Impact Investing in Real Estate
Tomasz Wozniak 
May 18, 2022
Tomasz Wozniak
May 18, 2022 Impact investing is one of the most important considerations that we at HIC analyze when reviewing a new real estate project or development opportunity. The term “Impact investing” refers to an investment strategy that, besides achieving attractive financial returns, is looking to create a positive impact on the world. In this edition of the Real Estate Newsletter, we wanted to focus our attention on impact investing, specifically within the real estate sector.
We have specifically focused on:
We start our analysis with affordable housing – one of the key goals concerning impact investing in real estate. The definition of affordable housing varies from country to country. In the US, for example, affordable housing means units that cost up to 30% of gross income. In India the percentage goes up to 40%. The UK defines affordable housing as social rented, affordable rented and intermediate housing, provided to specified eligible households whose needs are not met by the market.
On the impact side, investing in affordable housing tackles an issue of homelessness (which affects 150 million people globally) as well as providing further support to low-income and potentially vulnerable families (which sometimes can be pushed into homelessness because of health emergencies or job loss). It’s a strategy that can genuinely benefit local communities and economies at large – affordable housing means more disposable income for families which translates into higher purchasing power for the economy.
On the investment side, there are certain benefits that investors can capitalize on. First, affordable housing is resilient to changes in the real estate market and the economy in general – in the event of market downturn demand for affordable housing will remain in place (in some examples it can even increase) whereas demand for high end, luxury housing can be significantly reduced. Second, various countries offer government backing which means that rent would be paid by the government in case the tenant is not able to afford it (for example, due to sudden job loss). Third, depending on the country it may be possible to receive tax credits that help with the acquisition and development of the entire development inclusive of the affordable housing.
Another venue that real estate investors should be exploring in order to create a positive impact are so-called “stranded assets”. Stranded assets are assets that suffered from unanticipated or premature write-down, devaluation or conversion to liabilities. Real estate assets are vulnerable due to potential changes in regulation and costs but also changes in lifestyle and climate change (especially since COVID-19 pandemic).
For example, an older office building in a central business district without certain amenities such as efficient temperature control or a gym could be soon considered a stranded asset. This presents an opportunity for a real estate developer who can look to acquire the assets, improve the energy efficiency and create space for health and mental well-being. In doing so, developers would be able to extend the life of the asset and increase rental income (as sustainably built properties that support tenants’ well-being are achieving higher rental income).
Financing is one of the elements that is present in all real estate projects regardless of geography and type of asset. This may come in various forms and for the purpose of this newsletter we wanted to focus specifically on debt secured on real estate assets (mortgages). In the UK, which is one of our key markets, we have seen a number of lenders introducing lower interest rates for mortgages secured against energy efficient properties. For example, one of the UK’s leading real estate lenders will discount their interest rate up to 2% for developments that achieve an EPC rating of A. This offers significant savings to a developer while extending the useful life of the property and having a positive impact on climate. These offers don’t only affect development finance. For clients looking to refinance their existing property or purchase a new one, lenders are also offering savings on interest rate, provided that the property has sufficient energy efficiency.
Above is only a small selection of things to consider when thinking about impact investing in real estate. It’s also an area that can be tailored to individual circumstances and outcomes that people might want to see in the world. Please get in touch with us and we will be happy to discuss further.