Social impact is taking the next step

In the UK, the real estate impact investor segment is maturing and targeting a broader base of investors.

A survey by Big Society Capital, released this week, found that social impact investments in the UK reached £9.4 billion ($11.6 billion; €10.9 billion) in 2022, an increase of 20 percent compared to the previous year.

It is the latest evidence that the demand for socially focused impact products is growing, particularly in relation to real estate. Over half of this investment is directed towards social and affordable housing, according to the survey.

This may not come as a surprise to New Private Markets readers. Last year, we covered a report from consultants Bfinance on the blossoming market for real estate impact in the UK.

A key shift that has taken place has been the structure of the funds in market, Nikki Howard, who authored the Bfinance report, told us this week. Having once been dominated by closed-end vehicles, there is an increasing shift towards open-ended funds.

We can look to AEW for evidence of this trend in action. The real estate manager converted its UK-focused Real Return Fund to become the ‘UK Impact Fund’ recently. It is the firm’s first foray into the impact space and is structured as a UK PAIF, or property authorised investment fund, an open-end vehicle.

In Howard’s view, the growing number of open-ended funds is a sign of the market’s developing maturity. Some managers have used their close-ended vehicle to establish a track record and proof of concept, which is now allowing them to launch open-ended products with relatively long lock-in periods.

The move towards open-ended funds may also be leading to a broader definition of social impact. AEW’s fund, for example, will invest across supported living, key worker accommodation, care homes and town centre regeneration projects. “Lots of investors see social impact as meaning social housing, and there has been a lot of demand for that,” AEW executive director Ian Mason told us. Such a narrow focus does not necessarily lend itself to a fund without a limited time horizon. “In an open-ended fund, we don’t like single sector; there is a risk you become a forced buyers of assets,” says Mason. “That’s why we have a multi-sector strategy.”

The LP base is diversifying, too. While UK-focused funds in this space have previously relied on Local Government Pension Schemes for support, there is now an increased interest from impact fund of funds and endowments, Howard explained. For its part, AEW is targeting institutional investors and private wealth channels as well as local governments for fresh capital.

Social infrastructure and place-based strategies, according to Bfinance’s Howard, are likely to see increased activity in the coming months. The UK Sustainability Disclosure Requirements, set to come into force in July next year, may spur this along. Expect momentum to keep building.