By Cedric Bucher (CFA) is CEO at Hearthstone Investments
Fund investors’ decisions can make a real difference in creating positive environmental and social change - and the UK residential property sector is no different. But how can a Property Fund Manager drive positive impact?
Positive Environmental Impact in Residential Property
Most readers will be familiar with the drive to reduce the environmental footprint of UK housing, with the focus centred on two key areas: The type of energy used in the home, and how efficiently energy is used.
Changes in building regulations and construction methods over time resulted in housing stock having varying levels of wall or roof insulation, and types windows and doors. Similarly variable are the systems used for heating, hot water, and lighting. A home’s environmental footprint is determined by the source of energy used, the efficiency of installations, and even the type of light bulbs used. All of this can be measured and evidenced through a well-recognised and regulated metric – the Energy Performance Certificate, or ‘EPC’ rating.
Positive Social Impact in Residential Property
Social impact has more facets. First is the distinction between social/affordable homes and the private rented sector (‘PRS’). The former is typically being provided for by Housing Associations (sometimes entering long lease agreements with Investment Funds), whilst the latter are owned and operated by private enterprises including institutional Fund Managers.
The fundamental positive social impact is the increased provision of good quality homes. The undersupply of new homes across all sectors in the UK is well-documented and, particularly in the PRS, existing stock is often old and of poor quality. Beyond that, a professional landlord can provide higher standards of management, treating tenants as valued customers. This includes 24/7 maintenance support, the availability of longer tenancies and the assurance of having a well-established company as landlord. Metrics such as the number of good-quality PRS homes delivered due to the Fund’s activity (alleviating housing shortages), tenant segmentation statistics (length of stay, and average salaries and rents), and tenant satisfaction scores can be used to determine social impact.
The role of the Property Fund Manager
The Fund Manager has to assess the interests of various stakeholders – in particular, the Fund’s investors and tenants in its properties. Typically, these interests are fully aligned as satisfied tenants pay their rent on time and stay longer, and this results in resilient income for investors.
But there can be situations where the Fund Manager needs balance these interests. For example, the Fund Manager will need to assess how to manage tenants in arrears – weighing up the interests and concerns for tenants whilst fulfilling the investor’s income objectives. Another example are investments to enhance energy-efficiency; sometimes such decisions can be easy – something as simple as changing to more efficient lightbulbs can enhance EPC ratings from D to C. However, moving from a B to an A might require the installation of Solar Panels. Whilst of course it would be ideal to install PV panels on all properties, the upfront investment by the Fund might benefit the tenant due to lower energy bills, but this may or may not be offset by higher rents or increased capital values. Many of these decisions are very much the same as they are for homeowners or Buy-To-Let landlords. The main difference is the magnitude as a Fund might manage hundreds of properties. A trusted network of partners including property managers, energy experts and valuers, regular investor feedback and timely technology-enabled reporting all help in achieving outcomes that are in the best interest of all stakeholders.
To find out more, visit Hearthstone Investment's website.