Sustainable and impact investing is a strategy on the rise. According to the European Sustainable Investment Forum, sustainable investment in Europe grew by almost 23% between 2011 and 2013, while impact investment was up by 132% – both well ahead of the market as a whole.
Now we are seeing the emergence of this approach in property investment, too. Towards the end of last year, Legal & General and Patron Capital announced a partnership that will invest in real estate projects with a “positive social impact”. Cheyne Capital also launched a £300m Social Property Impact Fund, backed by Big Society Capital. As these high-profile institutional endorsements show, investors are increasingly interested in property investments that have a positive social and/or environmental impact.
Enlightened investors have long recognised the benefits of responsible and sustainable property investment – the first of which looks to mitigate environmental, social and governance risks, and the second to maximise value through best-in-class ESG practices.
What’s different about impact investing is its focus on areas where social and environmental challenges are creating commercial opportunities.
The idea is that by investing in properties that are responding to demographic shifts or helping to solve societal problems, it is possible to generate both positive impact and attractive financial returns.
The sceptics argue that investing for impact means sacrificing some financial return. But our experience has shown that doesn’t have to be the case. In fact, by identifying “hidden gems” that are growing in value precisely because there is an underlying societal need – and by aligning their interests with developers and operators – impact investors can find growth opportunities in an otherwise saturated market.
Take investment in regeneration areas (which is where our own involvement in this area began). This has a tangible impact on local communities – by providing affordable housing and business space, for example.
However, it also offers investors the potential for long-term value growth. In 2004, we invested in The Hoxton, a boutique hotel in the London borough of Hackney, then one of the most deprived areas of the country. Eight years later we were able to sell it for nearly nine times our original investment.
Refurbishing buildings to incorporate positive environmental features can also be rewarding. Not only can it go a long way towards reducing our carbon footprint, but it also makes offices more attractive to tenants, because it reduces their bills – which typically results in better occupancy rates over time. We redeveloped two office buildings in Birmingham, improving their energy performance with the help of solar panels, LED lighting and infrared lighting sensors. The result was 30,000 sq ft of energy-efficient SME office space, which we sold last year for a yield of 5.75%.
Changing demographics can also throw up investment opportunities. For instance, the ageing population creates growing demand for care home places – which is why in 2012 we launched a fund to develop high-quality, environmentally-friendly care homes. Last year, we sold three of these homes at yields of 5.5%.
There is a clear need here. We have no shortage of pressing societal challenges to address – in healthcare, education, affordable housing and the environment, to name but a few. And large parts of the UK remain chronically under-invested.
All told, this will create various opportunities to invest in real estate in a way that generates positive societal impact as well as competitive financial returns.
So for groups such as ours with a long-standing interest in this area, it is encouraging to see large institutions starting to use the language of impact and committing ever-greater sums to impact strategies.
It can only accelerate the development of specialist expertise – which should boost returns, attract more capital into the area, and ultimately deliver more positive social and environmental change.
Simon Ringer is a partner at Bridges Ventures
