Investment Perspectives
Five Lessons Over Five Years of Social Impact Investing in Affordable Housing
By: Ann Xu, Portfolio & Impact Manager, CBRE UK Affordable Housing Fund
June 17, 2024 6 Minute Read Time
Social impact investing has made significant strides over the last five years, generating measurable social and environmental benefits alongside risk-adjusted financial returns. As an early pioneer in affordable housing impact investing, we see this sector as key to addressing the UK’s housing crisis and fostering inclusive communities.
Five years ago, we created a proprietary social impact framework to guide the CBRE UK Affordable Housing Fund (AHF). The Fund delivers sustainable, high quality and affordable homes for people unable to rent or buy on the open market in the UK. Launched in 2018, AHF has emerged as a pioneering unlisted fund targeting institutional capital for affordable housing impact investing, becoming a leading voice in social impact real estate.
Our impact framework revolves around five core pillars and bespoke performance metrics. These elements are integrated into our investment process to achieve both social impact and risk-adjusted returns for investors. As the framework evolves, so does our expertise. This article explores five lessons that have shaped our approach over the past five years.
We see these dual objectives as complementary. Prioritising Environmental, Social and Governance (ESG) considerations, such as decarbonisation and heating system upgrades, not only benefits our residents but also enhances financial performance (while safeguarding the environment). These considerations are viewed as a form of risk, such as obsolescence, regulatory changes, income stability challenges, and future capital expenditures. Mitigating these risks future-proofs our assets and valuations which over time helps improve overall financial performance.
Our commitment to the affordability impact pillar ensures our housing remains affordable and sustainable by setting rents below market rates and capping them relative to local incomes. While this may appear as a performance sacrifice, it enhances financial resilience by reducing tenant turnover, arrears, and vacancies, thus fostering stable income streams beneficial to investors.
Partnering with The Good Economy (TGE), an independent impact advisory firm ensures transparency and accountability. TGE conducts an annual independent assessment of our portfolio, highlighting strengths and weaknesses. Together, we host annual impact framework discussions with investors, responding to TGE's feedback to enhance our impact approach. This collaboration has led to new portfolio targets, tighter investment parameters, and more detailed performance metrics. For example, to meet our affordability objective, we committed to setting rents relative to local net median incomes where not stipulated by local authorities, shifting towards a more people-centred approach.
Impact reporting differs from typical quantitative fund metrics like internal rates of return and yields. It blends qualitative and quantitative methods to assess impact, focusing on who is affected, the magnitude of impact, associated risks, and our contribution. This requires different data sets and processes, involving close collaboration with our Registered Provider (RP) partners who conduct tenant satisfaction surveys, including real-time app-based feedback, to capture emerging issues and track sustainability through energy consumption meter readings and service quality through rent collection and response times to queries. All data collected is reported to the Fund, illuminating the human side of our strategy.
We select partners who prioritise the well-being of residents and quality service delivery. For example, Pinnacle Spaces, our primary RP in London, manages our affordable housing and undertakes rent collection, maintenance, and tenant engagement. In the words of Kate Donovan from Pinnacle Group: “Residents want good quality accommodation, affordable rents, and a landlord that listens and responds. They also want to feel part of the community and be able to contact a person they know if problems arise. If these needs are met, they will be satisfied tenants.”
Our investors are committed to resolving the UK housing crisis by delivering affordable, high-quality housing. Many investors focus on local impact and the “levelling up” agenda, which aligns closely with our social need pillars. Investors are engaged and holding us accountable for our shared objectives. Our partnership with TGE is also collaborative; we evolve our impact approach together and they serve as an external sounding board, stress-testing our impact measurement procedures and proposing alternative approaches. TGE's feedback on our performance is shared with investors, ensuring accountability and continuous improvement.
During residents' onboarding, RPs capture testimonials that reflect the impact of our housing on their lives. Many testimonials are emotional and express deep gratitude for the quality and security our homes provide. “For many residents, securing a new-build apartment is like winning the lottery because many have been on waiting lists for years,” says Kate Donovan from Pinnacle Group
The human stories underscore the tangible outcomes of our strategy, which include seeking to improve resident well-being and increase disposable income. Site visits and interviews with RPs and residents consistently reveal strong preferences for our housing over alternatives. Our homes are also significantly more affordable—on average, 22% cheaper than market alternatives—resulting in higher disposable income for our residents.
5. Raising standards through an institutional approach
As an institutional investor, we leverage our influence to raise standards and drive improvements in affordable housing development. Our negotiation power and scale enable us to advocate for higher specifications comparable to private housing standards, including better heating systems, energy efficiency, insulation, provision of white goods, amenities, and security measures.
We proactively set higher standards and reject proposals that compromise quality. Our aim is to inspire other investors and developers to adopt similar approaches, fostering knowledge-sharing and best practices across the industry. This collaborative effort creates a positive ripple effect and additionality, ultimately enhancing the overall quality of affordable housing. By driving improvements and setting benchmarks, we contribute to creating housing solutions that would not otherwise exist.
Five years ago, we created a proprietary social impact framework to guide the CBRE UK Affordable Housing Fund (AHF). The Fund delivers sustainable, high quality and affordable homes for people unable to rent or buy on the open market in the UK. Launched in 2018, AHF has emerged as a pioneering unlisted fund targeting institutional capital for affordable housing impact investing, becoming a leading voice in social impact real estate.
Our impact framework revolves around five core pillars and bespoke performance metrics. These elements are integrated into our investment process to achieve both social impact and risk-adjusted returns for investors. As the framework evolves, so does our expertise. This article explores five lessons that have shaped our approach over the past five years.
1. Fiduciary Duty: balancing the twin priorities of financial returns and social impact
Harmonising societal and financial objectives is at the heart of social impact investing. The Fund’s mission is to provide sustainable and truly affordable housing across the UK, allowing institutional investors to achieve their impact goals and an attractive risk-adjusted return. Duality of both these objectives is fundamental – impact investing is distinctly not philanthropy, and the Fund must deliver on its fiduciary duty to its investors.We see these dual objectives as complementary. Prioritising Environmental, Social and Governance (ESG) considerations, such as decarbonisation and heating system upgrades, not only benefits our residents but also enhances financial performance (while safeguarding the environment). These considerations are viewed as a form of risk, such as obsolescence, regulatory changes, income stability challenges, and future capital expenditures. Mitigating these risks future-proofs our assets and valuations which over time helps improve overall financial performance.
Our commitment to the affordability impact pillar ensures our housing remains affordable and sustainable by setting rents below market rates and capping them relative to local incomes. While this may appear as a performance sacrifice, it enhances financial resilience by reducing tenant turnover, arrears, and vacancies, thus fostering stable income streams beneficial to investors.
2. Clear Impact Methodology: an evolving framework supported by continuous investor communication and greater data collection
The impact methodology serves as a roadmap, defining end goals, key themes, and measurable social and environmental benefits. Initially theoretical and untested, this framework becomes operational only with acquisitions and subsequently a portfolio of stabilised assets. Over five years, we have refined and improved our approach, recognising that impact investing demands continual evolution.Partnering with The Good Economy (TGE), an independent impact advisory firm ensures transparency and accountability. TGE conducts an annual independent assessment of our portfolio, highlighting strengths and weaknesses. Together, we host annual impact framework discussions with investors, responding to TGE's feedback to enhance our impact approach. This collaboration has led to new portfolio targets, tighter investment parameters, and more detailed performance metrics. For example, to meet our affordability objective, we committed to setting rents relative to local net median incomes where not stipulated by local authorities, shifting towards a more people-centred approach.
Impact reporting differs from typical quantitative fund metrics like internal rates of return and yields. It blends qualitative and quantitative methods to assess impact, focusing on who is affected, the magnitude of impact, associated risks, and our contribution. This requires different data sets and processes, involving close collaboration with our Registered Provider (RP) partners who conduct tenant satisfaction surveys, including real-time app-based feedback, to capture emerging issues and track sustainability through energy consumption meter readings and service quality through rent collection and response times to queries. All data collected is reported to the Fund, illuminating the human side of our strategy.
3. Alignment: shared values across partners, investors, and external stakeholders
We have learned that shared values with all our stakeholders are essential to social impact investing success. Across our partners (e.g., RPs and operational managers), external stakeholders (e.g., TGE), and investors, we have shared our aspirations to: solve the UK’s housing crisis, deliver quality housing at affordable rents, build lasting communities, and safeguard the environment. Our success is interdependent.We select partners who prioritise the well-being of residents and quality service delivery. For example, Pinnacle Spaces, our primary RP in London, manages our affordable housing and undertakes rent collection, maintenance, and tenant engagement. In the words of Kate Donovan from Pinnacle Group: “Residents want good quality accommodation, affordable rents, and a landlord that listens and responds. They also want to feel part of the community and be able to contact a person they know if problems arise. If these needs are met, they will be satisfied tenants.”
Our investors are committed to resolving the UK housing crisis by delivering affordable, high-quality housing. Many investors focus on local impact and the “levelling up” agenda, which aligns closely with our social need pillars. Investors are engaged and holding us accountable for our shared objectives. Our partnership with TGE is also collaborative; we evolve our impact approach together and they serve as an external sounding board, stress-testing our impact measurement procedures and proposing alternative approaches. TGE's feedback on our performance is shared with investors, ensuring accountability and continuous improvement.
4. Tenant Experience: tenure-blind approach
Tenant experience is a cornerstone of our social impact investing strategy guided by our “tenure-blind” approach which ensures equal, high-quality service to all residents. We treat our tenants as residents and customers, and all receive the same service.During residents' onboarding, RPs capture testimonials that reflect the impact of our housing on their lives. Many testimonials are emotional and express deep gratitude for the quality and security our homes provide. “For many residents, securing a new-build apartment is like winning the lottery because many have been on waiting lists for years,” says Kate Donovan from Pinnacle Group
The human stories underscore the tangible outcomes of our strategy, which include seeking to improve resident well-being and increase disposable income. Site visits and interviews with RPs and residents consistently reveal strong preferences for our housing over alternatives. Our homes are also significantly more affordable—on average, 22% cheaper than market alternatives—resulting in higher disposable income for our residents.
5. Raising standards through an institutional approach
As an institutional investor, we leverage our influence to raise standards and drive improvements in affordable housing development. Our negotiation power and scale enable us to advocate for higher specifications comparable to private housing standards, including better heating systems, energy efficiency, insulation, provision of white goods, amenities, and security measures.
We proactively set higher standards and reject proposals that compromise quality. Our aim is to inspire other investors and developers to adopt similar approaches, fostering knowledge-sharing and best practices across the industry. This collaborative effort creates a positive ripple effect and additionality, ultimately enhancing the overall quality of affordable housing. By driving improvements and setting benchmarks, we contribute to creating housing solutions that would not otherwise exist.