A puzzlingly common mis- conception in the investing world holds that investments
that take into account environmental,
social and governance considerations
entail a certain trade-off: doing good
for people/communities versus turning a profit.
While numerous meta-studies and
academic papers have debunked this
perceived trade-off, the stubborn misconception has persisted. This is true
particularly in the real estate investment
world, where many landlords or property owners seek to deregulate their
affordable properties as quickly as possible, so as to cash in on higher market
Although it may not seem as sexy as
investing in gleaming new rental high-rises, affordable housing (Low Income
Housing Tax Credit, Article XI, 421-
A, and other programs) can actually
be a more solid investment proposition
than market rate properties. Moreover,
affordable housing offers the opportunity to invest in an asset class that has
the potential to produce market rate
returns or better, that also enables mis-sion-based or impact investing in the
service of ESG considerations.
In much of the United States there is
a demand for affordable housing, with
increased renters throughout the country experiencing a cost burden (
spending 30% or more of their income on
rent). This demand and constraints on
supply for affordable housing translates
into high occupancy rates for affordable
rentals; higher occupancy means lower
volatility for investors.
ADDING IN ESG TECHNIQUES
By incorporating a few simple ESG
practices into property management,
including social programs and financial
literacy training, affordable rental investors can help tenants stay in their homes,
leading to less credit loss (from tenants
not paying their rents) and lower turnover rates, further lowering costs.
This can result in a “lower beta”
income stream. “Lower beta” pricing
of assets are just as attractive as more
volatile market rate apartments, which
can be much more difficult for property
managers to fill, especially in the case
of new luxury apartments with sky-high rents.
A recent deal shows how invest-
ing in affordable housing is gaining
increasing traction among institution-
al money managers. In July, a joint
partnership between L+M and Invesco
paid $1.2 billion for a collection of
2,800 rental apartments in New York
City, with the plan to convert two-
thirds of the units from market rate to
affordable housing; typically invest-
ment managers buy rental properties
in New York with the opposite goal in
mind, to convert rent stabilized units
to market rate units.
The group may be seeing the investment as more defensive, since, as I
believe, they can count on the higher
occupancy of affordable units to help
mitigate the impact of market cycles.
The deal also takes advantage of significant tax breaks offered by the city,
another benefit that is often typical of
affordable real estate investing.
The deal amounts to a win-win-win
that typifies affordable housing investing: Lower rents for tenants making
below the median household income,
higher occupancy rates and more stable income for the investors and boosted affordable housing in a city where
demand for affordable housing far outstrips supply.
It may still be early days as the investing world wakes up to the opportunity
represented by affordable housing, but
it’s clear that some institutional money
managers already are taking notice.
Perhaps it’s only a matter of time before
the rest of the investing world realizes that the perceived trade-off in using
ESG considerations is nothing more
than a myth.
Jonathan Needell is president and chief
investment officer of KIMC, an employee-owned, California-based real estate investment company that invests in affordable and
workforce housing units that make a positive
environmental and social impact. The views
and opinions expressed here are his own.
By Jonathan Needell
Can Affordable Housing Help Build a
Institutional money managers already are taking notice of this asset class,
complete with the advantage of ESG investment practices.