By Rebecca Menes
At the nexus between property developers and today’s socially-conscious investors stands an increasingly persuasive investment choice. Called a green property fund or impact fund, it’s an influential way for investment managers in emerging markets to match developers with those who aspire to both profits and positive change.
The concept is simple: Fundraise from third-party clients to ensure developers in urbanizing markets have the capital to build green. Then keep a tight hold on technical criteria to ensure peak building performance, which will benefit both occupants and the environment while adding caché to developers’ brands. It’s a virtuous alternative to building a conventional product and then selling high, with gains mostly derived from improved land value.
This formula of the investment manager absorbing the costs of technical oversight through in-house expertise is the secret of success for green funds. There is little additional cost for a green spec when the initial design is adapted to meet requirements, particularly when the investment manager negotiates in bulk with contractors. This keeps the cost of going green negligible.
When it comes time to make a profit, the objective of the fund determines the exit strategy. Income-producing funds might raise capital, build a green field project, and then list the property for 10 years. Shorter-term funds might focus on a for-sale product with a higher profit upon exit. The sweet spot is when market prices are increasing due to greater demand than supply, marking the ideal moment for liquidation. Investors can exit and realize their returns, or they might restructure and roll over the equity into a future phase, when new investors are brought in.
Alex Buechi, a partner and head of ASEAN Markets for Diener Syz, is ready to meet his investors’ needs with carefully vetted projects from Indonesian developers who share his belief in the profitability of resource-efficient buildings (one of them pictured above).
“Once we have understood the developer’s intention, it’s like a marriage,” Buechi said. “Even though the developer can get financing elsewhere, there’s loyalty, as we share the same mindset. We both understand that green must be intrinsic and not a gimmick. In turn it is understood that my firm won’t compete with the developer through overlapping activities.”
While often perceived from outsiders as risky, increasing land value in emerging markets makes property investments relatively safe as the underlying asset is the acquired land. Complexities such as the percent of ownership allowed by foreigners or land ownership eventually reverting back to the government are handled by the investment manager, ensuring investors don’t take on headaches they can’t handle.
“The process is a big part of the risk,” said Alan Wilson, CFO of RMB Westport. “Being directly involved with our hands firmly on the wheel is a key factor in how we deliver good returns on our properties in difficult markets. That’s how we control quality, lower the risk profile, and help to solve the demand and supply mismatch.”
What is most important to socially-conscious investment fund managers is absolute certainty that the project benefits the end user, who is often the low-to-middle income homeowner. Willem Odendaal, a technical specialist at South Africa’s International Housing Solutions (IHS) who lives by the credo “you can’t manage what you can’t measure,” has installed smart meters in affordable green homes to monitor electricity and water consumption, and provides education to tenants to ensure performance as projected.
IHS is also undertaking a test by pitting a 200-unit green development against a similarly-sized non-green development next door. Positive results from the test will prove to the banking industry that green mortgages should be offered to qualifying homeowners. IHS plans to build 14,000 rentals and 6,000 for-sale units in the near future, all of them affordable and with resource-efficient design.
South Africa’s Old Mutual Alternative Investments (OMAI), with US$4 billion in assets under management and ambitions to expand elsewhere in Africa, takes a head-and-heart approach through funds that combine bottom line returns with a development agenda. They are passionate about “non-obvious” opportunities where there is a serious gap in social infrastructure, such as affordable housing and quality schools.
“More and more investment firms are being held accountable,” said Lenore Cairncross, an investment professional for Development Impact Funds at OMAI. “Their clients want to know if their money is positively impacting society as a whole. When they look at competing investments, which will they choose? If the returns are close, they’ll choose the sustainable one.”
“I hope there will be more competition in our fund environment,” he said. “Where there is no competition there is no market. It’s about innovation at the end of the day. And we will never stop reinventing ourselves.”
Images courtesy of IFC
Rebecca Menes is the Associate Operations Officer for IFC’s EDGE green buildings certification program. International Housing Solutions, Old Mutual Alternative Investments, and RMB Westport are using IFC’s EDGE for their property funds to show compliance, taking a metrics-driven approach to lower risk and increase profitability and brand value for developers while yielding outstanding returns for their clients. Diener Syz has its own eco-tool for evaluating green investments. For more information, email email@example.com.