21 / 11 / 23 - 4 minute read
Risk and return used to be the two key factors dictating investment decisions. A third equally important dimension – impact – is now incorporated into decision-making.
Impact relates to environmental and social issues – or the ‘E’ and ‘S’ in ESG. ESG, across Europe at least, is embedded in investment decisions. An example of this is the fact that 70% of the 120 investors who took part in the PATRIZIA Client Survey 2023 say that ESG criteria are an important part of their investment process.
Impact investing is the most explicit demonstration of environmental and social issues driving investment decisions. PATRIZIA launched its PATRIZIA Sustainable Communities impact investing strategy in 2022. For an overview of the company’s approach towards this type of investment, we spoke to PATRIZIA Head of Investments – Europe and Fund Manager of PATRIZIA Sustainable Communities, Marleen Bikker-Bekkers, and PATRIZIA Head of Capital Markets Netherlands, Saskia van den Bronk…
Saskia van den Bronk, PATRIZIA Head of Capital Markets Netherlands
How does PATRIZIA approach sustainability in real estate investing?
Saskia: We believe that investors can make an important contribution to achieving the UN SDGs. Governments and public capital are not doing enough. Fortunately, there is a lot of private capital in the world. If we deploy that now in a different, more sustainable way, we can make a difference.
Our ambition in this respect is great: making the SDGs measurable, setting concrete targets and not only trying to achieve them but, if possible, anticipating them. Financial returns must go hand-in-hand with a just future. More broadly, PATRIZIA has identified four sustainability focus areas: social impact, environmental impact, governance impact, and innovation and technology. We need the latter to make real estate and infrastructure more sustainable.
How does your impact investment strategy achieve a dual return of better environmental and social outcomes, as well as financial returns?
Marleen: For our PATRIZIA Sustainable Communities strategy, we have set up three pillars, or themes, that focus on six SDGs in total: affordable housing (SDG 1: ‘No poverty’), green real estate (SDGs 6: ‘Clean water and sanitation’, 7: ‘Affordable and clean energy’ and 13: ‘Climate action’) and inclusion and connectivity (SDGs 3: ‘Good health and well-being’ and 4: ‘Quality education’).
There is a large need for affordable housing in many European cities, particularly among lower-to-middle income people. More than 80 million Europeans spend too much of their income on the home, i.e. they pay more than 40% of their income on housing, and this percentage is rising rather than falling. This is unsustainable. With PATRIZIA Sustainable Communities, we invest in more affordable homes for lower-to-middle income people, who it’s important not to push out of central locations in cities, due to this imbalance of income and living costs.
In terms of climate, all our development projects should be ‘net zero carbon in operation’. Real estate can make a major contribution to achieving the climate goals because, currently, more than 40% of all energy consumption in the world comes from buildings.
The importance of the third pillar, that of inclusion and connectivity, is evidenced by the fact that more than 75 million people from Europe live in social isolation, i.e. they speak to not more than one person per month socially. We therefore invest in the community, by creating social spaces such as parks, community centres and libraries in or close to our properties and running social programmes there.
As for the financial return, if we cannot achieve at least 12% IRR [internal rate of return] on a project, we do not invest in it. Realising the KPIs for the three impact themes and the financial return therefore go hand-in-hand.
PATRIZIA Head of Investments – Europe and Fund Manager, Marleen Bikker-Bekkers
How do you measure the impact of your investments?
Marleen: Together with consultants from Deloitte, we have built a framework to define a number of measurable KPIs for each impact theme. Regarding affordability, the criterion is that housing costs should not exceed 35% of household income. With housing, we only target the lower-and-middle-income groups in society. With inclusion, we measure, for example, how often residents participate in social engagement programmes.
Not everything is perfectly measurable yet. The framework is still partly under development, but we have made great strides and are measuring much more than before. It is harder work, but fortunately there is also something in return - a fairer and cleaner world. Of course, we also use GRESB as a tool to measure general ESG criteria, but Sustainable Communities requires its own developed framework to properly measure the impact KPIs we have defined.
Airton Road - one of the two investments in Dublin made as part of the PATRIZIA Sustainable Communities strategy
What investments have been made so far through the strategy?
Marleen: We have invested in two affordable and social housing projects in Dublin, Ireland, where we are building almost 800 apartments for more than 1,600 lower-to-middle income people. Not only this, but we are also building an annex of a library, not only because the opportunity presented itself, but also because libraries demonstrably have a social function. People come there not only to borrow books, but also to read the newspaper and have a cup of coffee, for instance, and meet each other.
In the pipeline are social and affordable housing projects in the UK at commuting distance from London, care homes for the elderly in Spain and Germany, a redevelopment project converting old, unused property into affordable housing with a community around it in London and several urban regeneration sites in the Benelux.
We choose bottom-up projects that meet our financial, as well as impact, objectives.
What’s your outlook on the future of impact investing?
Saskia: Impact investing is here to stay. It’s a strategy still in its infancy. Fortunately, the realisation that we are falling behind rather than ahead in achieving the SDGs is gaining ground. Some sceptics speak of hype, but we emphatically do not believe that.
Fortunately, many regulations are coming and regulators are steering towards a minimum allocation for impact investing. Pension fund members, especially young people, are also increasingly getting involved in the discussion. In Denmark, for instance, they can already opt for SRI (Socially Responsible Investments).