Impact investing, by its very nature, is designed to channel catalytic capital into investments that solve some of the world’s most pressing issues. Right now, this is more important than ever.
Through Wellers Impact's experiences working in East Africa, this blog series is exploring the new challenges that East Africa and local institutions are facing as a result of the global Covid-19 pandemic. The last blog explained how impact investing can benefit not-for-profit organisations and help them to become resilient during times of crisis. The valuable land that many of them own in East Africa presents an exciting opportunity for an investment that will help not-for-profits continue and expand the essential work they do for their communities.
The fourth blog in our series will address why real estate is the ideal asset class for impact investing. At a time of uncertainty that we currently face as a result of the pandemic, this blog will explain what advantages make it a particularly attractive and relatively stable investment option.
Real estate impact investing is often associated with incorporating environmentally sustainable practices into buildings in alignment with the SDG goals and other environmental best practices.
Other associated strategies which concentrate on social impact include the construction of affordable housing and social housing. While these are more common forms of real estate impact investing, there are alternative, innovative and effective methods being developed.
Wellers Impact takes a unique approach to real estate development, using fair economics to create impact through the development of not-for-profit (“NFP”) owned land, providing the NFP with an ongoing, sustainable income.
Wellers Impact’s experience has shown that real estate provides an ideal opportunity for impact creation and it helps to overcome a number of challenges that other asset classes face in impact investing.
Most notably, the asset class of real estate generally has reduced risk due to the physical asset underlying the investment and provides a stable, regular income, which is particularly significant during critical and unexpected events. This makes it an attractive investment when markets are volatile and unpredictable.
There are now over 20 funds focusing on real estate as a means to generate impact all over the world. However, Wellers Impact believes real estate is still under-utilised in the impact investing sector. This is primarily due to high barriers to entry into the market due to limited availability or high cost of land.
Wellers Impact has overcome this hurdle through building close relationships with significant NFP landowners in East Africa.
Real estate is an ideal asset class for impact investing for a number of reasons:
Competitive financial return
The genuine market return of investing in real estate, especially in emerging markets, is a big driver for the rise in interest as an impact investing asset class.
For example, Hass Consult reports that land prices and returns in Kenya to the beginning of 2020 are still continuing to outperform other asset classes. They report property to be resilient during the Covid-19 pandemic.
This financial return is generated through rental income, appreciation of the value of the land and buildings, and profits earned from business activities occurring within the property.
This makes real estate an attractive market for impact investors seeking risk-adjusted market-rate returns and who do not want to compromise financial return for the sake of impact.
The relative stability of the real estate market is another appealing factor for investors, especially in a time of crisis like the Covid-19 pandemic.
As real estate is a physical asset and generally less volatile, it can reduce the risk of the investment.
As investors will always have an equity stake in the underlying physical asset or access to it as collateral, they are more protected from potential unpredictability of markets.
Stable and regular income
One common advantage of real estate investments is the opportunity to receive a substantial, stable income from underlying rentals over a long-time frame.
During critical events, a stable income aims to provide resilience and protection for an investor.
Investments that depend more on income as the basis of their financial returns or at least a combination are usually less volatile than those reliant on appreciation in capital value.
Flexibility in exit strategies
Real estate investment offers the opportunity of two investment strategies; sell to exit and hold to generate long-term income.
These options provide flexibility for the investor to take advantage of changing market conditions to maximise financial return.
For example, if there is an unexpected change in the market and prices fall, perhaps caused by a global crisis, the asset-backed investor can typically choose to rent out the real estate and wait for prices to stabilise before selling the property.
Demand for real estate and economic activity are generally positively correlated.
As GDP grows, demand for real estate drives rental and sale prices upwards also appreciating the value of the building.
Therefore, by passing some inflation onto tenants and through appreciation in the value of the land, the value of an investor’s capital in the building tends to maintain its buying power.
Reduced currency risk
Emerging market currencies tend to depreciate in value against the US Dollar over time.
However, as real estate values appreciate over time (often roughly in-line with inflation), this can correlate negatively to the depreciating currency offering a degree of protection for international investors.
Real estate offers an excellent opportunity for portfolio diversification as it has low, and sometimes negative, correlation to other asset classes.
Potential in emerging markets
Real estate has particular potential within emerging markets due to increasing economic growth leading to increased demand for many types of real estate, especially commercial and industrial facilities.
Rapid urbanisation and substantial population growth is also resulting in huge increasing demand for housing and community infrastructure, especially in expanding cities.
Growing student populations are also rapidly increasing demand for safe and purpose-built student accommodation facilities.
As this demand for real estate has risen, property prices have increased, which with the right conditions presents a compelling opportunity for investors seeking high financial returns.
Despite the clear advantages of the real estate asset class, we have found that the market remains under-utilised within impact investing. There are high barriers to entry due to the expense of purchasing land and the difficulty of acquiring land in international contexts.
Wellers Impact’s experience within the real estate market in East Africa has exhibited that many landowners distrust property developers and, as a result, land is difficult to acquire. Wellers Impact has overcome this barrier through building strong relationships with land-owning not-for-profit organisations and ethical businesses in the region.
Wellers Impact believes that honest, strong relationships are crucial within this market and the extensive experience of our team has made it possible to form these.
For examples of the work we do, visit the Real Estate Development page of our website.
Wellers Impact is a UK-based, FCA-Regulated Impact Investment Manager who works to unlock community-focused impact through SDG-focused impact investing. Through innovative investment models that utilise fair economics, Wellers Impact originates investment opportunities across three core business activities; real estate developments in partnership with local land-owning not-for-profits in East Africa, financial support for agriculture firms and supply chains globally through sustainable development finance and direct investment into private water, sanitation and plastics recycling firms globally. Investment involves risk. Suitable for Sophisticated, Professional and High Net Worth Investors only.