Affordable housing: a stable ESG-focused investment class
Institutional and foreign investors are increasingly allocating capital to ESG-focused affordable housing investment.
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By: John R. Williams President and CIO at Avanath Capital Management
Over the last several years, capital flows into ESG-focused investments have rapidly increased. This is a trend that has been accelerated by the pandemic, as well as the rising social injustice and civil unrest that has been brought to light over the last few years. This has brought more attention to socially conscious investing from both domestic and foreign investors, especially in the affordable housing industry.
Historically, there has been a misconception that socially conscious investments sacrifice profit for social impact. We have been at the forefront of ESG investing for the last decade and have been able to prove that is not the case and investors are quickly realising this.
So, what makes ESG-focused affordable housing investments so attractive?
1. Affordable housing is a stable investment class
Affordable housing is an asset class that tends to perform in times of both economic prosperity and economic uncertainty. It is one of the main reasons it is attractive to investors. In fact, in times of uncertainty like the COVID-19 pandemic, affordable housing becomes increasingly more attractive to investors as they look to diversify their portfolios and reduce downside exposure.
Beyond this, affordable housing is one of the most in-demand and supply constrained sectors in commercial real estate. Demand continues to outpace supply at a rapid rate, which continues to increase as home prices and rental rates continue to soar. This makes affordable housing investments attractive to both institutional and foreign investors.
In fact, in our previous affordable housing fund, more than 50% of capital was raised from foreign investors. These investors look to U.S. affordable housing as a stable and durable portion of their portfolios because of its increasing demand and limited supply. This provides downside protection coupled with the impact component of providing quality housing that is affordably priced for residents.
Affordable housing assets have also continued to perform compared to market-rate multifamily communities throughout the pandemic, which is also very attractive to investors. Rent collections remained high throughout our portfolio throughout the pandemic. This is largely because our residents do not pay more than 33% of their income towards rent whereas market-rate and luxury multifamily renters are paying a significantly higher portion of their income towards rent.
We anticipate that the appetite from foreign and institutional investors will continue to grow in 2022 and beyond for social conscious affordable housing investments.
2. ESG initiatives directly translates to property performance
In addition to the stability of affordable housing, ESG initiatives tend to translate to property performance.
For example, in many of our affordable housing communities we provide social programming and services that enhance residents’ lives such as health and wellness for seniors, financial literacy classes, after-school programs for kids and home down payment assistance programs, among many others.
These types of social programs translate to happier residents, reduced turnover and longer retention, all of which contribute to bottom line property performance.
A focus on sustainability also plays a major role in driving down operating costs and contributing to profitability. This includes items such as drought tolerant landscaping, low flow toilets and grey water systems to reduce water usage, LED lighting and solar panels to reduce utilities costs, among others. We are constantly looking for new and innovative sustainability initiatives that can reduce long-term costs at our properties and reduce our carbon footprint and impact on the environment.
Diversity and inclusion also play a vital role in property performance. As an affordable housing investor, we typically own properties in underserved minority communities. By prioritising diversity at all levels throughout our firm, particularly at the senior levels, we are able to better serve residents. Our residents are diverse and having a diverse team in place allows us to create an environment that fosters retention and trust. Diversity throughout our team also inspires innovation from diversity of thought, so we are constantly pushing the envelope for residents and investors.
3. Advances in measuring social impact results
Tracking social impact has historically been a challenge for many ESG operators and investors. Measuring the true impact of social programs and services is often difficult to measure.
That said, this has continued to evolve, and we are making advances in measuring impact and empirically demonstrating results. We anticipate this will continue to evolve and tracking and measuring results will become increasingly more accessible, which is attractive for investors.
For example, we previously worked with the University of Southern California to conduct a study of our after-school programs at one of our communities in Long Beach, California. The study was used to create initial benchmarks and measure the true impact of our social programs over the long term.
We also recently launched an industry leading ESG platform, Amplify. The platform’s goal is to extend the success of Avanath’s authentic social commitments and programs to build a best-in- class environmental, social and governance program that serves as a model for the industry. The platform will address the challenge of measuring results on a broader scale by utilising our historical data to create an industry model that can be used by other owners in the industry. The ability to better track the significance of these programs is another reason for increased capital flows to the sector.
Overall, because ESG investments have increased in popularity over the last several years, it is important to look for fund managers who have experience in the space and understand how to navigate ESG initiatives that truly impact residents, investors, and a portfolio’s bottom line.
Avanath has always been an advocate for ESG and bringing more institutional capital to underserved communities. This growing interest and capital flow to ESG-focused affordable housing investments are a positive for the industry. It will continue to drive more capital to these communities as institutional and foreign investors increasingly recognise the benefits of holistic investment and its tie to strong, risk adjusted returns.
John R. Williams is President and Chief Investment Officer of Avanath Capital Management, a privately held, vertically integrated investment firm with a focus on affordable and workforce housing investments throughout the U.S. Contact him at firstname.lastname@example.org.