This week’s letter is a guest op-ed from Private Equity Real Estate senior reporter Arshiya Khullar.
The US was suffering from a deep housing crisis even before the covid-19 outbreak, with over 500,000 people homeless and millions of others struggling to pay rent.
The pandemic and job losses have only exacerbated this issue. As of June, there were an estimated 1.1 million households in New York – one of the worst affected states – with at least one person who filed an unemployment benefits claim, according to New York University’s Furman Centre for Real Estate and Urban Policy. In the lower income group, the number was over 450,000.
Affordable housing is as crucial to a city and its residents’ economic well-being as other infrastructure like transportation, healthcare facilities and schools. In short, affordable housing provides an essential service, so affordable housing investments surely should be considered in a similar way to infrastructure instead of purely as a real estate strategy.
For its June cover story on affordable housing, sister publication PERE interviewed Alicia Glen, former New York deputy mayor for housing and economic development. Last week she launched MSquared, a real estate investment platform focused on mixed-use projects aimed at tackling the affordability crisis. Glen believes that affordable housing investments, if well-structured, can have a risk profile just like a classic infrastructure deal. “If people start thinking about housing in this way, we can attract more patient capital, build better projects, maintain income diversity in projects, and still deliver good returns for institutional investors,” she says.
There is merit in Glen’s argument. In the UK, for instance, the government’s private finance initiative programme has procured social housing as an infrastructure investment. Indeed like other infrastructure development projects, affordable housing depends entirely on an effective public-private partnership, although the degree of government involvement varies by strategy. The US government’s Low-Income Housing Tax Credit programme, for example, allows managers to avail tax credits for the acquisition, rehabilitation or construction of rental housing targeting lower-income groups. Certain types of workforce housing or mixed-income assets that have a mixture of market-rate and affordable housing units are also semi-regulated and firms can leverage tax-exempt financing options.
Even within the real estate industry, affordable housing is increasingly being pitched to institutional investors as a core or value-add strategy with limited upside and a long-term hold. Washington DC-area developer JBG Smith is currently in the market with an affordable workforce housing fund that has a 15-year affordable covenant and a gross hurdle rate of 9 percent to maintain a balance between impact and returns. There are other firms, like London-based Cheyne Capital, which acquire assets with inflation-linked, long-dated leases running 20-40 years, so that rents do not increase faster than wages.
Such investment theses would sit well in an infrastructure manager’s typical strategy too, so there is a clear alignment of interest. A classic private infrastructure fund has a life of 15 years and target returns could well be between 12-14 percent, depending on the type of infrastructure asset.
Over the past few years, infrastructure has become a highly appealing asset classes for institutional investors. According to Infrastructure Investor’s LP Perspectives Survey published in January, more than a third of the 146 surveyed investors expected to commit more to infrastructure funds in 2020 versus 2019, buoyed by the sector’s limited volatility, low correlation to the more volatile public markets and other reasons. Expanding the investment opportunity set to affordable housing will help infrastructure managers leverage this burgeoning appetite even more.
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