Schroders Capital launches real estate impact fund

The private markets division of asset manager Schroders plans to make repurposing town centers a key component of its investment strategy.

Schroders Capital has launched its UK real estate impact fund, which seeks to address both social inequality and climate change through investment strategies that include repurposing retail town centers into mixed-use projects, PERE has learned.

Schroders Capital, the private markets division of London-based asset manager Schroders, is in discussions with cornerstone investors on the open-end, core-plus fund, which has received £10 million ($11.9 million; €11.50 million) in seed capital from Schroders. The firm is on track for a first close of approximately £150 million by year-end and hopes to scale the fund’s portfolio to about £1 billion within three years, assuming an average loan-to-value ratio of 20-30 percent and a maximum LTV of 40 percent. Schroders Capital is targeting a 7-8 percent net return over the long term, with an average hold period of 10 years.

The impending launch of the fund was previously reported in PERE’s July/August cover story on Sophie van Oosterom, Schroders Capital’s global head of real estate, as well as in coverage of a December 2021 PERE Connect event where van Oosterom was the featured speaker.

Potential investor groups include local government pension schemes, insurance companies, high-net-worth individuals and wealth managers in the UK, as well as sovereign wealth funds and other overseas institutions.

The UK Real Estate Impact Fund will adopt a “place-based” impact investing strategy comprising affordable housing and workplaces, as well as the repurposing of retail town centers into mixed-use communities. “We believe real estate investments can play a significant role in helping address social inequality, particularly in the UK,” said impact fund manager Chris Santer. The firm will invest 65 percent of the fund in areas defined as “deprived,” or impoverished, by the UK government. In a first for Schroders real estate funds, the vehicle will be overseen by both an investment committee and an impact committee.

Chris Santer Schroders
Santer: sees a big impact investment opportunity in the UK’s town centers

“There is a big opportunity now in town centers across the country,” he added. Santer noted while affordable homes and workplaces can be standalone strategies, they can also be components of a town center repurposing. “There’s a high level of vacancy in some town centers, which then become stuck in a downward spiral,” Santer explains. “We already have identified a pipeline of projects where we believe the centers can be repurposed and where we can deliver not just social housing, but mixed-use and mixed-tenant communities, to bring vibrancy back into city centers.”

Although town centers typically encompass multiple properties with multiple owners, they can also include large shopping centers with single ownership, the latter of which the firm will be pursuing. While Schroders may occasionally acquire additional ownerships in a town center, acquiring multiple assets from multiple owners to create a single ownership will not be the main focus of the fund.

Schroders Capital has identified “an extensive pipeline of projects” and is in advanced stages of the acquisition process on three of those assets. With one asset in the pipeline, the manager has underwritten the property as having 10 percent let to voluntary community and social enterprises; 20 percent to small and medium-sized enterprise and the remaining 70 percent to private sector tenants. The firm expects to announce the fund’s first investment by year-end or in early 2023.

The fund will have clearly defined impact targets assessed by an independent consultant annually. Alongside social impact objectives developed using Schroders’ in-house framework, all of the fund’s investments will also have environmental targets aligned with Schroders Capital’s real estate net zero carbon pathway, published in February 2021.

“Real estate faces quite a large decarbonization challenge-filled outlook going forward,” Santer said. “I think cap-ex is going to become an increasing part of all real estate funds. It makes a lot more sense to repurpose and refurbish buildings where we can rather than knocking them down and starting again. That doesn’t feel like the right thing to do for the environment.”

Schroders Capital will invest mainly in established and well-leased buildings but will also take on leasing and refurbishing risk, with a limit of 20-25 percent of the fund in active re-positioning at any point in time. “There are some pretty unique opportunities in town centers for repurposing where the assets need to be priced appropriately and are increasingly being priced appropriately for this cap-ex to happen,” Santer said. He expects to deliver half of the fund’s returns from annual income distributions and the remainder from capital growth.

The manager made its initial foray into impact with its Social Supported Housing Fund, for which it closed on a total of £192 million with its partner Civitas Investment Management in August 2021. In June, Schroders Capital hired Santer, formerly the chief investment officer at UK real estate investment trust Primary Health Properties, to lead a dedicated real estate impact business at the firm.

Schroders Capital is the latest firm to come to market with a real estate impact fund in recent weeks. Earlier this month, London-based property investment manager Orchard Street announced the launch and first close of its £400 million impact fund, Orchard Street Social and Environmental Impact Partnership.