Affordable housing is a topic which is trending across multiple investment research feeds inside RFPnetworks. The interest in this segment of the real estate market goes beyond bricks, mortar and land. The latest research dives deeper into environmental, social and technology opportunities, which touches both private equity and public equity portfolios. The talking points between investors and investment managers of affordable housing funds revolve around multiple factors.
It may be too early to claim that the stock-bond correlations that drove diversification in the past have broken down. There are many unique causes behind this phenomena that may be temporary and dissipate. But in the meantime, institutional investors need diversification and inflation linked income. Allocating to affordable housing is one potential solution. But it is not a done deal.
Real incomes of the most vulnerable in society are being impacted by inflationary pressures from a multitude of angles. The price of the basic needs of society have simply skyrocketed over the past 3 years, with only tenuous signs of abating. The sources of inflation remain stubbornly resilient, driven by forces that are now all too familiar:
1. Unresolved supply chain bottlenecks - initially driven COVID and zero-COVID policies, specifically China.
2. Unanticipated house price increases - people working from home were not just working. Turns out they were busy with home improvement, and trading-up to a new home to accommodate the home office.
3. Energy, commodity & (building) material prices reached all-time-highs - driven by slow supply chain recovery rates and, more significantly, the Russia-Ukraine crisis.
4. Basic food prices saw double digit increases - driven by all of the above, but also by poor harvests which many admit can only be attributable to climate change.
5. East-West geopolitical tensions - introducing free trade agreement constraints
6. Shortage of microchips and intellectual property 'ownership' - microchips are becoming the new gold.
7. The impact of deglobalisation on input prices - as on-shoring, near-shoring, friend-shoring shifts production away from the cheapest far-shoring outsourced arrangements.
Simply put, price increases on basic necessities are being passed through to the segment of society that has no power to negotiate. These lower income households are now living in accommodation which is both figuratively and literally not designed to insulate them from energy price increases. The world has moved from a regime of loose money and least cost manufacturing, to loose inflation and real income reduction for the masses.
Central Banks know that inflation is financial enemy number one. They also know that the cure is to raise interest rates. But like fiscal policy, monetary policy also comes with a multiplier: For many people in affordable housing, rising mortgage rates and tougher bank credit lines have put the private housing option firmly out of reach.
For project developers, the end of easy free flowing money has raised the cost of capital, and reduced their expected IRR. The traditional approach to building affordable homes has become too expensive. In terms of labour, materials and the CO2 budget required along the development chain. Affordable housing development has slowed, stopped or indeterminably delayed.
The demand for affordable housing has rarely been so acute, and supply so subdued. Yet where there is demand, there is an opportunity to supply. In the case of affordable housing, institutional investors are looking for innovative real estate investment managers. Those that can solve the investment equation and re-balance basic societal needs. These investors are keeping a close eye on the companies in their listed equity and private equity portfolios that are able to facilitate the transition to a new way of building affordable homes.
If institutional investors can find ways to: reduce their portfolio CO2 footprint; alleviate societal challenges and needs; and earn long-term inflation-linked income streams, they have reasons enough to allocate substantial capital. Their research has already begun inside RFPnetworks.
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