The vision of the institutional investor
Investing in social real estate
Institutional investors, including pension funds, create more possibilities for social real estate in their investment policies. With all the demographic and financial developments investors see possibilities on the field of health care real estate for consumers, health care providers and pension funds. There is a great need for more, better and more flexible social real estate.
The institutional investor is a private enterprise, and first of all needs to make a real (solid) return to be able to pay the retirements. Social property is very diverse (e.g. education, health and culture) but not all real estate is equally interesting for an institutional investor. The property that is primarily dependent on subsidies is less interesting for an investor. The social real estate market in which private parties are able to conclude long term leases with social institutions, is an interesting sector. Rents provide the direct return and follow the inflation. In addition, social real estate is less cyclical.
The current market forces a better assessment of financial choices. Municipalities and other public institutions will increasingly pay attention to the actual cost of real estate. Obvious guarantees by the government in the past are rapidly phased out. In addition there are developments in social sectors such as health care, requiring a business economics approach. It changes from supply-oriented to demand-driven. Today the incentive is there for a clear consideration on the spending of real estate.
This article explain why an institutional investor is interested in social real estate and why social institutions are interested in a cooperation.
Vision
With real estate as a strategic asset on the balance sheet, it is important that the (care) entrepreneur has developed a vision on housing. Part of this is the vision on cooperation with private parties and how this affects the design and layout of the existing or future real estate object.
“In times of crisis, man becomes resourceful. In this way transforming the perspective on real estate, investment and processes. New solutions are being sought. That’s the positive in times of crisis. Still disposing social real estate is experienced differently in the country as in the ‘urban’ environment. The region it is quickly perceived as the cutting of the umbilical cord. The DNA and the genes have been determined, now proceed independently. Nothing wrong with that however! Entrepreneurial spirit and creativity are encouraged. It is not only a question of sales but also the re-balancing of responsibilities”. J.A. de Graaf, Councillor Boxmeer.
Insight provides overview
Regular research shows that social organizations, such as municipalities have limited understanding of the current real estate portfolio. Often there is no insight in costs and revenues of all objects. A good understanding the total portfolio is a first step. This can be done by means of a strategic housing plan for each object. In this plan, considerations are described transparently, choices are made and the current portfolio is optimized. A prerequisite for a fruitful cooperation with an investor.
Objectives must be known before the collaboration. Initially, two goals should be clearly determined with each other. What is the purpose (function) of the social real estate and what can be the role of the investor who buys the property and rent it back to the social party.
Influence on the development
Social real estate investors are particularly interested in properties which are in the early development state. The inclusion of existing properties is more difficult, because those properties are less flexible to use or they are realized with help of subsidies. In the care sector there is much existing property with a less flexible format and not in the correct locations. Care institutions, based on their patient focus would like to achieve new small scale construction with a pleasant climate and where the needs of the patient are having full attention. A change in customer approach.
Multifunctionality
The investor, as an expert in the field of real estate, operation and management would like to keep an eye on the development along from the start to optimize multifunctionality. Increasing the occupancy rate by practical design solutions, interesting additional (commercial) parties, focus on alternative uses and of course the location make a lasting investment in social real estate possible.
Entrepreneurship
The entrepreneurship of the institution that wishes to enter into partnership with an investor, is of great importance. The institution and the investor are going to enter a long term relationships with each other, which preferably consists not only of a lease contract but of a broader cooperation. For those social parties which, until recently, used subsidies and guarantees to finance properties this mean shift. An entrepreneurial approach is needed.
Long-term lease contracts
For very specific real estate a long term lease contract is needed in order to make it interesting for the investor. In the care sector, leases are completed on average between 17 and 20 years. Sometimes even longer if alternative opportunities for usage are estimated low. Once, in the coming years the real estate market of the care sector has developed and knowledge and experience in developing social real estate is available and more facts are known about the durability of the funding of care, then lease contracts may be shorter.
Risk reduction
Social institutions are faced with new risks in terms of rental income, value fluctuations and maintenance which in the old funding system with guarantees from the government hardly ever occurred. An investor could play a role in this by taking over ownership of properties from the social institution.
Social objective
An investment in social real estate is also an investment in a better social environment. In the Netherlands there are proven deficits in good quality housing and facilities for seniors, education, students, new businesses and public institutions. For pension funds or pension investors, it is interesting to make a proven contribution to the social environment in the form of (care) housing and facilities which also their participants benefit. In short, from the perspective of an institutional investor the consideration to own social real estate becomes attractive when:
- The vision and objectives of the institution that will be renting, are clear;
- The social parties such as municipalities have good insight into their real estate portfolio and the costs of it;
- There are opportunities to cooperate with (commercial) parties;
- The institution wants to cooperate based on its entrepreneurship;
- The social real estate is embedded in the environment.
This article is an insight into the way the institutional investors like pension funds are related to social real estate. The institutional investor is willing to share knowledge and expertise.
The article was published in the Handboek van de gebouwde omgeving 2012 and was posted with the permission of IGG. This article is also available as PDF.
About the authors
Ido Esman is as Head of Fund Management of Syntrus Achmea Real Estate & Finance also responsible for investments in care real estate, which is one of the priorities in the positioning of the organization. Syntrus Achmea wants to be involved in an early stage and would like to participate in the process of developing social housing.
Eric Zweers is director and co-owner of ABC Management Group. He is involved in the development of social housing from the phase of vision creation to the phase where the property is delivered. ABC is Knowledge Partner of the Research Group of Social Real Estate at the Hanzehogeschool in Groningen.