Work-play-live: Future-proofing the built environment through impact investing

[Hilary Waterman specialises in communications and is an avid traveller who enjoys exploring new cities. She was a student on the City, University of London Writing for Business short course in January-March 2020. Hilary wrote this blog as part of a homework/in-class exercise on that course.]

Author’s note: The views expressed in this piece reflect those of the author, not Savills Investment Management.

In a letter to investors in 2018, Laurence D. Fink, CEO of BlackRock – the world’s largest asset manager – wrote:

Society is demanding that companies, both public and private, serve a social purpose. … To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.

Laurence D Fink, BlackRock CEO, January 2018

We are in the midst of a sea change in how companies conduct business and plan for long-term growth. ‘Doing good’ may have been an activity conventionally pursued by nonprofits looking to better the world. But due to a confluence of factors including globalisation, socially conscious Millennials and the ever-increasing gulf between the haves and have-nots, impact-driven investment has landed squarely on the agenda of profit-driven businesses too. As much as personal values are fuelling this behaviour, society and the environment are demanding it.

Urbanisation gone wild

You only have to spend a day in a global city such as London or New York to observe the effects of rapid urbanisation. Cities, with their diversity of employment and lifestyle options, are drawing ever-increasing hordes. But as populations continue to grow, cities will increasingly struggle to physically accommodate these influxes, threatening quality of life and creating greater wealth disparities.

The demand for real estate is morphing alongside this booming urban growth. Savills Investment Management (Savills IM), the international real estate investment organisation where I work, launched its Dynamic Cities project in 2017. The index evaluates European cities’ real estate investment performance according to their so-called ‘future-proofing’ qualities. The rankings are based on scores across six key indicators, or ‘i’s’:

  • infrastructure
  • interconnection
  • inclusion
  • inspiration
  • innovation and
  • investment

Population and economic growth trends are the engines driving successful cities, per the index. Nonetheless, alongside these quantifiable attributes are less tangible but equally important ones, including liveability, engagement and diversity, among many others.

These qualitative measures are essential to cities continuing to attract talent, innovate and be productive. They speak to the fact that urban environments are appealing perhaps as much for their economic opportunities as for their community offerings.

Photo by Max Ostrozhinskiy on Unsplash

Building long-term success

The Dynamic Cities project emphasises the importance of a city’s balanced performance across all six i’s, which are about far more than gross domestic product, rental forecasts or other conventional property market values. Environmental, social and governance (ESG) factors underpin various facets of the research. The investment indicator considers, for example, a city’s number of ‘green-rated’ properties that serve to future-proof building stock.

As highlighted in the Savills IM annual sustainability report:

We now look ahead to what some have dubbed the ‘decade of delivery’: the focus has firmly shifted from statements of sustainable intent to tangible improvements critical to addressing global and local sustainability challenges.

Savills IM annual sustainability report 2019

London has topped the Dynamic Cities index for three consecutive years, which stems from its balanced performance across examined categories. As highlighted in the 2017 Dynamic Cities report, the London Infrastructure Project 2050 – which involves more than £1 trillion of investment into social and digital infrastructure, housing and other services – primes the British capital for long-term resilience as a global city.

The London of 2050 is likely to offer not only outstanding employment opportunities but also places to live within easy commute of work, inspirational green spaces to unwind, and cafes to forge connections. This is what you might label a city’s ‘work-play-live’ solution to avoid falling behind the times.

Photo by Chris Barbalis on Unsplash

The impact-investing imperative

So where does impact investing fit into the future of cities? Property investment that takes into account the needs of a local community is likely to be more successful over the long term. Why? Because structural resilience to change – whether in the form of COVID-19 or flooding coastlines – hinges on adaptability, including sensitivity to the needs of communities and consideration of climate change.

Just as property demand characteristics are changing, so is investment appetite. Various private sector firms, whether in banking or real estate, are producing research pointing to the fact that investment with a measurable social or environmental impact appeals to many investors’ core values. According to 2018 UBS Investor Watch results, 65% of investors want to make the world a better place.

Regardless, some investors may continue to shy away from properties using energy-saving innovations or social impact funds, for example. Such opportunities may be less familiar to traditional investors and, hence, seem higher risk. At a certain point down the line, however, such approaches will become commonplace, and cities may be unable to cope without them.

Photo by Karsten Würth on Unsplash

A real estate landscape ripe for doing more good

Despite its obvious merits, impact investing is still considered nascent in the real estate industry. Nonetheless, from a climate perspective, the built environment will have one of the greatest effects on the climate of the future. Alex Moss, director of the Real Estate Research Centre at Cass Business School, states in this Savills Real Estate Insights podcast that 75% of the world’s natural resources are consumed in cities.

Impact investing, he argues, requires a long-term, holistic approach to the surrounding environment – a consideration of the people who occupy the building as well as the financial returns. Ensuring that urban buildings are fit for purpose over the longer term is no longer just a nice-to-have. The fabric of our cities is changing, and real estate must adapt to accommodate that.

Megatrends such as ageing populations have already presented formidable challenges to the real estate landscape. Consequently, the time is ripe for new investment approaches. Increasing numbers of retirees unable to live independently creates a need for more care homes, for instance. Property segments that were once considered ‘alternative’ are becoming mainstream, and many of them play a pivotal role in the functioning of our urban communities.

As Lucy Winterburn, director, investment at Savills IM, notes in the Savills podcast alongside Moss, five years ago impact investing was just a footnote. Today, investors do not merely want to know if an investment manager does it, but also how they do it and how it might help maximise returns. There will always be capital looking to invest, she states, but the world – especially the younger generation – is becoming increasingly interested in mobilising
that capital for good.

Staying relevant and resilient

So, where impact investing may have once been a nice-to-have in the investment universe, it is now becoming a must-to-stay-relevant. Such an approach is essential to the flourishing of our urban communities. Those investment managers and cities that fail to recognise this future-proofing imperative can only fall behind their peers.

[Photo credit: feature image by Chuttersnap on Unsplash]