Buildings for change: impact investing in U.K. real estate

Real estate is a natural home for impact investing. The built environment offers scope to create positive environmental and social benefits for communities, as well as attractive financial returns for investors.

But the real estate industry faces an uphill battle to establish its green credentials. It accounts for 40% of CO2 emissions globally and development is carbon intensive. An average ground–up development has a carbon footprint equivalent to 50 years of operation.

Recently, however, the sector has been slowly building its green credentials with an expansion of buildings with sustainability certification. And with many countries committing to be a net–zero emitter of greenhouse gases by 2050, the World Green Building Council has stated that all buildings must be net zero carbon to achieve the Paris Accord’s limit on global warming.

Private capital is now vital to help quicken the pace of building greener buildings and retrofit existing ones.

Buildings for communities

The social impact of real estate is currently less explored than the environmental impact, but by investing in buildings we are investing in the towns they belong to and the communities who use them. This opens the door to impact investing for real estate owners and investors. For example, they can contribute to social inclusion by investing in underserved areas and by focusing on buildings that meet genuine community needs and have a sustainable future.

One growing issue within commercial real estate in many countries is rising vacancy rates and the resulting increase in redundant spaces. Empty, boarded up buildings have detrimental social impacts on communities, such as a loss of pride in the towns they live in, an increase in crime levels and perceived safety issues, and a reduction in quality of life.

Taking the U.K. as an example, the MSCI’s U.K. Annual Property Index highlights the rise in vacant floorspace within the real estate market. Often caused by structural shifts due to changes in shopping habits or work locations, vacancies have been rising within the office and retail sectors. These assets tend to sit at the heart of communities in terms of employment and social spaces.

The rise of redundant spaces and the potential to repurpose them as net zero carbon buildings that meet the local community’s needs provides significant opportunities to generate positive social and environmental impact.

Additionality is a key concept in impact investing. It refers to the extra benefits generated by the investment than those that would have otherwise occurred. Repurposing the U.K.’s existing real estate landscape will provide greater additionality and positive impact than investing into new builds, in our view. It also significantly reduces embodied carbon that would be produced from ground–up development.

Impact investing, when properly implemented, allows for a full understanding of catchment areas and integration of local needs. It develops real estate solutions to best service these needs, which in turn means impact assets are more efficient as they are frequently used and drive higher footfall to the asset and surrounding area.