Busting the Myths of Impact Investing
Kairos Investment Management Co. President & CIO Jonathan Needell shares his views on how investments can both create environmental and social impact and produce market-level returns. He also names common misconceptions about affordable housing ventures.
The desire to go beyond profit maximization and becoming aware of the need for social and environmental change have determined many companies to consider impact investing. Executives are proactively thinking about how their decisions are influencing the lives of those around them. According to its latest survey, the Global Impact Investors Network estimated that 229 of the world’s leading impact investing organizations collectively managed more than $228 billion in assets in 2018.
Kairos Investment Management Co. focuses on disciplined investment underwriting for properties below the institutional range, located in growing or supply-constrained markets throughout the U.S. This includes student housing, as well as affordable housing assets. Jonathan Needell, president & CIO of KIMC, discusses the misconceptions surrounding impact investing, particularly when it comes to low-income housing communities. He also touches on how capital can be employed sustainably and how it can meet the financial expectations of affordable housing investors.
Name typical misconceptions surrounding impact investing in low-income housing communities.
Needell: Many investors believe that impact investing and investing in affordable housing deliver returns that are below market levels. We believe that impact investing in affordable communities is accretive to returns. Most of our environmental improvements pay back in less than five years with what we would consider to be “engineering risk,” which we believe is low with little execution risk. In addition, running social programs at properties … is an essential part of impact investing in real estate, that can lower vacancy, the cost of making a unit ready for a new tenant once it is vacant and the level of credit loss—non-payment of rent—at a property.
What are the main reasons these misconceptions appeared?
Needell: Affordable housing properties are typically older, so many investors think they are less safe or may have lower returns than newly developed properties. These misconceptions are based on misperceptions of newly built properties being safe investments. Just because a property is new does not mean it was built in a good location, well designed, well managed or appropriately leveraged—a financial risk in its own right. You can’t build Class B or an older building. You can fix up a Class B or older building, making it safer, cleaner, more modern in the amenities it offers, lower in carbon footprint by improving infrastructure and providing services that tenants need.
Needell: We believe that the returns for impact investing in affordable housing communities can produce market level—non-impact related investment—returns or better. We also believe that as impact investing becomes more mainstream, the features prevalent in impact investing will be what the investing public expects and impact investing will be indistinguishable from investing.
What roles do development finance institutions, pension funds and endowments play in impact investing?
Needell: Currently, LIHTC-developed properties are funded by debt from banks and the buyers of credits which include institutions, particularly those that need CRA investments or community reinvestment act investments to satisfy regulations like banks and insurance companies.
Pension funds and endowments mostly have participated through traditional development programs. Some require affordable units to be integrated into the building like the 421-A program in New York City. However, we believe more endowments and foundations will start increasing the volume and continue their investment in impact-related affordable housing. The trend towards impact investing has received some support from the pensioners and students at schools with large endowments.
Which investment instruments are most common nowadays?
Needell: The most common impact-related housing investment, and not an investment we have typically made, are green bonds sold by institutions like Fannie Mae. Other typical structures are through direct ownership of properties or funds that invest in a portfolio of properties offering investment diversity. Green bonds are more liquid and are usually less risky and mostly institutionally owned.
Direct real estate interests through property ownership and funds tend to be more risky. Most socially responsible mutual funds do not seem to have any significant real estate exposure, which is potentially detrimental to those funds performance, which feeds typical “impact comes at a cost” thinking. This is because larger dividend paying industries are typically tobacco, utility, oil, gas and real estate.
Image courtesy of KIMC