The story is familiar. Coronavirus has caused turbulence in global financial markets. Patterns of human activity have radically changed – with profound economic implications. And governments are struggling to rebalance their books after repeated fiscal stimuluses.
But for all the financial confusion of the last six months, the pandemic has accelerated the emergence of two trends that are transforming the way investors allocate their funds. First, the pandemic has increased appetite for investments that deliver financial profit with a broader societal purpose, because coronavirus has helped demonstrate that profit and purpose are often mutually reinforcing. Second, the pandemic has reminded investors that not all yield is the same, and that it pays to invest in resilient income-streams to cope with economic downturns.
The rise of sustainable investing
Evidence suggests we are moving towards a world where governments, institutions and individuals expect investments to deliver more than financial returns. Allocations to ESG funds are now at more than $1tn globally, with record inflows registered in the first half of 2020 alone.
The rapid ascent of sustainable investing reflects the increasing awareness that companies should be accountable to society. Last year, the CEOs of nearly 200 major US companies published a statement reversing decades of corporate orthodoxy, acknowledging that companies should pursue a wider stakeholder value, not simply shareholder value.
But the rapid ascent also reflects the growing recognition that sustainable investing can deliver superior returns: research from Morningstar, which examined the financial performance of 745 European ESG funds, showed that the majority of these funds outperformed their non-ESG peers over one-, three-, five- and 10-year periods.
It is true that this year’s outperformance may be linked to sustainable funds’ low exposure to assets badly hit by the pandemic, such as oil and gas. But companies and investors that focus on their societal and environmental impact tend to be more discerning about their supply chains, partners and counterparties, which can help manage risks and unlock value. Besides, as demonstrated over the last six months, businesses that focus on societal challenges are often the most resilient, because they provide the services that our society cannot live without.
The search for resilient yield
The pandemic has also increased demand for resilient, long-term income streams.
As global equities see-sawed and economic activity contracted, central banks and governments across the world injected trillions of dollars in monetary and fiscal stimulus, aiming to provide the spark that reignites economic activity.
For investors, this means moving deeper into unchartered territory, as low interest-rate policies become the rule rather than the exception. This in turn means bonds can no longer be relied upon to securely meet retirement costs and pension obligations, and investors are scrambling to find resilient, positive yield for the long term.
Social housing REITs: dividends for investors and society
Listed real estate investment trusts (REITs) have long been a great way to gain exposure to the world’s largest asset class, while benefiting from the liquidity of a tradeable security.
REITs in general have not been immune to the impact of the global pandemic. As one would expect, their performance has been correlated to the property sectors in which they invest and so some REITs have proven to be more resilient to the economic forces of Covid than others.
UK REITs investing in social housing, for example, have continued to receive rent despite the economic turbulence. This is because they invest in desperately needed new housing for individuals whose rent is funded by central government. A change of economic circumstances is unlikely to halt the funding of such an essential service.
Triple Point Social Housing REIT uses private capital to fund the development of newly built or newly renovated housing for people with long-term care needs like learning disabilities and physical disabilities. These properties, known as specialised supported housing, are often adapted for long-term living and are designed in coordination with local health commissioners to house people moving out of institutional care facilities like hospitals and care homes. Triple Point collects inflation-linked rental income from its tenants to target a dividend of 5%.
Health commissioners like these homes because they can improve resident wellbeing while saving the government money. These benefits, combined with a growing national population, mean that demand for this type of housing is likely to persist for the foreseeable future. So, for socially minded investors, investing in social housing REITS represents an opportunity to receive a sustainable, long-term, inflation-linked dividend income of around 5%, while helping to address one of society’s most pressing issues.
Max Shenkman is head of investment at Triple Point Social Housing REIT