This is an understandable question that the Ethical Property team are asked by tenants, investors and partners, so in this article I’ll provide both the answer and some context behind why I believe the guiding principles that have underpinned our success over the last 5 years in Australia, are relevant to the property industry as a whole.
More investors are beginning to appreciate that their investments can help generate social impact as well as deliver financial returns. In fact, the market is seeing a shift as more major institutional investors focus their investment strategies towards positive social change at a local and international level, with “impact investment” growing to a $715 Billion market. Ethical Property’s strategy takes a shared value approach that delivers profit driven by the social value it creates. Impact is the reason it succeeds and operating ethically is creating opportunities to support thriving and inclusive communities with stronger and more sustainable financial returns.
For many organisations operating in the global investment market, impact is becoming a greater part of their overall investment strategy. The likes of S&P Dow Jones Indices are incorporating environmental, social, and governance (ESG) performance into their overall assessment of an organisation’s success; they’ve created a new indices called the S&P 500 ESG. We’re seeing this motivate the world’s largest corporates to think more holistically about their performance. Measuring an organisation’s strategy around environmental, social, and governance performance is an effective way of assessing how well an organisation is managed; beyond establishing risks it identifies opportunities.
Impact investment can now routinely deliver returns at market rates, in fact, the market value of companies on the S&P 500 ESG indices outperformed those on the original S&P 500 indices. This ties into the data coming from the licensed Global Impact Investing Network’s 2019 Annual Impact Investor Survey, which showed that two thirds of impact investment funds were targeting market rate returns. It also found that nearly half of those who didn’t have impact investment plans were building it into their strategies. The degree of interest in impact investment is growing; it’s now on the minds of those in boardrooms all over the world and given that property is perhaps the worlds oldest investment asset-class, it makes sense that property investment opportunities are looked at through an impact lens.
As life starts to turn back to some level of normality, it’s likely the appetite to invest to provide benefits for the communities in which these organisations operate will grow rapidly. There’s a real momentum building in Australia. You can see this in the residential space: organisations like Assemble Communities are attracting major investment to support building an initial tranche of 3,300 affordable homes in partnership with affordable housing providers that enables them to access $1.5 billion of institutional investment. That would have been unheard of until recently.
The next question is: if you can create financial returns by investing in affordable accommodation, what can you do for commercial and retail spaces?
Operating ethically within commercial property management can achieve solid results, our average Total Rate of Return for the last 5 years has been just under 6% annually and is projected to increase to 7% this year (FY21/22). With our pipeline of new projects, we are aiming to see that increase again over the next 3 years to 9% annually. Our social impact goals focus our activity around creating meaningful employment opportunities for the local community, inclusive targets for those who have been marginalised, and contributing to the resilience of a neighbourhood coming out of the COVID pandemic. This represents a real opportunity to influence change at a systems level, alongside what we are seeing in the affordable and community housing space.
When we talk about ‘ethical’, we talk about working to four key ethical principles: ethical value creation, ethical tenant management, ethical asset management and ethical community engagement.
Ethical value creation is pretty simple. We are generating financial returns for impact investors but we are also generating a social yield for communities in which we operate. That is a balanced, circular, and regenerative perspective on value creation, because we are creating a value flow within our ecosystem to create thriving communities, and everyone is going to benefit from that.
Ethical tenant management is where we deliberately and intentionally curate diverse, values-aligned tenants. Equally, this means supporting collaboration and connection across our tenant community. We encourage our tenants to be engaged and responsive to each other, and we respond to tenant needs with targeted support. This has been enormously powerful during the pandemic. Through eighteen months of lockdown, we have still been able to distribute to investors because our profit is driven by purpose.
Ethical asset management refers to our work in property development; we look to provide spaces that work. That means spaces that are affordable, adaptable, flexible and sustainable. We optimise spaces for the changing needs of each enterprise. This allows us to bring in different tenant cohorts into the community, and find spaces that fit as they grow.
The final ethical principle is around ethical community engagement. Our vision is to create thriving communities where every story has a place. So, engagement is really important to us, because we want to ensure that the defined social purpose of one of our sites connects with the neighbourhoods needs and delivers real community benefits. This is what we’re aiming for with our newest project, called the Brunswick Design and Innovation Centre where we are designing an economic development hub that encourages the local community to come and benefit from the commercial and educational offerings, with a longer term goal of contributing to the creation of the Brunswick Design District.
If we consider that all investments have a degree of impact for people or stakeholders, then everything is potentially an “impact investment”. Focusing on profits and shareholders can either be because of, or at the expense of, other critical outcomes such as environmental sustainability, social impact and good governance. Regenerative economic thinking is becoming more mainstream and the economic climate, coming out the other side of the COVID pandemic, will provide new opportunities for brands that support the wellbeing of the communities in which they operate.
Therefore, it is incredibly important for all businesses to think about purpose and how they impact their community. This can then become a driver of financial success through new opportunities as well as a ticket to play because more people are choosing to walk away from brands who do not build their business models around ethical principles. People are motivated more by purpose and meaning than by financial remuneration. With a strongly values-focused younger generation coming through the ranks, this is relevant now more than ever and today, people are expecting more from their employers.
At the systems level, the built environment in Australia should be designed around people and purpose, but to date there are few examples of public/private/philanthropic partnerships resulting in a thriving community that is inclusive, diverse, accessible and equitable. The pandemic has highlighted the existing intergenerational inequalities, especially with so many young people out of work. Both social and economic development need to feature strongly in how we design the towns and cities of the future. This isn’t something that can be addressed piecemeal, this requires a long-term and coordinated response across an entire ecosystem of built environment players.
At the community level, there is an atmosphere of coming-together and an emphasis on local communities to a greater extent than ever before. I think people realise that thriving communities are resilient communities with a strong sense of identity and civic engagement. If you can bring people and assets together in a deliberate and intentional way, combining strategy with social development and community programs, you can leverage the strengths of the local people. That is an exciting opportunity in urban development.
From the commercial property point of view, I think that change is needed.
Traditionally, commercial properties operate around a rental model, that’s very transactional. We saw a shift after the GFC when commercial space operators started considering how they could generate a dynamic environment that enabled younger enterprises to flourish and thrive, that led to more convenience and more connection in co-working spaces. This meant that interactions in this kind of model became less transactional and more relational. I think a lot of people are wondering if that is the way to go with commercial property after the pandemic as more employers work out how to balance their needs and those of their employees.
I believe that the next evolution in commercial property will be built around creative design and strategic solutions to space. I think it’s about creating opportunities for collaborative projects that generate value flow within and beyond the walls of your building. To that end, we’ve repurposed asset management tools from other asset classes to apply a more strategic and solutions focused approach to work space or for us “space-that-works”. It results in adaptive, agile space that is designed around an enterprise’s development cycle, their mission and their people, with the added value of establishing a space in a collaborative community.
Outside the walls of the building, there is a real opportunity to bring an impact ecosystem together in a deliberate and intentional way, by establishing where an exchange of value can occur between organisations and networks, then channelling their inputs and resources to targeted economic and social groups located in or around our commercial space who would most benefit. Going beyond transactional or relational interactions, the next step is thinking about how to create shared economic value across multiple sectors and communities and using “space” as a platform to benefit a much broader community.
We want our tenants to experience something that is not only going to help them achieve their own enterprise goals or mission but to feel as though they’re part of something bigger that will generate value for many years to come. We are building the basis of a new property platform for social change, where we collectively help enable exclusive commercial property investments to become inclusive neighbourhood assets for the community as a whole. As proof of concepts are established in the coming 12 to 24 months we aim to create a network of property assets that impact an entire community and demonstrate how ethical value creation can provide a pathway to purposeful and profitable community development.
With support from our impact investors and local/state government partners, Ethical Property will hopefully be delivering an Impact Neighbourhood near you.
I’d be interested in your thoughts and you may want to know more, in which case I would love to hear from you.