Lessons in social impact investing from Germany
10 March 2022
Social impact investment is a major focus of the real estate market in Germany. There is much to learn, especially on how to conduct investments in real estate that are not-only commercially successful, but also provide a positive impact on society.
The role of social impact investment in Germany is driven to a large degree by the kinds of investors that we have. A significant proportion of investors in the Germany real estate market are public investment bodies –pension funds of municipalities, of federal bodies, churches and other participants in German society. These funds are not driven by the need to generate high profits – although profit is, of course important. Instead, they are motivated to make investments that also give something back to society.
Our real estate market is also structured very differently from some of our European neighbours. The majority of people rent their houses or apartments, which makes investing in build-to-rent such a significant part of our domestic marketplace. When investing in residential properties, it’s also important to consider the social infrastructure that is needed for that residential investment to thrive: shopping services, kindergartens, schools, student housing, things like that. As a result, these residential asset classes have always been important for investors in Germany too.
The political environment is also very conducive to social impact investments. By law, developers are required to devote a significant minority (30%) of their development to social housing, where the rent is capped and deemed affordable for those with less income. Municipalities also have certain statutory pre-emptive rights in designated areas.
In parallel, there are financing concepts and subsidies provided by the federal estate to encourage investment in residential properties. As an advisor, we therefore become involved much earlier in the process than in the UK, for example, helping clients to apply for those subsidies before the more traditional advice we would give, including acquisition of land, construction agreements, planning approvals, etc.
ESG is certainly one of the most talked-about trends in the German market. Traditional investment funds are under pressure to become "green". Of course, sustainable impact investment carries risks too. Longer-term, change of use may not be as easy to acquire, and it might become more difficult to dispose of these assets. As an investor you always have to consider your exit, but sustainable and social impact investments may require investors to remain involved for a longer period of time than usual.
From the beginning, investors in this space have to be aware of the legal framework requirements that such investments carry. They may be more sophisticated, or demanding, or challenging, and might increase reporting obligations. Similarly, in residential social impact investments, tenants may benefit from more favourable lease or tenancy agreements. In Germany, for example, the respective adjudication and legal provisions governing landlord/tenant relationships are very much in favour of the tenant. Many obligations as a landlord can’t be assigned to the tenant. This, of course, impacts on asset management.
There are upsides, however. We see in Germany that social impact investments can improve negotiating position with municipalities and other public bodies in securing investment opportunities. In this regard, it is comparable with PPP investments in infrastructure projects. As a private company, you’re providing funding for certain social infrastructure projects, projects which are important for governments or other public bodies. Certainly, if you’re willing to make social impact investments, you are in a much stronger negotiating position with public bodies who are, ultimately, looking to redevelop cities in a way that strengthens society, not weakens it.
The real estate market is under continual pressure to adapt and change to market conditions, which are increasingly being driven by sustainability concerns and the need to invest in ways that bring a positive social impact. Whether investors are developing new properties or redeveloping existing properties, the real estate industry needs to consider the sustainability of its activities which fundamentally impact on where we live, where we play and where we work.
