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DNA of a Manager Search: Impact Real Estate
The ‘DNA of a Manager Search’ series seeks to provide investors with practical insight on implementation through the lens of real-life examples. Here, a UK LGPS fund carves a new ‘impact’ allocation with a focus on real estate—unearthing a rapidly-growing and complex universe of strategies.
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IN THIS PAPER
Embarking on an impact investing journey: What is the appropriate approach to asset allocation? What should investors be prepared to accept as an impact investment, and which types of impact should we prioritise? How should measurement and accountability be handled?
Mapping the strategy universe: The impact real estate sector is evolving rapidly, with plenty of newer products and additional managers keen to launch funds with the right seed investment. We identify six main categories of real estate investment with social impact—three in housing, three with a non-housing focus—and map target returns and fees for key segments.
Key risks in impact real estate: Investment in this sector presents a number of distinct risks which are not present—or not to the same degree—in conventional real estate investment. Here we look at five: development risk, regulatory/policy risk, partner risk, capital raising risk and impact delivery risk. Discussion includes (anonymous!) anecdotal examples where these risks have unseated asset managers and investors.
This impact investment case study is a story being mirrored around the globe among institutional investors of various shapes and sizes. There is increasing conviction among the pension fund community that ‘impact’ can be pursued without sacrificing financial returns. This demand is being met with an explosion of strategies and products across virtually all asset classes.
The roster of available impact real estate strategies is far deeper and more varied than it was even three years ago. In the UK alone there are now more than 50 direct real estate investment strategies with a social impact focus. It is crucial to apply close scrutiny during manager selection in order to minimise the danger of poor outcomes — a result that would not only harm financial performance but also risk undermining stakeholder backing for impact investing in general.
Although this is a UK case study, its key themes are country-agnostic: it is designed to assist investors globally as they consider their approach to ‘impact’ in this asset class. In addition, it may be useful to regulators, policy-makers and others that seek to encourage private investment in this space.
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This commentary is for institutional investors classified as Professional Clients as per FCA handbook rules COBS 3.5R. It does not constitute investment research, a financial promotion or a recommendation of any instrument, strategy or provider. The accuracy of information obtained from third parties has not been independently verified. Opinions not guarantees: the findings and opinions expressed herein are the intellectual property of bfinance and are subject to change; they are not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets discussed. The value of investments can go down as well as up.
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