The basic characteristics of an environmentally and socially responsible (ESR) real estate fund manifest in the conscious decision not to solely pursue capital gain, but to additionally aid the development, and even conservation, of the area of investment. These environmentally and socially responsible funds have a unique identity, which in the context of global issues, can only be interpreted as positive. Preqin’s Real Estate Online service contains detailed information on more than 50 real estate funds with a specific environmentally or socially responsible ethos.
As the chart above shows, since 2009 there has been an overall reduction in fundraising for ESR private equity real estate vehicles. Considering the actual number of such funds launched since 2009 is only 24 (raising $2.5bn in total), questions regarding investor appetite have to be raised.
In terms of strategy, the highest proportions of ESR private real estate vehicles closed have been value added and opportunistic strategies. This could be due to the nature of these strategies providing higher returns that may satisfy investor concern. Developed markets are attractive regions for socially responsible investment; the highest number of ESR vehicles launched since 2009 have focused on the US and Europe.
Next Estate Income Fund held a final close in October 2012 on €230mn, making it the largest ESR real estate vehicle to close since 2009. The fund targets newly developed office buildings in Europe, complying with sustainable development criteria either at purchase or with a low upgrade cost and within a short period. Differing slightly in its responsibility, AIP Japan Fund V targets socially responsible investments in nursing facilities within Japan. It invests in land and buildings but would seek to appoint a specialized firm to manage the assets while AIP’s staff focused on the operational aspect of the nursing facilities. The diversification of ESR real estate funds shows the integral part these vehicles can play within the wider social context. Although fundraising has been muted, public opinion on sustainable, responsible and environmentally friendly investments will continue to place pressure on fund managers to raise ESR vehicles.