Delivering Social Value in real estate: An overdue discussion in Latin America and the Caribbean

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Delivering effective environmental, social and governance strategies in the global real estate sector is an increasingly important issue. In this blog we address the opportunities that lie ahead for Latin American and Caribbean cities through the delivery of social value in the real estate sector.

Environmental, Social and Governance in Real Estate

Sustainable property development is central for more equitable and inclusive cities – but sustainability is more than climate change.

When we refer to sustainability, we usually think about net zero and the environment. This is especially true for the built environment industry where for the past 20 years emphasis has been placed on achieving carbon neutrality – the ‘E’ in ESG (ESG is the acronym for Environmental, Social, and Corporate Governance). Standards and certifications for green buildings are ubiquitous – there’s EDGE, LEED, and BREEAM, among others. However, the real estate sector can also be a great enabler of social value creation by generating jobs for local people; providing high-quality public and green spaces that support health and wellbeing; and promoting community integration. Delivering social value through real estate can positively impact urban communities and create long-lasting benefits that improves people’s quality of life – the ‘S’ in ESG. However, there isn’t a universal definition on social value – and it is time for the real estate industry – including local governments, capital investors and developers – in Latin America and the Caribbean to come together with a regional view.

What does the ‘S’ in ESG stand for?

There is currently no consensus on the meaning of ‘social value’. There have been some efforts in North America and Europe to draw a general concept. Here are some examples:

• The Urban Land Institute defines it as “the extent to which activities improve economic, social, and environmental well-being.”
• The United Kingdom Public Services Act (2012) considers that “social value seeks to maximize the additional benefit that can be created by procuring or commissioning services, above and beyond the benefit of merely the services themselves.”
• The Royal Institution of Chartered Surveyors posits that “social value refers to all of the impacts that an intervention, policy or project has on society and the value that these impacts have, both positive and negative.”

Key players in the industry, including think tanks, academic institutions, and governments have taken steps in trying to operationalize social value in several sectors, including real estate. This trend has been accelerated by the Covid-19 pandemic, which has given stakeholders the time to reflect on the kind of economy and society we want to live in. Despite efforts, there is a knowledge gap on how the built environment industry can objectively measure social value during construction and operations.

In fact, existing sustainability assessment tools, such as Building Research Establishment Environmental Assessment Method, WELL building standards certification and GRESB real estate assessment, are limited to health and well-being – assessing how a building’s design affects occupiers’ wellbeing. Other critical aspects such the impact of real estate on local people and communities are either limited or non-existent. Furthermore, most tools fail to monetize the social benefits of real estate projects, making it difficult to analyze impacts objectively and comparatively.

Growing demand for ESG investments in real estate industry

Defining and measuring social value in real estate is relevant for both public and private institutions. On the one hand, local authorities regulate and plan the development of new buildings and issue building permits that could potentially incorporate social value requirements – similarly to sustainability standards already in place for new construction or retrofit projects in some cities. On the other hand, public and private entities invest in property directly to obtain economic returns by selling, managing or leasing residential commercial, and industrial assets. Investment decisions could be driven by financial metrics as well as social value indicators.

Investors have started making real estate investment decisions that combine traditional financial metrics (e.g., net present value, internal rate of return, cash-on-cash return) and ESG performance indicators to create long-term positive impact. An indication of this is the development of the Sustainability Guidelines of the European Association for Investors in Non-Listed Real Estate Vehicles and the increased participation of investors in the 2020 GRESB real estate assessment.

Moreover, the Urban Land Institute (ULI) in Europe reports a strong demand for impact investment in real estate. At least 58% of real estate practitioners who responded to the 2020 ULI European survey say that incorporating social impact or social value contributions in their portfolios will increase in importance in 2021 (here’s an interesting Podcast by Sidewalk Labs related to this discussion). Latin America and the Caribbean is no exception. Major social housing and infrastructure investment funds with operations in Mexico, Peru and the Dominican Republic are keen to better understand what social value is: how to create it; measure it; manage it and report it.

A regional definition of social value in real estate: the potential benefits for cities in Latin America and the Caribbean

The discussion on social value in the real estate industry in Latin America and the Caribbean is at a very early stage. Helping bridge the public and private sector is essential to kickstart a meaningful discussion on how to deliver social value in real estate in cities. This could have major implications in how we plan, deliver and manage urban development – ensuring that local communities are at the cornerstone of new buildings, whether it’s a new apartment building, an office building or an industrial warehouse. There are several potential benefits to having a definition and framework on social value to cities:

• Cities could attract new investments in urban development and regeneration given the growing global trend and appetite for ESG investments.
• Cities could ensure (through local regulations) that real estate projects led by developers effectively deliver benefits to local communities without compromising project viability (e.g., using indicators that cannot be directly accounted for in traditional financial models or cost-benefit analysis).
• Cities and developers could find more community support for new and large-scale development and urban regeneration initiatives, minimizing the opposition by residents to proposed projects (commonly known as NIMBYism).

If you’re a developer, an investment fund or a local government, please do not hesitate to share your thoughts in the comments section below.

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