It’s been a while since the Financial Times (October 16th, 2017) reported that the UK National Advisory Board for Impact Investing (a group of charities and investors), asked the government to come up with a £2bn catalyst fund to ‘jump-start private sector investment in economically-deprived communities’. The NAB’s report claimed that this would unlock tens of billions from investors over a five to 10-year period. Since then the government has announced funds of up to £4bn to accelerate housebuilding, but this is not what NAB had in mind. Instead, in their 2018 call to action the NAB say they want a coalition of public, private and third sector investors to be ‘committed to using their respective financial capital, human capital and intellectual capital towards a more inclusive and sustainable society.’
If the government is not going to persuaded by a powerful group of Impact Investors to help to create societal value, then who can we look to for a ‘more inclusive and sustainable society’? This was one of the questions that was explored in the recent Real Value Report that RealWorth was commissioned to write for Trowers & Hamlin. A range of senior Interviewees representing a broad cross-section of the property and real estate sector were asked; how can the financial gap between standard and pro-societal development be bridged? The proposition that RealWorth put to the participants in the study was that there may be an average 20% cost difference between a mixed-use development that seeks to improve factors such as health, crime wellbeing, skills, jobs, green space etc. and a development that is planning to be compliant but otherwise has no such aspirations for its stakeholders.
Participants of the Real Value study felt that the gap funding was unlikely to originate from local government budgets given the current and expected legacy of central government austerity policies. There were also no allusions about the size of the challenge with participants accepting that the disparities in British society were so large that it would take a massive fund to rectify the acute and chronic problems that have built up through the neglect of successive administrations. They cited the lack of affordable housing, the reduction and maintenance of green space, childcare provision, social care facilities and community-integrated health care clinics and residential facilities all of which contribute to the improvement in people’s lives who are living in conditions of multiple deprivation. But there was some optimism that gap funding could be found in some instances for some these problems under the approach known as patient investment, the same route advocated by the NAB.
Because of the large sums required, some of the money would either need to come from central government, or HM Treasury would need to redirect revenue into the new scheme. The Real Value interviewees thought that if this was to work, dispensing the new Societal Value Investment Fund would need to be administered as a financial transaction rather than as a grant-aid scheme. This is partly because of the extended period of a patient investment (stretched as it would be over the life of the scheme), and partly because expenditure of this nature is recorded differently on a government’s balance sheet.
Since The Real Value Report was published, RealWorth has been working with a small number of interested parties to explore how a new Societal Value Investment Fund might work if it conformed to these criteria. Here are three potential vehicles:
Two-thirds of the HBF is allocated for infrastructure. Criteria changes might include a portion of the fund allocated to investment (currently the money is only available as a loan). It could be made available to place-making bodies from any sector (not just the private sector) and could be focused (at least in part) specifically on elements and features of a development that increases societal value. HBF funds could then leverage an interest from impact investors attracted to participate in the scheme with a promise of profits on investment from the social and environmental returns. These would be calculated through social return on investment in a manner similar to social impact bonds.
The UK Guarantees Scheme was introduced as a response to difficult financial market conditions when infrastructure finance was hard to secure in the wake of the 2008 crisis. The capital in this case would come from the impact investor, and the and Guarantee Scheme would be used to pay back their investment over time against societal returns. The rate of return would be calculated through social return on investment. Clearly, HMT and the National Audit office would need to be satisfied that the methodology to show social returns was robust, but the concept conforms to other social impact bond vehicles.
The US Opportunity Act was included in new tax legislation that President Donald Trump signed in December 2017. The NY Times reported that the Act allowed investors in Opportunity Funds to reduce their tax burden (specifically in the payment of capital gains tax). The fund in this case does not come from government, but it needs government approval to be accessed. In the US there are more than $2 trillion in profits that have accumulated in individual and corporate accounts because of stock market gains. The Act assumes that investors would like to reinvent these capital gains but want to avoid payment of 20% in capital gains tax and a further 3.8% surtax if they sold the shares. The sum that individuals pay in tax in the UK is broadly the same depending in income, expenses and other tax allowances.
The new law allows investors to use the gains from the stock market and invest them in an Opportunity Fund. The Fund is then used to pump-prime either new businesses or property schemes in new or existing low-income or high-poverty areas nominated by each State. In return the government allows an investor who keeps money in the area for seven years a deferment on the payment of tax, and an ultimate reduction to 85% percent of the original tax bill. If the investor stays in the area for more than 10 years, then the tax owing is forgiven, and the investor pays nothing on the original investment or any of the proceeds from the Opportunity Fund investment which can be calculated using social return on investment.
Reliable criteria for repaying investors in social and environmental change already exists for other types of social impact bond schemes. UK Government advice for those performing economic valuations of social impact bonds is that they should keep the commissioner’s perspective in mind and produce valuations that clearly separate and show the following:
An understanding of societal value is beginning to shape designers’ and developers’ views on the provision and use of real estate development. The need to adopt and implement the monetisation of social and environmental change caused by the establishment property and development should now be used to help both the government and investors to accelerate new funding streams into communities in dire need of improvement.