Impact Investing In Real Estate - Schroders
For consumers onlyImpact Investing in Real EstateReturns with purposeOctober 2019Impact Investing, where positive contributions to societyand the planet are delivered with the aim of achievingattractive returns, is the investment model advocated bySchroders. In today’s world its important to understandand develop an investment’s social purpose as we believeit will help ensure resilient returns for the longer term.This paper explores Impact Investing and where impactcan be achieved in Real Estate.IntroductionImpact Investing should be considered central to realestate investment. The built environment supportspeople in every aspect of their lives – homes, workplace,health, education and leisure. Therefore focussing on thequality of internal and external environments will providea direct benefit to people and society and deliver bothoccupiers’ and landlords’ expectations.Buildings are reliant on resources and energy forconstruction, refurbishment, maintenance and operation,making it crucial to understand environmental impact,particularly carbon, through every stage of their lifecycle.However, as with other sectors, investors in real estatehave not given enough consideration to the impact it hason people as well as the planet.Today, in our world of social change and climateemergency, reducing negative impact and deliveringpositive impact to the planet and society is necessary tosupport our future and our investment horizons. Impactinvesting is therefore beyond ESG because it seeks toproactively take action to improve situations, doinggood for society, the environment and providing thescope for attractive returns.What is Impact Investing?Impact investment are investments made with theintention to generate positive, measurable social andenvironmental impact alongside a financial return.Impact investments can be made in both emergingand developed markets, and target a range of returnsfrom below market to market rate, depending oninvestors' strategic goals.Source: The Global Impact Investing Network 2019.Investors want Sustainable InvestmentsThe majority of investors want sustainable investmentoptions and people are interested in a broad range ofsocial and environmental issues. Many have yet torecognise that their investment decisions enable themto personally contribute to a more sustainable society.The opportunity is therefore significant to presentinvestment ideas that clearly set out and deliveron people’s values enabling investment whichsupports society, the environment and meetsinvestment ambitions.
SDGs and Real EstateThe built environment supports people, business andcommunities and requires resources and energy tofunction. Therefore understanding potential contributionsas well as the negative impact should be an inherentelement. Opportunities for recognising and deliveringimpact within real estate are significant.At Schroders we have identified three SDGs withsignificant potential for impact:SDG 8 Decent Work and Economic GrowthSchroders’ Global Investor Study 2018.Understanding Impact and Real EstateUN Sustainable Development GoalsIn 2015 all United Nations Member States recognised therange of issues we all face by adopting the UNSustainable Development Goals (SDGs) as part of the2030 Agenda for Sustainable Development. These SDGsprovide a common framework for public and privateorganisations to present the impacts of their activitiesand report on the outcomes they achieve.The choice of SDGs an organisation makes is important.The selection should be mapped to an organisation’sactivities and purpose, therefore appropriatelyrecognising the influence it can have, to ensure thatpositive impacts can be delivered and importantly thatthey are evident to all stakeholders.UN Sustainable Development GoalsA real estate owner should consider the number of jobs abuilding enables, whether for construction, servicing orsimply the company occupying the space and how theseare local jobs, support education, training and skills andspan age and advantage groups thus supportingcommunities and the economy.SDG 11 Sustainable Cities and CommunitiesThe quality of the built environment is key to successful,safe, resilient and sustainable cities and communities.This is where all aspects of real estate fundamentals cometogether: architecture, streetscape, transport andconnectivity, housing, landscaping, biodiversity andamenities. All aspects must respond to and evolveheritage and culture to foster places where the wellbeingof people, communities, business and nature thrive.SDG 13 Climate ActionBuildings are a significant contributor to carbonemissions, with 40% of global emissions commonly cited.At a portfolio level programmes should exist to reduceenergy consumption and improve energy efficiency, useand install renewable energy as well as require informedchoices for construction design, processes and materialsto manage whole life carbon and conserve our naturalresources. It is accepted we need to target net zerocarbon for buildings, both for construction and operation,and the real estate industry needs to respond tothis challenge.SDGs and Schroder Real Estate’s Pillars of ImpactSource UN 2015 Agenda for Sustainable Development.At Schroders we have taken these three SDGs to frameour pillars of real estate impact: People, Planet, Place andProsperity. These provide a holistic view across social,environment and economic impacts together withinvestment returns forming the basis of our Real Estatestrategy. We believe that purposefully considering ourimpacts should enable us to deliver better investmentreturns for the long term contributing to a better futurefor us, society and the planet.Impact InvestingDoing good for society and returns2
Schroder Real Estate’s Pillars of ImpactDelivering Impact in Real EstateImpact can be achieved for all types of real estate, old andnew, provided impact objectives are set at the outset. Theextent of the impact will of course vary. The investmentmanager needs to recognise the contributions for eachasset and how these can be managed to reduce negativeand improve positive impact as an integral part ofmanagement strategy. Such an approach will involvegiving greater thought and analysis of the occupants’physical, mental and wellbeing needs, supply chains,natural resources and materials, waste and landscape.Making impact an explicit consideration will supportbetter management decisions and improve outcomes forall of a building’s stakeholders as well as returns.well as renovating parts of the original retail, landscapingand public realm.This collaboration helped shape the design and amenityof the scheme, including infrastructure and accessibility,and informed public safety and wellbeing. Apprenticeshipand recruitment services were also developed to supportthe construction project, workers and staffing fornew occupiers with around 3,500 new jobopportunities created.The scheme delivers a wholly regenerated town centre toposition Bracknell as a significant retail centre inBerkshire. This should help attract further investmentfrom the wider area to continue Bracknell’s economicdevelopment and prosperity. As owners of the scheme wecontinue to invest in developing the town’s future.Energy consumption and RenewablesSchroders is a signatory to RE100 and this commitment to100% renewable electricity extends across our real estateportfolios. Our programme involves continualimprovement in building operations and includes settingenergy targets. For our UK portfolios we targeted a 6%consumption reduction over two years to 2018. Over theperiod we implemented a number of initiatives identifiedthrough asset audits including LED lighting, voltageoptimisation and efficiency of heating, ventilation and airconditioning systems, supported by improvements tobuilding management.The programme achieved an 8.1% reduction whichequates to 3.8m kWh, 930 tonnes CO2-equivalent avoidedand a saving of 340,000.Socially and environmentally conscious HotelsExamples of real estate with impact in Schrodersexisting portfoliosA regenerated town centreSchroders has delivered a new town centre for Bracknell,a town in the South East of England. We have beeninvested in the centre for over 15 years and the new54,000 square metre Lexicon Bracknell scheme opened inSeptember 2017.Unusually we have control over the majority of this towncentre. The regeneration plan involved working closelywith local government and the community to identify theneeds of the centre and the town as a whole. The schemeinvolved delivering new retail, leisure and 1,000 homes asAcross our European Hotels we are focussing onimproving guest experience and supporting shared socialand environmental values. We are working to removesingle use plastic moving to microfiltered water instead ofbottles, removing straws, cups and bathroom disposablesand with our suppliers preferring loose goods instead ofbagged. We are looking to local producers and donatingunsold food products to schemes supporting those inneed. We have an energy programme to reduceconsumption and improve operational efficiency and useenvironmentally friendly cleaning products. Supportingour staff is vital to any hotel community, both front andback of house, across their needs to the roles they allcontribute to ensuring our hotels consciously deliver onour values.Impact InvestingDoing good for society and returns3
Impact Investing and returnsHistorically investors have perceived a trade off betweencreating social and environmental benefits and financialreturns. It was accepted that you couldn’t have both atthe same time. Schroders believes impact investing isachievable with market returns. Schroders does notbelieve there needs to be a trade off between investmentperformance and environmental and social objectives.Impact investment is about acting in a responsible andpositive way; a core value for any business which rewardsattractive returns and contributes to a better future forsociety and the planet for the long term. Responsiblyconsidering our impact should be the model people,businesses and investors adopt to achieve change andaddress our climate and social crises and inequalities forall our futures.Social Supported Housing (SSH)Positive Impact: Residents are some of the mostvulnerable people in society.–Transferring residents to new purpose builtcommunity settings has a positive impact on healthand mental wellbeing. This frequently results inreduced life care requirements and costs to the state–Providing such housing releases in-patientcapacity for others with needs more appropriateto such settings–Many adults with learning disabilities live with elderlyparents. SSH provides a solution when parents canno longer provide careFrom ESG to Impact InvestmentInvestment Case:Source Schroders 2019.–The demand for SSH units is expected to increase asmedical advances improve survival rates at birth andincrease life expectancy–There is a serious shortage of social housing stock–SSH units offer significant cost savings to thegovernment compared with registered care homesand in-patient hospitals–Leases are 25 years to housing associations withinflation linked rents. Care and support are coveredby separate arrangements, which means thatresidents (or their families) can change their carewithout moving homeNew Real Estate Sectors with Impact OpportunityIn addition to mainstream commercial real estate, wehave identified two ‘alternative’ sectors which coulddeliver positive social impacts and attractive investmentreturns: social supported housing (SSH) and retirementliving. Both sectors benefit the health and wellbeing ofresidents and provide wider benefits for their families, thelocal community and reduce the pressure on the NHS andsocial services. There is a shortage of good quality,modern space in both sectors and demand is set to grow,driven by long-term structural factors which areindependent of the economic cycle. We expect bothsectors to out-perform the UK commercial real estatemarket over the next five years with returns lesscorrelated with the wider market, providing investorswith some diversification. A summary of the opportunitiesis provided below.Impact InvestingDoing good for society and returns4
families and unblock the local supply offamily homesInvestment Case:Retirement LivingPositive Impact: Improved health for older people and therelease of family homes in the housing market.–Many older people live alone and suffer from chronicloneliness. Residents in retirement communitieshave improved mental health and tend to stay fitterand healthier than other people of a similar age.This also helps to alleviate the burden on local healthand social services–Residents’ future care needs are provided for,reducing stress on them and their families–By enabling older people to downsize, retirementcommunities allow them to give capital to their–Retirement living market is fundamentallyundersupplied–The UK has a relatively large proportion of wealthyolder 65s, many of which are looking to downsize–The UK over 65s population will account for almostall of the growth in the UK’s population over thenext decade–The older generation is increasingly looking for adifferent housing offer to suit their livesThese sectors demonstrate how it should be possible todeliver positive social impact aiming for attractive riskadjusted investment returns.Impact investing, doing the right thing for us all, societyand the planet, can provide long term sustainable andresilient returns. It is clear this should be the model forinvestors to adopt.Conclusion–Impact investing is where positive social and/or environmental impact targets are set alongsidefinancial ones–We believe all organisations need to demonstrate how their activities make a contribution, to define anddeliver their social purpose to support sustainable and resilient investment opportunities and returnsfor the long term–Organisations are defining their social and environmental impacts with reference to the UN SustainableDevelopment Goals to recognise the influence and impact of their business–Impact investing is the model to support a healthy society, the environment, economies, and investmentreturns for the future–Positive Impact opportunities for real estate investors can be realised in existing portfolios and in newsectors, e.g. retirement living and social supported housing–We believe returns do not need to be sacrificed to undertake Impact investmentImpact InvestingDoing good for society and returns5
For consumers onlyRisk ConsiderationsThe value of investments and the income from them may go down as well as up and investors may not get back theamounts originally invested.Concentrated investments into the Real Estate sector may result in large changes in the value of theinvestments, both up or down, which could adversely impact your investment.In difficult market conditions, it maybe difficult to sell a security for full value or at all, therefore creatingliquidity riskSchroders Real Estate Investment ManagementAbout our businessSchroders has managed real estate since 1971 and is one of Europe’s largest managers of real estate. Our investment rangeallows our clients to access real estate through open ended funds, listed REITs, specialist funds, joint ventures, separateaccounts and global real estate securities. As at 30 June 2019, Schroder Real Estate manages 16.2bn of real estate on behalfof a wide range of institutions.Our philosophyOur philosophy is centred on consistent principles, to invest in strong fundamentals and to actively manage real estateportfolios. Our research-led approach identifies themes and trends informing our strategies to invest in locations and assetsbest suited to long-term real estate investment. As a result, our portfolios are located in ‘Winning Cities’ and regions bestsuited to benefit from these trends. We are an active manager of real estate, each asset has an individual business plan and isactively managed throughout its life to generate the optimum return for our investors.SustainabilityWe understand the importance and benefits of a sustainable approach to real estate investment. Sustainable investmentconsidering Environmental, Social and Governance (ESG) is central to our investment approach and is integrated into theinvestment decision-making processes and business plans for all our investments.Important informationThe views and opinions contained herein are those of theauthors as at the date of publication and are subject to changedue to market and other conditions. Such views and opinionsmay not necessarily represent those expressed or reflected inother Schroders communications, strategies or funds.This document is intended to be for information purposes only.The material is not intended as an offer or solicitation for thepurchase or sale of any financial instrument or security or toadopt any investment strategy. The information provided is notintended to constitute investment advice, an investmentrecommendation or investment research and does not take intoaccount specific circumstances of any recipient. The material isnot intended to provide, and should not be relied on for,accounting, legal or tax advice. Any references to securities,sectors, regions and/or countries are for illustrative purposesonly.Information herein is believed to be reliable but Schroders doesnot represent or warrant its completeness or accuracy. Noresponsibility or liability is accepted by Schroders, its officers,employees or agents for errors of fact or opinion or for any lossarising from use of all or any part of the information in thisdocument. No reliance should be placed on the views andinformation in the document when taking individual investmentand/or strategic decisions. Schroders has no obligation to notifyany recipient should any information contained herein changeor subsequently become inaccurate. Unless otherwiseauthorised by Schroders, any reproduction of all or part of theinformation in this document is prohibited.Any data contained in this document have been obtained fromsources we consider to be reliable. Schroders has notindependently verified or validated such data and they should beindependently verified before further publication or use.Schroders does not represent or warrant the accuracy orcompleteness of any such data.
All investing involves risk including the possible loss of principal.Exchange rate changes may cause the value of any overseasinvestments to rise or fall. Past Performance is not a guide tofuture performance and may not be repeated. This documentmay contain ‘forward-looking’ information, such as forecasts orprojections. Please note that any such information is not aguarantee of any future performance and there is no assurancethat any forecast or projection will be realised. For your security,communications may be taped or monitored.Note to readers in the United Kingdom: Schroders will be adata controller in respect of your personal data. For informationon how Schroders might process your personal data, please viewour Privacy Policy available at www.schroders.com/en/privacypolicy or on request should you not have access to thiswebpage. Issued by Schroder Real Estate InvestmentManagement Limited, 1 London Wall Place, London EC2Y 5AU.Registration No 1188240 England. Authorised and regulated bythe Financial Conduct AuthorityImpact InvestingDoing good for society and returns7
Impact Investing in Real Estate Returns with purpose October 2019 Impact Investing, where positive contributions to society and the planet are deliver ed with the aim of achieving attractive returns, is the investment model advocated by Schroders . In today’s world its important to understand
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