CAN THE REAL ESTATE SECTOR EVER REALLY BE ETHICAL?

Let's be blunt: I inhabit a sort of no-woman's land, being heavily invested in the notion of ethical business and yet with a background in Architecture and Real Estate Investment. In my perhaps novel universe, Real Estate Investment & Property Development can both contribute significantly to communities and also offer strong returns. I have the same view about ethical business: that it can be simultaneously financially and also socially fruitful. In short, I believe in the Win-Win. 

But can Real Estate Investment ever really be Ethical?

The CRE sector is increasingly concerned with ESG et al but a) I usually get the impression this is being forced upon the sector without any real enthusiasm and, b) the backlash against ESG in the States is likely to filter down to the UK (although perhaps not so much the EU).

Rarely, Real Estate Investors come to this with a voluntarily ethical perspective, and there is nothing strange about this - in essence, offering to financially support new and socially beneficial development via investment ought to be almost entirely a positive scenario.

On the ground, however, many things are amiss

In theory there should be no especial conflict. Local Authorities are, to put it in layperson's terms, 'stony broke'; meanwhile the Groundhog Day Housing Crisis relies on a perpetual housing deficit. I spent a decade in the Built Environment sector and every single year Government of whatever stripes pushed out 'new' policy but nothing ever changed.

As such investment should appear to be almost universally a positive. Certainly Local Authorities are no longer in any position to effect change and waiting on so-called 'funding' is an increasingly futile and desperate measure: banking on a Government funding lottery is no way to plan the future of a town, city or other conurbation. Local Authorities need the help of private investment and development to improve communities' provision.

In fact, many if not all private developers are as much interested in improving communities as they are in reasonable profit. This is a very similar stance to that of Impact Investing. In addition, in principle, investment and development should have Social Impacts almost naturally. For example, a new housing development (if well-planned with good amenities and with affordable housing provision) ought by definition to be contributing both to lowering house prices (aka The So-Called Housing Crisis, which is really an Affordability Crisis) and to the community and built environment at large.

Alas, Trouble in Paradise ...

Sadly this private-public idyll is rarely realised. For a start, investors (as opposed to developers) have (somewhat understandably) become a little hesitant around resi, perceiving it as frankly too politicized (except perhaps for some reason when it comes to Multifamily & Co-Living). There are also overt examples of Bad Practice - land-banking, preying on foreclosures and so on - and I also don't doubt there are very many less-than-optimal private landlords/ladies.

But there are also very many well-meaning developer and investors.

Nonetheless there are aspects of Real Estate Investment that even the most well-meaning must address, because when we drill down there may be elements that simply don't sit comfortably with publicly proclaimed ESG and ethical viewpoints. 

For example:-

Is it really ethical to invest in Student Accommodation when we know that all we are doing is providing students with unnecessarily swanky boutique-hotel level accommodation at artificially inflated rentals (and, often, poor urban planning) in order to maximise investor yields and University profits, when we know with certainty these students are taking out massive debt? This clash of values may be more apparent when the student is our own child and bankrolled by ourselves;

Is it ethical to consistently look for waivers on affordable housing targets because we are not liking the looks of our RLVB's?

Related, is it also right that Housing Associations now behave increasingly like private developers with stringent criteria about who is worthy of a home? Whilst it's understandable that Housing Associations would want to protect their finances, this is a radical shift from HA as safety net and social provider to HA as policer of worthiness. How do we support a society that wants to give Second Chances on debt, say, when even HA's vet residents at inordinately strict levels? Not everybody operates this way: both Prince William, in his campaign to end homelessness, and Timpson, who hire those with criminal backgrounds, are seeing the light, whilst HA's themselves sadly devolve.

Home as Capital / Asset

Some of these difficulties exist because we have all but removed the notion of real estate or property as 'home' except in the case of so-called "Home Ownership" and have increasingly emphasised the notion of property as financial asset only. (Too, it is noteworthy how rapidly "home ownership" reverts from "home" to "capital" should the "owner" default, which rather reveals the social sham of mortgage-based home ownership.) 

As Cowan et al astutely observe in their book Great Debates in Property Law, the perception of (resi) property as financial asset is not a neutral fact but rather a political position stemming from the 1925 laws, whose overarching goal was to make property-exchange identical to money-exchange (primarily from an ease of exchange viewpoint). This is an ideological position which has been stubborn - but this doesn't make it natural.

Where "home" fails, then (for example where a homeowner is pushed into repossession due to poor advice, or an untenable financial position due to nightmarish macroeconomic factors) sociopolitical ideology reverts brutally back to what it ultimately is: financial asset.

Can therefore the Real Estate Investment & Development sectors ever Really be Ethical?

Is it therefore even possible to simultaneously hold contributional and ethical values as an investor/developer alongside the goal of strong or even reasonable returns? Or is Real Estate always ultimately a brute financial force? If so, how can the Real Estate sector ever really do ESG? And how can those investing in Real Estate 'do' Socially Responsible Investment (SRI) without it ultimately amounting to smoke, fury and alphabetical letters signalling nothing?

I don't blame investors for not wanting to touch the resi sector with a bargepole. I don't blame housing developers for struggling with targets in the face of inflated construction costs and endless NIMBY nightmares. But could the sector have real Impact in other ways?

Could developers commission valuable research on homelessness (and then not take actions that undermine the findings)? Should the sector, instead of repeatedly finding reasons to ask for dispensations on affordable housing targets, or looking for ways to cut corners which lead to serious safety issues, collaborate instead with existing innovators who are already researching safe and also carbon-friendly ways to reduce building costs, also, architectural thinkers who design safer, cheaper, more carbon-friendly ways forward?

As but one example, the standard new housing development is incredibly wasteful of land, and even of brick, yet developers almost always build this way because they are convinced that this is what 'people' want and that 'an Englishman's home is their castle'. And 'people' may well want this if there is, frankly, nothing better on offer. But isn't the English dislike of terraces, apartments and maisonettes in larger part due to fear of noise pollution and nuisance neighbours, which could equally be fixed by better sound insulation and alternating doorways? I'm not saying this is definitely so but better market research could prove invaluable - it may well be that the cost of mitigating such concerns would be far lower than that of providing barely-detached housing.

We need to see a paradigm shift toward Innovation and Research if we are to find ways forward that a) contribute socially and b) make financial sense. If we won't engage with these remits then any claims at ESG (or similar) within CRE and Resi Investment and Development will remain superficial at best. And that would be a shame for a sector within which so many, I know, do genuinely hope to contribute.

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