To reconcile social & financial values in private-sector urban development
Tomorrow’s Thriving Communities by ULI
Earlier this month, I was invited at ULI Europe’s annual conference to talk about what real estate developers and investors can do to “build more liveable cities and make a profit”. I was honored to participate side by side with:
- Professor Yolande Barnes, Chair, UCL Bartlett Real Estate Institute
- Alexandre Huyghe, Chief Executive Officer, Re-Vive
- and Sue Chadwick, Strategic Planning Advisor, Pinsent Masons LLP and Research Fellow, Open Data Institute (Moderator).
The session’s title (“Delivering the Future: What Investments and Partnerships Will Look Like Going Forward”) actually scared me at first because it is such a massive question! But after putting my thoughts together, I realized that we, at Curiosity is Key(s) had stuff to talk about! So here are my notes.
Are social and financial values irreconcilable?
I definitely am one of those (weird?) people who think that they are not!
It’s not impossible
There is no doubt that it is a very complicated question. But social and financial values are interconnected: by designing and managing an asset that brings value to the people, one builds attractiveness for their asset and therefore financial value.
Even though doing “Mother Theresa” type of work while seeking financial returns might prove impossible 😏, I believe that a company can still do “good”, improve liveability in areas they invest in, and sustain their profits.
Private-sector real estate investors are evidently not equipped nor structured to solely focus on providing public goods. But…
(i) in almost any case, we could incorporate public goods (spaces and amenities especially) in our operations; and,
(ii) we could decide to promote and/or finance the development of socially- and environmentally-driven real estate products only.
Widening the perspective
For us at Curiosity is Keys and Keys Asset Management, investing in real estate means investing in the infrastructure for urban life. And so, failing at accounting for the liveability of a building or an area when underwriting a real estate transaction is missing the point of our own sustainability as a business.
In fact, from its inception, Keys has looked at real estate from the operational point of view rather than the traditional excel-driven and comparable-based $ value. Our team knows that in order to invest in durable real estate value, we need to address user needs first. So we stay close to our operators, or sometimes we operate ourselves to understand precisely what makes the attractiveness and operational value of an asset.
In short : we think in terms of “product” just like for other consumption goods. And because we’re real estate investors we’re extending the rationale to the operational phase to ensure social and financial value creation throughout the lifecycle of the asset.
It sounds like a commonplace but I actually find it to be rare for an investor to think that way. Most investors trust most developers who themselves don’t necessarily understand the value of testing their intuitions for the “product” against their own biases. They seem to continue to believe that their experience enables them to know what is best for a community without questioning their users. I like to challenge that - just to make sure we maximize the quality of our response to market demand!
Tools
As Head of R&D at Keys Asset Management, I hold sustainability and positive societal impact as overarching goals for 100% of our work. Even though we are still in the process of formalizing our approach, I think I can safely say that we have given ourselves 3 productive tools to develop new real estate products :
1- Impact investment frameworks
Impact frameworks are a great way to assess the potential of any innovation. It forces you to get a clear perspective on how your solution is going to affect people and the planet and therefore helps you in understanding its viability in the long run. They’re the bedrock of a good innovation process, and later on, a great tool to formalize a forward-looking investment thesis.
According to the GIIN, impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investment frameworks allow testing one’s instincts about the “for good” potential of an asset against international standards, thus building consensus about what is or is not a positive impact on the planet and/or people.
At Keys, we’ve just started fundraising for a new impact fund dedicated to the development of flexible, well-managed, community-oriented rental housing for the urban middle-class. (Co-living is part of the solution naturally 😉). We have chosen to use the UN’s SDGs as our general impact compass.
2- User-centric concept design
I recommend designing for users first and then comparing with the traditional highest and best use approach rather than the other way around. Although note that designing for users does not prevent from developing inclusive and diverse user profiles at the portfolio level, to the contrary.
In our user-centric approach, the project manager becomes a product developer and follows a design process comprised of 8 critical steps:
- He/she assembles a multidisciplinary team to bring all perspectives to the table;
- He/she runs an in-depth analysis of the local socio-economic context, real estate maket, and urban fabric;
- He/she identifies and researches future users to outline their core needs;
- He/she designs the perfect user experience and drafts the product’s value proposition;
- He/she understands the value creation model for the new product, develops a business plan and maps out key partnerships;
- He/she drafts the optimal yet realistic operational organization;
- Once a location in mind, he/she thinks in terms of “place-making” to create the local destination with the appropriate reach and means and methods;
- He/she proposes a valuation model that understands the probable weight of real estate capital vs. operations.
3- Experimentation & iteration
Failure is one essential component of any learning experience. That’s why at Curiosity is Keys, we experiment a lot, we fail, we learn and we iterate. Our applied research and development approach is interlaced with fieldwork and real-life projects. Those so-called “experimentation projects” are real estate development operations through which we test new business and valuation models.
For instance, last year, we worked with a municipality’s city planning team to design, model, and develop a model for “productive” urban real estate. This particular case was focused on sustainable food production, and questioned our ability to come up with a profitable real estate model for urban farms. Our conclusion is that there is none under usual land value assumptions! So we had to add recreational spaces to boost the financials. But the important lesson here is that the social value of bringing local food production to urban areas is such that we were able to work with the city on a valuation model that allowed for us to buy the land at a lower cost in exchange for committing (i) to run a socially-driven operation for 10 years, and (ii) to include the local government in all tenant selection decisions.
Generally speaking, Curiosity helps Keys exploring how, we, as investors, can design, develop and operate innovative places, hand in hand with local stakeholders, while sustaining our business offering to our investment partners.
Conclusion
Cultivate curiosity
At Curiosity is Keys, we believe in this powerful opportunity that cities have to invent new economies and new balances for their people. That’s why we’ve made it our mission to explore and research those trends, to better understand why and when to implement change. Using human-centered and participatory approaches, we consolidate and share collective intelligence, test and experiment with new models, measure their impact to design place-based solutions for a wide range of local stakeholders.
In the end, it’s all about being curious and passionate about what you can bring to people and how you can help make their lives easier from where you stand.
Instead of Design & Build, do Design & Operate
I believe that in order to postpone obsolescence and ensure the viability of a real estate asset in the long run, one has no better choice than to factor in the social value of places in their financial analysis. This is easier done when one runs an integrated business and moves from “invest, design & build” to “design, invest & operate” business plans. Because the design phase forces you to address your users’ specific needs first, and before addressing your own. And because the operational phase forces you to face customers and therefore improve your value proposition on an every-day basis.
Learn to quantify the social value of a real asset
Now, if I am right in thinking that addressing people’s most basic needs should lead to increased “social value”, defining how to quantify this social value remains one of finance’s biggest challenges lying ahead.
In the course of two years, urbanites have had to deal with gilets jaunes in France, Brexit in the UK and aggressive Trump supporters in the US, #metoo, Black Lives Matter, unprecedented climate marches and of course Covid-19. In this context, can anyone reasonably think that they can develop and invest in urban infrastructure that contributes to increasing inequalities and/or overrunning parts of the urban population? So… if I push it a bit further, I even think that the era of profit maximization in real estate is over 💥.
Some are going to continue to look at socially-driven investment as an anomaly — I like to see it as being fierce.
