Pension schemes urged to be wary of impact real estate investment risks

Pension schemes should be wary of several risks when they attempt to engage in impact real estate investing, a report from Bfinance has stated.

The report noted that there are five key risks affecting investors, and therefore pension schemes, in impact real estate, namely development risk, regulatory/policy risk, partner risk, capital raising risk, and impact delivery risk.

Bfinance detailed how each of these risks could affect pension schemes, warning that development risks can be exacerbated when managers use leverage to fund development and that hidden leverage could be costly.

It also warned that government backing is a “key dimension” of impact real estate in the UK, and that managers that fail to anticipate the regulator’s toughening stance on long leases have suffered in the past.

Failure to navigate regulatory shifts can also result in reputational damage for the investor who may be perceived as exploiting vulnerable members of society for financial gain, according to Bfinance.

The report urged investors to have clear targets as “well-defined impact objectives at fund level are just as important as financial return objectives”.

It went onto to say that investors should watch out for ‘additionality’, as it can come in many forms and is often a topic of controversy.

The report warned that partnership with the wrong entities can create substantial regulatory and reputational risks, and advised that asset managers need to have a robust process in places to assess partners.

It also cited concerns that capital raised could be much less than fundraising targets, stating that a number of funds have been “stuck under the £100m mark for extended periods of time”.

Bfinance associate and report co-author, Nikki Howard, commented: “We are excited to be able to share this analysis, which really showcases the dramatic growth in the number and variety of real estate strategies that deliver impact alongside credible financial returns.

“We see more and more financially-oriented investors across different parts of the world, such as pension funds and endowments, that are entering dedicated ‘impact’ strategies in 2022 – not just in real estate of course but in private equity, listed equities and more.

“The roster of managers is far deeper and more credible than it was even three years ago, which is a great thing. But it is extremely important to apply sharp scrutiny during manager selection in order to manage the risks involved.

“We’ve dedicated the second half of this report to a discussion of some of the distinct risks in this sector: these risks have already tripped up a number of asset managers and their investors, as shown in some instructive anecdotal examples.”

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