HONG KONG / SINGAPORE (8 August, 2022) – All real estate investment and development has the potential to deliver social impact, according to a new report by Urban Land Institute (ULI) in partnership with global law firm DLA Piper.

The global report, Social Impact: investing with purpose to protect and enhance returns, concludes that often with relatively small adjustments to strategy, real estate can deliver market rate returns, while at the same time intentionally deliver social benefits that would not have otherwise occurred to underserved people, communities, and locations. A social impact approach can also offer specific risk management benefits that support returns.

David Faulkner, president of ULI Asia Pacific, comments, “Social impact investing often offers compelling opportunity to institutional investors in contributing meaningful solutions to major societal challenges and finding new opportunities with lucrative risk-adjusted yields. It is crucial for the real estate sector to take social impact into account and adopt a holistic approach, which would enhance returns and performance in the long-term.”

“Hong Kong’s Central Market is a perfect example of social impact investing at play,” David adds. Redeveloped by leading property company Chinachem, the project demonstrates how assets would prosper and stay relevant in the future when the developers consider social and environmental externalities and adapt their strategies to ensure positive impact. In partnership with the Urban Renewal Authority (URA), Chinachem identified three opportunities to embed social impact objectives through the redevelopment of Central Market, including creating a socially inclusive community space, generating employment opportunities, and provisioning growth potential for local businesses. Having aligned its decision-making closely with social impact objectives, Central Market has since generated significant social impact to its neighbouring community and incubated the growth of numerous start-up ventures.

Social impact investing is more commonly applied to housing, healthcare, education, civic building and placemaking strategies, but there already are strong examples of its integration into wider forms of real estate. Through impact strategies that bring benefits for underserved communities in wealth, health, education and inclusion, the report finds it is possible to deliver gentrification without displacement.

The research demonstrates through a range of global case studies that social impact strategies improve the intrinsic value of assets by enhancing net income, reducing risk, lowering sensitivity to market cycles and ensuring the long-term viability of the project, and ensuring the long-term viability of the asset, including potential capital growth. These benefits to net income and certainty of income are not yet fully understood by the market, with 43 percent of investors responding to a survey appreciating their potential to reduce financial risk and have a positive impact on returns. Benefits in reputation and recruitment are more widely accepted.

The report makes a clear distinction between social value and social impact investing and finds that only 46 percent of the real estate investment industry is conscious of the distinction. Social impact is characterised as social value creation fully integrated into the investment process and delivering intentional and additional beneficial value to underserved people and communities, with both social and market rate returns targeted and measured. All social impact creates social value, but not all social value delivers social impact.

It is important for the industry to examine and understand the difference between social value and social impact, as developing a strong corporate social value culture is key to unlocking the potential of social impact investing. Delivering social value provides the necessary foundation from which all companies can take the next step to incorporate social impact investing. “Like environmental considerations, we see that social impact will simply become best practice over time through integration into all stages of investment decision-making,” adds van Doorn.

The report acknowledges regional differences in investor appetite, with interest in social impact strategies strongest in Europe, followed by the US and lowest in Asia. This interest also reflects regional differences with respect to the delivery of social infrastructure where the private sector plays and important role in this in the US and increasingly in Europe, while in Asia this is still predominantly provided by the public sector. The report encourages investors to consider the opportunity to invest with social impact given the potential for market rate returns, de-risked by the impact strategy and often supported directly or indirectly by public funding. Socio-economic risks can also be reduced through social impact investing.

The requirement for “patient capital” in social impact investing is key and that is acknowledged by 83 percent of survey respondents and accepted as a characteristic of many forms of operational real estate investment. A blending of returns across development, stabilisation and income phases provides long-term certain income streams that require a longer-term investment horizon duration.

One challenge for the growth of social impact investing is that this longer investment horizon can create a mismatch of capital where many institutional investors are continuing to allocate capital to separate tranches of secure income or growth and/or shorter duration investments. It is also important to understand how social impact is embedded into the strategy to ensure it endures beyond the exit.

The research finds the role of the public sector in enabling private sector social impact investment is underused and often poorly understood by public and private stakeholders. Many policies are not specifically targeted at impact investing and yet are pivotal to its success. Public policy may seek to encourage investment into economic sectors and locations through tax incentives, funding assistance and access to cheaper capital. It can also level the playing field for land acquisition.

Valuation practice was also identified as lagging and the gap between worth and value models as widening. Capital allocation models are also acting as an impediment for smaller and medium scale investors and some foundations. Silo-based approaches to capital allocation, particularly those that include real estate impact in an asset class wide ESG silo, rather than in a real asset allocation, can result in these cross-cutting strategies being overlooked.

The rise in social impact investing is observed by the industry, with 68 percent of investors and 97 percent of investment managers expecting their social value and social impact activity to increase over the next three years. Key drivers identified by investors are public pressure and reputation (75 percent), closely followed by socio-political risks (67 percent).

Susheela Rivers, Global Co-Chair of DLA Piper’s Real Estate Sector, said: “DLA Piper is absolutely committed to being a responsible business and this is as important to our clients as it is to us. As providers of the built environment where we live, work and play, real estate stakeholders have always had a social impact, both positive and negative, which puts them in a position of huge responsibility. But Impact investing not only has the ability to improve lives, it also has a growing commercial imperative whereby net incomes can be improved, costs reduced and certainty provided. It is also about doing the right thing.”