[2000 Words; 20 Minute Read] In examining the effectiveness of the investment practice known as ‘Socially Responsible Property Investment’ (SRPI), funds and developers make special claims for their development schemes, namely, that they deliver enhanced social benefits. But what in development practice distinguishes SRPI from the actual priorities and behaviours of investors and developers in the sub-sector? Plus what are SRPI development schemes moving towards – a Social Credit Rating scoring of SRPI development schemes perhaps? SRPI is far from uniform, with a spectrum of investors and developers adopting differing priorities driven by their own investment targets. Despite significant barriers to widening its more mainstream application, at a minimum, SRPI can play an exemplary role in urban development. Socially Responsible Property Investment could be the new shoots of sustainable and resilient growth needed to shape the future of built environments.
In demonstrating and analysing the findings of the article, three clear topic areas are explored.
- the practice of SRPI in urban development;
- priorities and behaviours in SRPI and urban development;
- and the future of SRPI in urban development.
THE PRACTICE OF SOCIALLY RESPONSIBLE PROPERTY INVESTMENT (SRPI) IN URBAN DEVELOPMENT
Overall, it is clear that SRPI is not a uniform sub-sector or process. A spectrum of organisations range from explicit, branded SRPI funds and developers to those who consciously employ SRPI notions but not the term itself. Socially Responsible Property Investment ranges from those who seek full commercial returns plus social returns to those who, for high social returns, are even prepared to receive only the return of their capital. The larger funds have more conservative investment outlooks compared with the smaller ones, who are more prepared to innovate.
Socially Responsible Property Investment funds require schemes to pass in-house social impacts tests both before they are accepted and after completion. Although the impacts ‘audit’ echoes financial due diligence, however, its tools range in sophistication from gut feeling and simple checklists to Norton and Kaplan-style balanced scorecards. Explicitly, SRPI funds brand themselves with strict investment criteria to utilise for the benefit of investors, attracting investors who wish to be seen to invest responsibly. Socially Responsible Property Investment schemes often set out to show leadership for investors who like to be associated with such schemes. In this respect, social impacts (social returns) become commodified and marketable.
Despite this branding, SRPI in development means added cost and potentially lower return. Yields become higher, prices lower, while it was emphasised that very close cost control is required in order to deliver the social returns. Fund managers and developers are keen to make it clear that, as yet, there is no hard data to support any theory that sustainable buildings earn greater capital growth and they would never write that into a valuation. This interestingly contrasts with literature indicating that buildings with sustainable and green credentials do actually appear to earn greater capital growth. This is in addition to evidence that there is capacity in terms of total return over the medium–long term for development property to match or outperform the wider real estate market.
PRIORITIES AND BEHAVIOURS IN SOCIALLY RESPONSIBLE PROPERTY INVESTMENT (SRPI) AND DEVELOPMENT
Viable financial returns are often top or joint top priority with a social entry test. These returns might at times be lower than commercial comparables in order to accommodate the additional costs of delivering a social return. One SRPI developer strongly stated that the burden of commercial returns, including developer contribution agreements, left less ‘surplus’ to re-invest in social returns. Large SRPI fund managers often strongly emphasise that they require the same returns on SRPI investment as for mainstream funds, keen to reassure investors that being ‘responsible’ need not incur a lower return. The social impacts sought are in addition to this. In effect, the money is being made to work harder, providing a portfolio of social impacts plus a market return.
Developers who have the power to change a scheme and bring greater social benefits are far fewer. Housebuilders’ can be picked out for particular criticism, ‘producing units’ rather than well-designed places. Often, it is the role of the developer that is the entrepreneur, sourcing sites and de-risking them for the funders, either by their close local management or by being well networked and having excellent negotiating abilities. It is fund managers, however, who make the final decision on release of capital. Socially Responsible Property Investment developers can bring their expertise and influence to the table, but fund managers are explicit that the final sign-off decision is theirs in collaboration with a group of developers or third party investors such as banks.
Many fund managers emphasise proactive partnerships with government, in all its panoply, as essential for de-risking development schemes through paying for clear-up, land assembly and development-friendly planning policy. However, we see cases where this partnership had not been forthcoming, because their SRPI mix of uses was in conflict with local planning or because funding priorities circulate around numerical housing targets at the expense of quality and mix of uses. Therefore, it is possible to observe that, while SRPI in development follows public funding linked to government social targets, some very explicit SRPI developments have not received government money and may be in conflict with it.
THE FUTURE OF SOCIALLY RESPONSIBLE PROPERTY INVESTMENT (SRPI) IN URBAN DEVELOPMENT
While there was consensus that SRPI schemes have set out to be ‘exemplars’, the evidence can be split on whether this is effective in driving the change they set out to achieve in the mainstream. Some institutional funders are emphatic that socially responsible schemes as such should not be built, but all schemes should first deliver good returns. Whilst most other institutions are in agreement that SRPI would become increasingly prominent as funds continue to arise and grow.
Both mainstream and SRPI schemes predict high levels of conflict with planners, whereas intuitively one might expect to see a closer alignment between local policy and socially responsible schemes. Some SRPI developers see that development is increasingly asked to fund existing statutory provision such as development contributions and planning obligations, further stifling the ability to spend money to innovate. This trend is matched by conflict in the marketplace with traditional housebuilders. The ‘radical’ SRPI practitioners see that, while ‘the old model’ of spearheading urban development by building flats is dead, an ‘opportunity’ to introduce new ways of achieving social impacts during the downturn has been lost, thwarted by short-term economic outlooks, frozen land markets (including local authority land) and entrenched traditional housebuilder influence. This suggests new models need to emerge, as more tailored thinking happens around each site.
Interestingly, vast amounts of untapped capital exist in values-driven Charitable Trust Investments, which could take ‘equity’ positions in development packages. Examples of Trust funding being allocated from a charity’s investment capital could be uncovered. Where SRPI equity is required to complete the funding package, charities can and do see this as an opportunity to link their investment profile with social benefit. The amount of capital available in the sector is enough to carry out significant schemes.
COULD IT WORK FOR SOCIALLY RESPONSIBLE PROPERTY INVESTMENT (SRPI) IN DEVELOPMENT?
In conclusion, in practice, funds require schemes to pass in-house social impacts tests. Even though it is often claimed that there is no hard data to draw on, in practice, current developments in indexing and evidence are beginning to show that responsible property investment in urban development projects can earn greater capital growth. With regard to priorities, as would be expected, it is often argued that financial returns are of utmost importance to investors and, for this particular investment stakeholder interest, there is less priority to invest for social returns, notwithstanding reassurances made from institutional portfolio fund managers.
Despite this, investment priorities will in some part vary depending on the personal, social (and possibly moral) interests of pension and insurance contributions within such property investments.The behaviour of developers is also seen as critical in bringing about social benefits, especially as the final sign-offs for investment packages are in collaboration with boards involving developers. Further behavioural influence is seen by partnership working, such as fund managers and local authorities, whose involvement can de-risk development schemes.
With regard to the future of SRPI in urban development, it is still at an ‘exemplar’ stage, although there is agreement by most participants that SRPI would become prominent if funds were seen to continue on an upward trajectory. The impact of credit restrictions and tightening of investment opportunities may see this prominence wane, although the drive for more sustainable and stable investment could mean greater alignment to more socially (and environmentally) responsible development schemes. The property investment landscape in development has changed though, with direct government funding models becoming less common. It is foreseen that new and tailored models for funding and financing development will emerge, especially with the emergence of values-driven Charitable Trust Investments taking some untapped equity position in development packages.
More generally, it is found that contemporary development is sophisticated enough to avoid the worst pitfalls of the past, and shows a willingness to correct these mistakes within the mainstream, not only because it affects the brand, but also because many decision-makers themselves want their work to be associated with high-quality, sustainable products. The present findings also affirm that bringing SRPI and development together can indeed deliver development schemes that serve their locations with more attention. The power of these usually smaller to mid-sized schemes appears to vest in their ability to provide ‘exemplar’ outcomes, and yet a weakness is a lack of centralised benchmarking against which they might evidence their successes.
Socially Responsible Property Investment decision-makers looking at social returns employ an array of instruments and audits which bear similarities to one another but are markedly disparate. This does not allow for clear comparison across schemes and firms. The potential for such is already out there. SRPI Indexes at the corporate level shows promise, and industry awards exist per the scheme, although with limited business potency. The central problem of SRPI is closing the link between the creation of social impacts and the attainment of ‘market value’. If it is unhelpful to assume development’s role is simply to prop up returns, and if investors are not charities to deliver social benefit, and even in some cases require venture capital style earnings, the best schemes are left struggling to attract the money they need to happen at all, or they compromise and form a pipeline to higher rental districts. There is a premium to be paid if new types of socially responsible property investors enter the market: these may, in turn, hold the key to unlocking the potential for ‘better’ development.
PROPERTY INVESTMENT IMPLICATIONS FOR SOCIALLY RESPONSIBLE PROPERTY INVESTMENT (SRPI)
In considering future research and implications from this article, future work could explore the evolving direct funding and finance for development projects more broadly. An international Social Responsibility Credit Rating system could help to professionalise and structure SRPI activity. An effective method for unlocking SRPI’s potential would be by tapping into the energies of competition and incentive. This could be carried out by scoring and commodifying SRPI development schemes using a Socially Responsible Credit Rating toolkit, paralleling previously developed financial and market indices. This score could then be used to brand good schemes, and competitive markets’ money will flow towards these value-added brands. By commodifying social values competitively against a Socially Responsible Credit Rating in the retail markets, individual plan and policyholders will become aware of what the property element of their money is doing, and have the option to join pension and insurance schemes accordingly.
The full and formatted version can be cited as:
Squires, G. and Moate, J. (2012). ‘Socially Responsible Property Investment (SRPI) in Urban Regeneration: Priorities and Behaviours by Institutional Investors in Practice’ in Journal of Urban Regeneration and Renewal, Vol. 5, No. 2, pp.152-163.