Deep impact: a guide to real estate impact investing

It is broader than dedicated impact funds – it also covers investment methods that support societal improvements such as housing, local economic regeneration, employment, carbon efficiency and sustainability. All of these are linked by that common theme: return is not always their primary purpose – change is.

A little goes a long way

What impresses most about impact investment is how relatively small amounts of funding can have wider long-term benefits for local communities.

For example, the North West Evergreen Fund, managed by CBRE, now has £150m to invest, yet it started with a third of that capacity. It has financed a range of commercial schemes in the North West that have supported the creation of 30,000 jobs, developed 737,000 sq m of energy-efficient workspace and redeveloped 77ha of brownfield land, while creating nearly £1bn of real estate investment stock for the region. The statistics speak for themselves.

Does impact investing sacrifice financial returns for its non-financial goals?

While the social case for impact investing is well made, it is often thought it cannot generate a meaningful return. However, there is significant evidence to suggest otherwise.

In the case of impact investment through lending, access to finance is often a borrower’s main concern, so there is no need for an investor to lend at below market rates and compromise returns. Many lending impact funds relate their lending rates to market-standard pricing, which ensures a fair level of commercial return while enabling the development.

Providers of impact funding can also use the “carrot-and-stick approach”. For example, slightly discounting rates for a borrower that performs against its output targets or providing penalties for those that do not. On a portfolio basis, this has potential to even out returns, while ensuring overall vehicle output targets for impact are met.

Has Covid-19 taken the focus off impact?

Although Covid-19 has impacted decision making on whether to invest, buy, build or hold, it hasn’t adversely influenced decision making when deploying impact-funding capital. In fact, ethical, social and environmental obligations and targets are arguably higher up the agenda.

Fund managers who wish to buy ESG-compliant assets have their quotas, and impact funders still have their capital to deploy. Many of these impact-investment strategies also seek to support economic regeneration and are therefore counter-cyclical, and any financial adversity created by Covid-19 is a reason to invest to protect local economies.

Arguably, a challenging economic market will show a greater need to deploy impact funding as socially responsible investment becomes more important. Covid-19 is not a distraction, but an unexpected catalyst to put impactful investment even further up the agenda.

Green-lending focus

The environmental agenda has always been a high priority and the most quickly adopted aspect of impact investing. Minimum energy efficiency standards are now factored into the development pipeline dynamic, and a failure to meet these standards will not be an option by 2023.

While some buildings can be refurbished to this standard, many others won’t be. Therefore, there will be an emphasis on new developments to provide compliant assets. Lenders will also have to ensure they are financing buildings that are compliant, because failure to do so may make it harder to achieve an exit through sale of the asset or a refinance. If a borrower cannot evidence clear compliance, then this will likely be an early hurdle for a lender to decline funding.

Regulation will force our industry to think in a way that is aligned with impact investment, and those with capital already aligned to an impact strategy will be best-placed to capitalise.

Andrew Antoniades is head of lending at CBRE Capital Advisors