Affordable housing: A global problem demanding local solutions

Cities all over the developed world are suffering a lack of available housing as construction of new homes has not kept up with immigration and new household formation. The cost of land, labor and construction materials has grown worldwide over the past decade, making it harder to produce for sale or rent housing that is affordable to those earning average incomes or below.

Lack of affordable housing is becoming a global crisis. An estimated 1.6 billion people, representing one-fifth of the worldwide population, lack access to adequate housing and basic services, according to the UN special rapporteur on the right to adequate housing, and this number could rise to 3 billion by 2030.

The median-priced home can cost eight to 10 times annual incomes in London, and 18-20 times income in Hong Kong. The cost of available housing has risen sharply while median incomes have not. The lack of affordable housing hits the headlines in newspapers all over the world and has become a hot political topic.

A US survey by Redfin found that housing affordability would influence the voting decisions of more than 53 percent of people in the country.

Andrew Allen, global chief investment officer, equity investments at Savills Investment Management, says: “Nearly every market we cover has a significant affordable housing crisis. It is simply an enormous subject, and its significance dwarfs most of the subjects real estate people like to talk about. It is not just a question of scale, it is also the case that the quality of the affordable housing in most markets isn’t the quality it ought to be.”

More is needed

What new housing is coming online in these markets is generally upscale or luxury housing that developers can see the best returns on, but is unattainable to a large segment of the local population. So-called workforce or affordable housing does not pencil out on many developers’ balance sheets without some sort of government subsidy or assistance.

In addition, the numbers involved are huge. In Europe alone, investment manager Patrizia estimates 80 million people are overburdened by housing costs, most of whom live in cities and most of whom are in the lower- to middle-income bracket.

It is an area where it is possible to get bogged down in semantics. After all, every housing development has to be affordable to its target market, otherwise no one will be able to buy or rent it.

Rutger van der Lubbe, global head of investment strategy for real estate at Dutch pensions group APG, says: “Housing systems are culturally specific and location dependent. Affordable housing has different meanings around the world.”

For this article, PERE is focusing primarily on rental housing intended to be affordable to people on below-average to average incomes for the area where it is located. Many developers and owners of affordable housing target renters who earn below the average median income (AMI) for a particular area.

Others may target rents that are affordable to “essential” or “key” workers, such as nurses, firefighters or care workers in their locale. Investors may be operating within government subsidy schemes of one sort or another, which may be defined as social housing, or within an environment where rents are regulated – many of which have various regulations and standards. Still others may be providing affordable homes in the open market.

Common obstacles

The housing crisis may be a global problem, but delivering affordable homes requires local solutions.

Pamela West, managing director, real estate impact investing at Nuveen, which owns more than 30,000 affordable housing units in the US, says: “Whether it’s called social housing, workforce housing or affordable housing across the globe, it really is the same issue of rent-burdened residents, but the execution is very different.”

Different cities have different planning regimes, different regulatory environments and different public-sector subsidy programs, as well as the usual real estate variants of land costs, demographics and demand. For example, a large proportion of Nuveen’s affordable homes were built under the Low-Income Housing Tax Credit (LIHTC) scheme, which offers tax rebates for investors.

However, there are certain factors which come up in many places. One is rent control; an increasing number of national and city governments have introduced controls on rents and how much landlords are allowed to increase rents, especially for affordable housing.

Van der Lubbe says: “There are certain markets where we face rent controls and where we have seen significant construction cost inflation, yet land prices have not yet reflected the changed market reality. There is a struggle in certain cases to make financial returns work.

“On a global scale, we see regulation increasing, and that typically does not help in terms of providing greater supply. Ultimately, we need to have long-term vision in this market, we need to have visibility of what the regulatory landscape means.”

There is general agreement that regulation, including rent control, is not necessarily an obstacle to providing affordable housing if it is well thought out and, crucially, if investors have long-term certainty over regulation.

Wes Fuller, chief investment officer at Greystar Real Estate Partners, a real estate developer and manager based in the US, says: “Whether regulation works for us depends on the regulation. We have a large portfolio in the Netherlands, which is tightly regulated, but navigable. Frankly, in some markets, the regulations and the risk of mid-stream regulatory change is preventing new supply being constructed.”

Supply constraints

The whole real estate industry has been battling the effect of construction costs in recent years, and affordable housing is very much on the sharp end of pressure to maintain target rents and returns. As a consequence, many players are looking to innovate.

Greystar, which is developing “attainable” homes for essential workers in the US and elsewhere, has created its own modular construction factory, but is also innovating elsewhere.

Fuller says: “To be able to deliver housing at an appropriate rent for our demographic requires not just one or two changes, but an entirely different holistic approach. It starts with site selection, targeting municipalities that want new housing, which typically means lower impact fees and shorter permit times.

“We greatly simplified the design of buildings to shorten construction time and lower cost, and invested in a modular construction factory to further shorten construction time and lower costs. We invested in technology to streamline the operating model, which increases operating margins. All this translates to reaching operational stabilization much faster.”

Defining the challenge

Key terms in the affordable housing discussion

Cost burdened: an occupant spending 30 percent or more of their income on rent and housing costs

Low income: an individual whose family income is at or below 150 percent of the poverty line

Very low income: household incomes at 50 percent of the median family income for the area

US poverty level: adjusted each year for inflation, the US poverty level for a single-person household stood at $14,580 annual income in 2023, with a family of four below the national poverty line if they make under $30,000 per year

Densification, smaller units and co-living solutions where renters have small private rooms but larger shared spaces, can help the rent/return balance.

But van der Lubbe notes: “Densification and smaller, more efficient units can help drive down costs, but you need to provide appropriate housing solutions: you cannot fit a family into a studio apartment. It’s not only about affordability but also appropriateness.”

For Marleen Bikker-Bekkers, sustainable communities fund manager and head of European investments at Patrizia Global Partners, modular construction means “you can build faster, which helps returns.” Most importantly, she says: “It reduces embodied carbon a lot. Our strategy is not only focused on affordability, but also on building green.”

ESG considerations

Environmental sustainability is increasingly hardwired into real estate; however, the social impact is just as important in affordable housing.

West says: “Our management has a strong focus on the ‘S’ in ESG, the social impact. We analyze what services are needed by the residents of each building, which could be after-school tutoring, or skills training or financial services, which has been a big focus
for us.

“We found that many residents do not have a credit score. This means that, although they typically pay their rent on time, they don’t get credit for that. So we engaged a service that enables them to build up a credit score and thus have opportunities to access credit they didn’t before. Residents who have access to services and can benefit from well-maintained properties stay longer, which leads to more stable outcomes for each household.”

Aligned with ESG, one of the risks mentioned by participants in the affordable housing sector is the reputational risk. One manager said the industry does not want to be on the wrong end of this and needs to be mindful of the responsibility that landlords have in providing for people who may be disadvantaged.

Investor interest

Nonetheless, investor interest is growing. An investor survey by Savills and Savills Investment Management found that investors with €700 billion of real estate assets were looking to allocate more than €60 billion into the living sector over the next three years, and 39 percent said they were considering investing in affordable housing.

Bikker-Bekkers says: “For investors, it is not a straightforward sector. It is relatively new, and new things tend to be approached with skepticism. Working with government and other institutions is a bit scary for some. It requires a little more explanation, but we are seeing more investor interest, for sure.”

And Fuller adds: “Mission-driven capital is increasing around the world, and this product appeals to both equity and debt providers. However, that doesn’t necessarily mean that they’re going to accept lower returns.”

On the question of returns, Greystar’s attainable housing strategy does not require public-sector support to make it pay, Fuller notes.

Nuveen’s West says their portfolio generates “solid cash yields and has attractive returns. We see a mid-single digit cash return and a high single to low double-digit total return.” She adds that Nuveen benefits from the economies of scale of owning more than 30,000 units as well as the expertise of an in-house team.

Bikker-Bekkers says Patrizia is aiming for “a mid-teens IRR and also seven KPIs targeting affordable, green real estate, as well as inclusion and connectivity.” The rise of impact investing means more and more investors will require both financial and impact returns, which is a further complication.

Savills Investment Management’s Allen says: “Investors have to find a balance between the financial return they want and the social ‘return.’ At the moment, the latter is hard to quantify, but there is work being done to change this.”

Offering opportunity

The size of the affordable housing challenge might suggest a huge opportunity set, but this is not the case, as aligning cost, regulations, subsidies (if applicable) and demographics is difficult, as is finding suitable partners.

Bikker-Bekkers says: “We have been working on this for a couple of years, and so have developed our network and partner relationships. The market turn has also affected land prices and made more viable projects available, but it is still not easy.”

West says she would love to find more infill sites in US cities, where Nuveen could develop “mixed-income projects for people with 30-130 percent AMI,” but acknowledges this is tricky. There may be plenty of moribund office buildings in US cities, but few are suitable for conversion.

“Some offices do lend themselves to conversion, but large office buildings with big floorplates don’t work well for a conversion because these buildings end up with units that are windowless,” she says. “However, we have seen former hotels that are much more suitable for conversion because the existing plumbing infrastructure and unit configuration are a better fit for traditional living spaces.”

Managers in this space acknowledge the need for co-operation if the problem of affordable housing, in either its broadest or most specific sense, is to be tackled seriously, never mind solved.

Bikker-Bekkers says: “I would love to see more open mindsets and co-operation. In some markets, governments are keeping things to themselves, in other markets it is the private sector, but we need both.”

Allen explains: “There needs to be a balance of public policy and private sector investment, because neither the public nor private sectors can solve the problem alone.”

India’s colossal challenge

The housing shortage is not just a challenge for developed markets

Industry estimates suggest India needs 35 million affordable homes to be built by 2030 to meet current demand.

There is no standard definition for affordable or middle-income housing, says Vipul Roongta, managing director and CEO of HDFC Capital, which has raised $3 billion for investment in affordable and mid-market housing. However, the bulk of that is for-sale units priced between $15,000 and $100,000.

India’s demographics, low mortgage penetration and improved affordability will “drive demand in affordable and mid-income housing for both for sale and for rent,” says Roongta. “This presents a significant opportunity for private sector participation.”

The provision of affordable homes in India is hampered by three factors: high land costs, limited participation from large developers and financing constraints. However, India’s investment in infrastructure has opened up new land parcels and more developers are taking part.

Roongta says the national and state governments have boosted the affordable housing market “through a combination of subsidies and tax benefits to home buyers and developers.”