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Hired, Housed and Healthy: An Introduction to Our Social Infrastructure Strategy

Social infrastructure—the physical assets where social services are provided to communities—has a crucial role to play in society. Franklin Real Asset Advisors’ Raymond Jacobs, Riccardo Abello and John Levy share their thoughts on the topic here.

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Long-term, flexible and efficient investment in education, health and affordable housing is widely considered essential for economic growth and the well-being of populations.

Franklin Templeton recently hosted an investor day outlining its social infrastructure strategy and impact investing approach as well as showcasing some of the investments in Europe, including housing, court buildings and medical facilities.

Attendees also heard presentations from health care and social housing experts, who provide advice and guidance to our investment teams.

Funding Pressure on Social Infrastructure

Across the world, there’s evidence that social infrastructure assets are severely underfunded, and some investments may not always be appropriate as needs and expectations change over the coming decades.

For example, a 2018 report compiled by the European Commission and the European Association of Long-Term Investors (ELTI) warned that investment in social infrastructure, both private and public, falls far short of the level needed to cater to the European Union’s current population.1 

The report estimated the minimum infrastructure gap in social infrastructure investment to be between €100 billion and €150 billion a year, representing a total gap of more than €1.5 trillion in 2018- 2030.2 

A shortage of social infrastructure assets such as schools, hospitals and affordable housing can mean not enough social services are being provided to communities.

Even among existing social infrastructure assets, the quality of the stock is often lower than one might like, and the environmental footprint considerably larger.

The aim of our social infrastructure strategy, which incorporates a strong focus on impact investing, is to tackle that problem head-on by facilitating hired, housed and healthy communities. By contributing to improvements in the quantity and quality of social infrastructure stock, we think these outcomes are obtainable.

Financial and Impact: Our Asset Management Approach

Our social infrastructure strategy has both financial and impact objectives.

As we develop our asset management plan, we set short-term, medium-term and long-term objectives for both.

For example, short-term financial objectives might include leasing up vacant space, addressing short-term lease expiries, managing tenant expansion and facilitating immediate capital expenditure that might be necessary.

From an impact perspective, short-term activity might include collecting energy consumption data. Over the medium term, we’d look to use that data to make environmental improvements at the physical assets.

Longer term, our focus from a financial perspective is on lease renewals and potential redevelopment opportunities at properties. On the impact side, our longer-term attention is on possible upgrades of building equipment and systems.

How Do We Make an Impact?

We view the provision of long-term capital that’s aligned with the interest of the asset as a critical element in social infrastructure investing and management.

But in order to achieve our goals, we think it’s not enough merely to align ourselves with these assets, we want to think about how we can contribute to better outcomes and better impacts.

We see it as our duty to raise the level of discussion and focus on how we achieve new and better results. We believe the focus on defining and measuring real contributions should be a primary consideration when assessing an impact strategy.

For many investors, the United Nations’ Sustainable Development Goals (SDGs) act as a common language for discussing, managing and reporting on impact investment strategies.

We feel strongly that investment products labelled as “aligned with the SDGs” should move beyond just alignment and make a real contribution to positive social and environmental outcomes. We explained our approach and our thinking about contribution in this recent article, “Beyond Alignment: Contributing to the Sustainable Development Goals”.

Investing for the Long Term

Social infrastructure investing isn’t just an opportunistic move for us for the short term. We want to be involved with projects for the long term, so we can make sure that impact is long lasting.

We’re finding many opportunities to directly increase the stock of social infrastructure.

For example, if we were to own property that’s primarily used as a school, but which includes some non-social infrastructure tenants, we could look at opportunities to bring in more social infrastructure tenants to that asset.

We could also look to add space to a facility for example, by adding a new floor to a building or by adding an entire new building.

The quality of services at the asset is important. When investing in infrastructure assets, we aim to partner with high-quality operators or make measurable improvements by buying an asset with a struggling operator and bring in better one.

We aim to deliver impact to our infrastructure assets in two principal ways—through functional enhancements and environmental upgrades.

Functional enhancements are essentially the physical improvement to the asset. For example, in an affordable housing project, a functional enhancement might include improving the actual apartments in the complex. In an affordable housing complex, we might work with a local telecommunications company to provide free Wi-Fi for tenants in a building; or we might try to work with a local municipality to provide better transportation options for staff to get to work at  a school or hospital, for example.

Environmental upgrade examples might include installing solar panels, improving heating systems and identifying and implementing best practices associated with waste management at our assets. One practical example that’s already underway is the installation of smart meters at a number of our largest properties.

These will allow us to measure electricity, gas and water used in those buildings. We will then be able to work with tenants to improve behaviour and the efficiency of their systems.

We typically look for long leases on our assets that allow us to build relationships with both tenants and the local community to identify ways to improve the impact of that asset.

In most cases, the tenants in these structures are paying utility expenses themselves. We can get to managers and decision-makers to help them see the financial and impact benefits of the improvements we recommend.

Social infrastructure plays a critical role in the health and vibrancy of local communities. As physical assets, social infrastructure also has a large role in the health of our planet.

Without adequate resources to maintain and improve social infrastructure, we believe communities are not well served and the environment suffers. In our view, bringing impact-focused private capital to the social infrastructure space can markedly improve the performance of these assets, which in turn can help better protect the environment and those that live in the community.

To read other articles from the Franklin Real Asset Advisors Team on social infrastructure, impact investing and other topics, click here.

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Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

 The views expressed are those of the investment manager(s) and the comments, opinions and analyses are rendered as at 2 December 2019  and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered outside the United States by other FTI affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.

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What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Investing in real estate securities involves special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector. Actively managed strategies could experience losses if the investment manager’s judgement about markets, interest rates or the attractiveness, relative values, liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no guarantee that an investment manager’s investment techniques or decisions will produce the desired results.

 


1. Source: European Commission: Boosting Investment in Social Infrastructure in Europe January 2018 [https://ec.europa.eu/info/sites/info/files/economy-finance/dp074_en.pdf]

2. Ibid. There is no assurance that any estimate, forecast or projection will be realised.

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