Impact investing is a buzz word in a world that has become ever more conscious. According to the GIIN 2020 Annual Impact Investor Survey, impact investment grew by 17% per year for the last five years to reach $98 bn, spanning private debt, private equity and real assets. Leading corporations in the US took a bold step further in 2020 and changed the definition of what a corporation means for them – it must serve all stakeholders and not just shareholders; the very definition of impactful businesses.

As real estate investors, our vision of impact is much more myopic and historically we’ve limited ourselves to aligning only social housing with impact. Beyond ironic given that the built environment is the stage on which all of our lives play out, for good and for worse. Whilst affordable and social housing undoubtedly forms a big part of the impact narrative, it certainly is not the only way one can be impactful.

It is time to break some of the misconceptions around impact investing in order and get more people to ‘do well by doing good’. In order to accomplish this, here are some common misconceptions that need to be broken:

1. Impact can only be made in specific places.

Often property investors think of impact only happening in certain geographies or limited to areas of regeneration. Impact happens everywhere, especially in property; it’s just a question of whether you are having a positive or negative impact.

Surprisingly, in the broad impact universe, 55% of impact investments are into developed markets. In recent years, impact investors have been focusing on investments in emerging markets (SE Asia and Sub- Saharan Africa), but this has been mainly within private credit (e.g., microfinance) and traditional private equity. Real estate has a higher potential in developed markets due to its local nature (it is hard to invest in a housing development in Vietnam if one sits in London), thus breaking the stigma that impact investment is a for profit version of Habitat for Humanity.

Secondly, within certain geographies, there is a misconception that real estate investments need to lead regeneration to be impactful. In reality this is but one way to have a positive impact. Successful investors such as Bridges Fund Management have made this a key part of their strategy and should be applauded, but deeply entrenched social issues exist everywhere. At FORE Partnership we are equally as focused on transforming ‘B’ buildings into ‘A’ locations, for example.

Certainly, investors should have different considerations if they are developing a former mine village (e.g. skills, training and connectivity) vs. London Zone 1 (e.g. affordability and loneliness), but that doesn’t mean they can’t be impactful in both.

What is common across all strategies, regardless of geography and micro location, is to assess the local needs and priorities and develop a relevant theory of change. A strong theory of change addresses local needs and national priorities and fosters collaboration with local community groups as partners for instigating change. The targeted outcomes need to be measurable and it is best practice to report and share results with all stakeholders in order to have an evolving framework that improves over time.

This of course can happen in any geography, and in any micro location.

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2.  Impact is sector specific.

Impact investing in real estate is disproportionately focused on affordable housing. The wider impact investment universe is not helping the case with its focus on housing. What if an investor develops a sustainable office? According to all impact frameworks, fighting climate change counts as impact, yet we would not dare call an investment in a shiny low-carbon centre city office an impact investment. We must recognise the potential of every investment dollar, pound or euro we spend to make a positive impact. And that there is an incredibly diverse set of opportunities to help make people’s lives better.

Take mental health: 9 million people in the UK and nearly half of Americans describe themselves as feeling always or sometimes lonely. The UK even appointed a Minister of Loneliness in 2018.

According to an analysis by Brigham Young University, the mortality rate of lonely people increases by 26%, and loneliness is as damaging as smoking 15 cigarettes a day. So why are we not classifying asset classes such as coliving, senior housing or intergenerational living – which take straight aim at tackling this social pandemic – as impact sectors?

What’s more, there are surveys to prove these concepts are working. According to an ExtraCare Charitable Trust survey, 87% of assisted-living residents never or hardly ever feel lonely and anxiety symptoms are reduced by 23%. Coliving reduces the cost of living and thus stress (according to Gravity Co-living it is 24% cheaper to live in a coliving building including services, utilities and rent). But this is obviously not the only benefit. According to the second edition of Coliving Insights, Gravity’s survey during lockdown showed 100% of their residents believe being in a coliving building helped them combat social isolation. Mason & Fifth put wellbeing at the heart of their vision of “well-living” with their five pillars of a healthy lifestyle – create healthy spaces, improve mental wellbeing, provide healthy food options, offer physical activities and curate social events – all applying the WELL Standard.

We seem to be focusing our definition of impact on measuring the economic support for those in need but there are so many other intrinsic aspects to the overall wellbeing of an individual.

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3. Impact and profit are bitter enemies.

Because our definition of impact in real estate overly focuses on affordability, in a sort of zero-sum game, lower rents must mean investors should accept lower returns. Often social housing investors have long-term annuity or pension capital that like a very low-risk government supported strategy. They typically have core return requirements. This reinforces the notion of impact investments yielding lower returns.

Of course, this needs to be looked at in the context of other residential investment opportunities that might be equally as impactful, but less obviously so.

Impact can and does make money, just take the London residential sector as an example. Prime yields in London for traditional residential assets according to Savills are 3.75%, while social and affordable rental products have a net initial yield of 4.5% to 5%, implying that affordable housing as a product is still a niche strategy and not as valuable.

A similar picture is painted with the other alternative residential asset classes such as temporary housing, coliving and senior housing. In the coming years, we see these valuations merging as the niche strategies become more institutionalised over the coming years. Investors seem to be focusing more and more on these previously niche strategies, further supporting this argument – five out of the top ten sectors at the 2020 ULI/ PwC Emerging Trends in Europe report and survey are alternative residential:

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On the commercial side, it is also a false assumption that sustainability and impact costs money. Recent studies finally show that sustainable buildings achieve rental and investment premiums. JLL’s 2020 study on The Impact of Sustainability on Value reveals that BREEAM ‘Excellent’ or ‘Outstanding’ buildings have a 10% green premium on rents compared to other grade A London office rents. Void periods are also lower (BREEAM ‘Excellent’ or ‘Outstanding’ buildings have only 7% void on average 24 months after PC whilst very good ‘Very Good’ have 20%). This of course comes at a slightly higher CapEx cost – there is a marginal increase of 0.8% for ‘Excellent’ rating and a larger increase for the highly inspirational ‘Outstanding’ rating of 9.8%. But the rental premium by far offsets the CapEx increase, which itself could be minimised if thought about early in the design process and in a holistic way. We are incorrectly focussed on the ‘brown discount’ and a risk of obsolescence, not a ‘green premium’ on rents and yields. Given the drastic move of LPs towards sustainability, it is only a matter of time that there is a sustainable, visible premium for sustainable and impactful properties of all shapes and sizes.

4. Impact is spelled with an "S"

It’s too simplistic to think that impact investing is just focused on the “S” in Environmental, Social, Governance frameworks (ESG). The UN Sustainable Development Goals define 17 key priorities for a sustainable world. Quite a few goals focus on creating a socially just world, and impact investing can often bypass the environmental goals (Goal 7 - Affordable and Clean Energy, Goal 11 - Sustainable Cities and Communities, Goal 12 - Responsible Consumption and Production, Goal 13 - Climate Action) and wellness goals (Goal 3 - Good Health and Well-being, Goal 6 - Clean Water and Sanitation, Goal 14 - Life Below Water, Goal 15 - Life on Land).

The real estate sector fails to see the link between all 17 goals and is overly focused on the social goals in isolation to the others. At FORE, for example, we inexorably link the “E” and the “S”. And we add one more, health, to think of it as ESG-H (adding in ‘Health’), in our vision of universal goodness. One cannot isolate one from the others – a development wouldn’t be impactful if it is, say, affordable housing but is built with hazardous materials (ignoring wellbeing) and has an EPC rating of F/ G (polluting the environment).

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5. You can't manage what you can't measure.

We have plenty of certifications and ratings that measure environmental performance – EPC, BREEAM, LEED, DGNB and some that focus on specific aspects such as Carbon Trust Carbon Neutral Certification (operation carbon certification), Cycle Score (sustainable transport practices) and Cradle to Cradle (materials certification based on circular economy principles). In recent years, the industry has made leaps in measuring how healthy buildings are with certifications such as WELL, Fitwel and accreditations on certain elements such as AirRated, looking specifically at indoor air quality.

Social impact measurement is the most difficult to measure, but there are a few firms that have developed comprehensive frameworks. There are two schools of thought – one that tries to apply a monetary value as a way to compare impact or KPIs based on a series of questions about a specific development. The first group is represented by companies such as Social Value Portal, Social Profit Calculator and Simetrica x Jacobs. They often have experience with government procurement and infrastructure projects measuring impact on employment, contracts and connectivity. The private impact investment universe typically looks at alignment to the UN SDGs or a KPI- based approach, an example of which is the Impact Measurement Project. There are also sector-specific tools such as HACT which have measurable outcomes specific to housing developments. All of these tools allow investors to track and report their Social Return on Investment (SROI).

However, impact, by definition, is amorphous, ethereal, and elusive. Insisting that we must measure it to prove that it exists is a noble idea and we should try, but an absence of evidence is not evidence of absence. Just because you can’t measure impact doesn’t mean you are not having any. And in truth, many of these measurement tools are not much more than pseudoscience and are not robust enough – yet – to provide conclusive support to investors wanting to do good while doing well. We can’t and shouldn’t wait.

Whilst we shouldn’t focus entirely on measurement, it could certainly help in some instances: for example for a sector such as coliving, which often gets bad publicity and resistance from councils who struggle to understand its benefits. Coliving operators could gather more data from their customers through surveys, in order to track the social benefits of living in such a community. This could help the sector grow tremendously, especially in countries such as the UK, where minimum space requirements leave developers and operators in the hands of local authorities to decide if it is good for the target customer or if it simply crowding people for the sake of profit.

All of these preconceptions about impact investing deter people from entering this investment universe. Often investment managers are worried that they don’t have the right sources of capital and that it will cost them more, so they continue to invest and develop real estate in a traditional way. I am hoping that by breaking the rigid definitions and industry misconceptions, more people will feel empowered to act and become impactful with their own capacity.

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