Philip Nell, head of UK real return assets at LaSalle Investment Management, writes about the convergence of real estate and impact investing.
Covid-19 is set to dramatically accelerate the intersection of real estate and ‘impact investing’, the practice where positive and measurable social and environmental outcomes are placed alongside financial returns as the ultimate objective for fund managers and their institutional allocators.
Impact strategies have attracted growing volumes of capital in recent years, reflecting an emerging consensus that investors can do well by doing good. As an asset class that is physical, local and designed explicitly with communities in mind, real estate has always had an intrinsic impact dimension and has been at the forefront of impact investing’s journey from specialist focus to mainstream product.
But it may be the pandemic that proves the defining moment in this convergence – initially and most visibly in the areas of homes, healthcare and education. In addition to its enormous public health ramifications, Covid-19 has exposed a range of systemic problems in advanced economies. The experience will shock investors into profoundly rethinking their role and responsibilities, beyond solely maximising financial returns, to encompass tackling structural societal challenges.
The sheer scale of certain problems – which implies enormous demand for private financing solutions, and therefore potentially attractive financial incentives – should only ease this shift in attitude.
While pandemic-induced behavioural changes will increase the supply of capital allocated to impact opportunities from institutions seeking stable, long-term returns, the underlying fundamentals of impact investing in real estate have not significantly changed in the past year. This is true of both the UK and continental European markets - and should be viewed as a positive.
There are many property types where valuations and future cashflows have been negatively impacted by Covid-19, such as retail and offices. Conversely, the diverse mix of asset classes that together comprise the impact investment property market continues to exhibit risk-return dynamics that would be extraordinarily attractive in their own right, even disregarding their potential to deliver societal benefits.
Philip Nell will explore the dynamics of different impact real estate asset classes and how investment managers in this space can mitigate downside risk in future articles.
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