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Funds target affordable housing for long-term returns

Can a new batch of housing-focused impact investing funds benefit communities and investors?

March 10, 2020

A growing number of impact investing funds are seeking out opportunities in Europe’s affordable housing sector as prices to rent and buy homes in major cities continue to rise.

Mid-market rental homes aimed at key workers are becoming a more attractive option for investors seeking stable, long-term income at a time of increased competition for those looking to deploy capital in real estate.

BMO Real Estate Partners, the property investment arm of Bank of Montreal’s BMO Global Asset Management, recently launched an open-ended fund to invest in flexible rent affordable housing in the UK.

It follows the likes of Cheyne Capital, Civitas and the property arm of Caisse des Dépôts into the sector. The French fund manager last year raised a record €900 million for its second Fonds de Logement Intermédiaire vehicle from 15 institutional investors, including pension fund, ERAFP. Nuveen Real Estate is also looking to invest in affordable housing across Europe.

“Seeing more institutional capital take this investment route is undoubtedly a positive,” says Philip Hirst, director, Upstream Sustainability Services, JLL. “Housing has been the main port of call for those looking to start impact investing in real estate; it’s easy for investors to grasp.

“At the same time, there’s a genuine social need as house price rises vastly outstrip wage increases, not to mention challenges in the wider economy and a shortage of high quality, affordable housing supply to meet demand.”

Mid-market housing

The affordable sector, providing professionally-managed housing for people priced out of major cities not classified as low-income, but not high-income either, has traditionally been overlooked by investors in the search for high yields.  

Aimed at longer-term renters who often know the local area, schemes may have lower tenant turnover than some in the higher-end, private-rented sector.

“Tenants of homes at lower rents are more inclined to stay put for both financial and community reasons,” says Hirst. “There’s often the assumption that affordable that automatically means deprived areas. But with cost of living pressures and house prices further out of reach for many than in the past, impact can be achieved in affluent areas too.”

However, not all funds can be regarded as being truly impactful.

“There needs to be real intent to make a change, for example, through improving quality, or adding new stock rather than simply buying existing assets,” says Hirst.

Legal & General last year provided £95 million of long-term financing to support Newport City Homes in their plans to deliver 1,000 new affordable homes in Wales over the next four years, while its Legal & General Affordable Homes arm is working with 14 UK housing associations.

Some of the institutional capital being invested is hyperlocal in its approach. In the UK, Resonance’s Real Lettings Property Fund was been backed by pension funds for London local authorities, Lambeth and Westminster.

“A local authority pension fund will often want to see and monitor direct impact in their own region or district,” Hirst says.

Investing to make a difference

For investors, the affordable housing sector comes with an additional plus point; fulfilling their own ESG (environmental, social and governance) criteria.

“More environmentally and socially conscious stakeholders have heightened the pressure on investment managers’ decision-making,” says Hirst. “That’s a global trend and one that will only increase in the coming years.”

Last year, the Global Impact Investing Network estimates that the world’s impact investing market is worth more than US$500 billion.

What’s more, funds are getting more ambitious in their strategies to make a positive impact. Franklin Templeton’s Social Infrastructure Fund, which has invested more than $270 million of capital so far, has assets ranging from a social housing portfolio in Cambridge to an elderly care facility in Milan.

“Investment managers take considerable time to create a strategy and launch a fund,” Hirst says. “Fund managers are becoming more long term and evergreen in their mindset. A quick, easy return is no longer the be-all and end-all.”