The starting point for successful impact investing is clearly defining your intentions at the outset. You need to be fairly specific about the type of impact that the investor wishes to focus on. Start by thinking about the market context; the challenge that has been identified or what you are trying to address.
In a residential sense we are thinking about shelter, so what is the solution that you are trying to provide to that challenge? Then, it is really important to develop a robust impact framework: the intention with specific, objective, target metrics. How are you going to hold yourself to account and what are the portfolio outcomes that you’re looking to achieve?
Once you have set those objectives, it is really important to measure all stages of that process. In a real estate sense, that starts with the sourcing, the underwriting, the acquisition and then the ongoing portfolio monitoring.
At a very early stage, we made the decision to engage with an independent impact advisory firm and they have really helped us to develop that impact framework and then continually reset the challenges, because everyone is still learning and this is still evolving.
We wanted to develop something that was future-proofed and was independently verified in the absence of an industry standard benchmark, which we don’t have at the moment.
If you compare it to environmental measurement standards, in the beginning there wasn’t a globally accepted benchmark. Now you have GRESB, which, particularly in a real estate funds context, is the accepted benchmark. But there isn’t a social impact global benchmark that exists.
That will develop over time. What we have done is develop a framework so that we have a more long-sighted approach, which enables us to adapt and be robust in the face of new benchmarks.
What impact targets do you set?
We began investing in affordable housing to respond to the affordability crisis in the UK – a very specific challenge that was primarily driven by a long-term systematic demand/supply imbalance within that part of the market. Essentially, demand was outstripping supply over the long run. We felt strongly that there was an opportunity for private sector investment to fill some of that gap and address that long-standing undersupply of affordable housing.
Our pan-European strategy is similar; it is responding to an affordability crisis in the housing market for middle-income households. We clearly define what we mean by a middle-income household and then set the affordability criteria that we are working to.
We developed a proprietary impact investment framework built on five impact pillars: social need, affordability, funding sustainable developments, providing quality services and increasing supply. They form the basis of all of our investment decisions, so we look at each individual investment and score them against that.
Each investment is different, but that enables us to ensure that any asset that goes into the portfolio fulfills that specific impact criteria that we have identified and the need that we are trying to address.
It also means impact can be measured and then, importantly, communicated to our investors. Transparency is a very important piece of impact investing as well – the transparency of reporting those metrics and sharing them with the investors.
As an example, if we are looking at an individual investment, as part of our due diligence we would commission an impact due diligence report, the same as if you get a building survey or an environmental report on that particular investment. And then each quarter we would do a portfolio-level audit, and then every year our impact adviser conducts a review of all of our investments.
The review evaluates our approach and assesses our effectiveness against that impact intention that we had identified. Then that is published in an independent report and shared with our investors. So, alongside the set financial statements that are standard every year, we also have a standalone impact report.
How have best practices evolved for impact residential investing and where do you see the greatest need for improved practices?
No one has all the answers on this, and the area is still evolving. You need to be open to that evolution and continually develop, but I think through actual investing, our understanding of impact is much more practical. We can move from that theoretical piece to the reality of implementing it, and then to owning it for the longer term.
Sometimes having a positive impact in one area can create issues in another area, so there is always that balance. You need to take it all into account and look at it in a very holistic sense.
In the relationship between sustainability in an environmental sense and impact management, you might have a high-level amenity – a community swimming pool, for example – and a build-to-rent scheme could conflict with affordability. Someone has to pay the service charge for that amenity. So, in this case, the amenity could be positive in that it helps create community and well-being, but you have to balance it against the cost.
As for the need for improved practices, the greatest need is the environmental space and getting each stakeholder in each part of the process to understand what is needed from a sustainability perspective and how that interacts with the impact intention. By stakeholders, I mean developers, funders, and the individuals and families who make these places their homes.
For example, consider heating solutions – they are not practical to change in the future. If you are developing something, you need to think about things like heating solutions upfront, but also how the choice of heating interacts with affordability: the ongoing cost of utilities, maintenance and other housing costs.
So, choosing a certain heating solution can have a positive impact on the environment, but does it have an impact in terms of affordability for that tenant? When we are preparing for the net-zero agenda, how do we collect data from individuals? How do we encourage individual behavior? It is all of those things.
There also needs to be more work done on setting standards for measuring and evaluating various types of impact against each other. And we need universally accepted measurements – common metrics – to make it easier for investors to evaluate different strategies, to judge one opportunity over another and, importantly, hold the managers they are investing with to account.
What role should institutional capital play in increasing the supply of affordable homes?
These are long-term problems. Political cycles, as we all know, are pretty short in nature, every four to five years. Institutional capital and not just government policy needs to be at the heart of these solutions if we are going to address the longer term.
Institutional capital needs to be working with and alongside government policy, and potentially finance. It is a partnership, and it shouldn’t be the expectation that institutional capital alone solves the problems. You are always going to have government regulation and intervention for these more vulnerable groups, but you are working alongside to find a solution.