Welcome to Part 3 of Future of Good’s series on social purpose real estate (SPRE).
Scan the news to find depressing reports of property management companies accused of “renovictions,” ignoring unsafe or unsanitary conditions, or other harmful practices that disproportionately affect vulnerable and marginalized tenants. Companies that have scores of properties on Airbnb are directly contributing to housing shortages by making homes unavailable to a long-term tenant. Commercial landlords take away from the vibrancy, prosperity, and safety of main streets by leaving their units vacant.
Real estate has long been regarded as one of the best places to invest your money. It’s a favoured category or “asset class” of traditional investment portfolios for many reasons: land and buildings can be secured as collateral, which is useful to lenders as well as owners. And its value can increase over time, because of a tangible improvement like a renovation, a less tangible improvement like a zoning change, or simply the dynamics of supply and demand, as can be seen in fast-growing cities with robust economies, where properties are skyrocketing in value. (Even the value of a burned-down “pile of rubbish”.)
But real estate is more than just land and buildings — it’s also about people, neighbourhoods, and communities. Unfortunately, investing in real estate purely for profit (whether through complicated financial instruments or aggressive house-flipping) can generate great wealth for the few, while producing inequitable and unjust outcomes for the many. Impact investing in Canada has grown by a massive 81 percent in the last decade. There is a tremendous opportunity to apply the principles and practices of impact investing to real estate.
Let’s explore where the money is coming from, where the gaps are, and how impact investors interested in creating social change through real estate might have to shift how they work.
There goes the neighbourhood: investors’ impact on communities
Like anything else in an investment portfolio, real estate properties have different risks and returns. What’s not typically considered by more conventional investment mindsets are the social impacts of a particular real estate property. But that doesn’t mean the impact — positive or negative — of these choices can’t be quantified or felt. From a global investment fund that owns thousands of properties all over the world to homeowners purchasing a condo as a second property and deciding whether to rent it or put it on Airbnb, the actions of real estate investors have a significant influence on neighbourhoods, communities, the economy, and the environment.
Using out-of-control property prices as a prime example: the affordability crisis is not just detrimental to individuals and families who can’t afford to buy, which in turn makes life harder for those who are struggling to pay the rent – it also puts stress on an already over-extended social sector by “squeezing nonprofit organizations and the people they help.”
This last part is worth repeating for leaders and organizations in the social impact sector: in addition to facing financial instability and precarity for their own real estate needs, runaway property values also exacerbate the civic and social issues that many non-profits address — everything from homelessness and poverty, to employment and economic development, to addictions and mental health. This is not limited to financially marginalized people (although they disproportionately bear the brunt of it). A highly-skilled, well-paid, white collar professional is not immune to the negative side effects of a brutally long commute, for example.
Effecting change through impact investing
So what’s an impact investor to do?
For starters, an investor could examine their portfolio and apply a “do no harm” filter — to ensure their money is not going towards companies that don’t align with their values. A deeper way to effect change involves the active pursuit of social good by investing in real estate projects with an explicit social, environmental, or community purpose. There is an emerging (but fragmented) marketplace of investment opportunities in SPRE initiatives that are often overlooked by traditional sources of capital. Examples range from renewable energy projects to addictions services centres to rowing clubs that have issued community bonds to local investors with great success. There are property owners who have committed to keeping rents affordable for artists, non-profits, or social enterprises that provide training and employment opportunities to those who need it most. Real estate developers that have been building affordable housing for years (some with incredibly small carbon footprints to boot) are now finding it easier to access lower-interest loans with favourable terms from local community foundations. The beneficiaries of SPRE can also include communities such as the Squamish First Nation and other groups historically excluded from the wealth generated by large-scale real estate developments.
While opportunities like these are becoming more commonplace, considerable barriers to participation remain for all parties involved. For investors, the biggest obstacle is not awareness or access, but acceptance of a new and different way of doing things.
Integrating impact investment and SPRE is straightforward in theory, but difficult in practice. Here’s why: Changing how the real estate system works is hard, especially when that system has worked tremendously well for the people in charge of it for a very long time. The playbook is tried and true: buy low and sell high, even if the property is left vacant. Charge the highest rent the market can bear. Advocate for civic infrastructure that will increase property values, and fight like hell against anything perceived to threaten them. For investors, take as much collateral as possible on mortgages and loans, and make sure to be first in line if things go south.
For SPRE to flourish, investors can’t apply the same mental and economic models as they have for traditional real estate. Social impact organizations will have different kinds of income streams, access to capital or collateral, and risk contexts. They might be aiming to keep rents affordable, so as to protect tenants from the speculative market and stem the displacement of low-income or long-term tenants as a result of gentrification. That means investors with ownership stakes can’t count on cashing out their equity in the same way. Lenders will have to learn to live with lower interest rates, or offer seniority to others as a way to help leverage additional investment.
Governments are uniquely positioned to provide this so-called catalytic capital, while foundations are able to also offer grants in addition to investment. Established financial institutions are stepping up their involvement, joining the small number of existing investment funds dedicated to social purpose real estate.
These SPRE-focused investment funds serve an important function for investors. Real estate is inherently rooted in a place-based context (“location, location, location”). Traditional investors have refined frameworks and formulas to help them assess, analyze, and compare different factors, even for places with which they are not familiar, to help them minimize risk and maximize returns.
Impact investors, on the other hand, may not have the intimate knowledge of different communities and local needs in order to consider the social impact of a potential investment. It might not be a factor for a one-off investment, but for larger or institutional investors who require a diversified portfolio of properties across many cities, the higher transaction costs (the effort and money required to search for, evaluate, and invest in a bunch of individual deals) can be a barrier. An intermediary fund can be a useful tool to meet this need.
Windmill Developments is adding a new solution to this toolbox. As we previously covered, the company is championing One Planet Living®, a new social impact framework for sustainable development, and are striving to incorporate its 10 guiding principles into all of their projects.
To accelerate its adoption by developers, designers, investors, and others in the real estate industry, Windmill has created the One Planet Living Fund, “a private equity fund focused on real estate projects that target net zero emissions,” zero waste, and a more sustainable relationship with land, water, and nature. These projects will also seek to advance health and happiness, equity and local economy, culture and community, and the other guiding principles of One Planet Living’s holistic framework. For those who are looking for ways to invest in social purpose real estate, the One Planet Living Fund is timely and relevant. The ability to invest for profit and purpose – to make a financial gain while generating social impact, environmental outcomes, and community benefit – is the epitome of impact investing’s goals.
The next article in our series on social purpose real estate will explore the role of data and technology in making our buildings (and communities) smarter and more sustainable, and opening up new possibilities for social impact.
This topic is sponsored by Windmill Development Group, a real estate company with a triple bottom line approach that aims for zero ecological footprint, and its sister company, Urban Equation, a consulting company that advises those in the real estate industry on innovative practices for sustainable development. Future of Good retains full editorial control, as in every other article it publishes. Read earlier articles in this series here.