Op Ed: How Institutional Investing Can Build Housing and Reap Returns

There are a number of forces determining who will need affordable housing next and those seeking future investment opportunities may expect to see returns of both social good and significant profit.

First the facts:

The new tax laws will cut affordable housing by 235,000 units over the next 10 years and cost the country 260,000 jobs
About 10,000 baby boomers hit retirement age each day and 73% of them expect to delay retirement, while 31% have no retirement budget or savings
Today, no state has an adequate supply of affordable rental housing for the lowest income renters
70% of college students graduate with significant debt
Between 2000 and 2015, the US produced 7.3 million fewer homes than it needed to keep up with demand and population growth
Half of Americans over the age of 55 who earn less than $60,000 per year—accounting for 25% of households—feel they can’t afford to cover both housing and healthcare

This data presages two new cohorts of Americans expected to need more affordable housing: millennials, unaccustomed to searching for affordable housing, and an unprecedented swell of baby boomer retirees also forced to rethink housing.

While the industry will always be able to count on some level of government investment, the future is murky. Now is the time for institutional and cross-border investors to commit to putting resources into affordable housing. We currently maintain positive relationships with a host of committed institutional investors who invest for social good without sacrificing profits. These forward-thinking entities have made possible the creation and preservation of a great many affordable housing units.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

However, insatiable demand and limited supply means there’s always room for more, because affordable and workforce housing actually serve the majority of Americans. Around 6.3 million units or nearly 41% of all the rental apartments in the US fall into the affordable/workforce category. With 2017 US Census Bureau numbers showing more than 58% of renters earning less than $50,000 a year, this segment of the population is considerable.

Where will they live? Many older multifamily developments have been acquired by investors who upgrade them for rents unaffordable to the current residents. Other older properties have become uninhabitable from lack of capital repairs over an extended period, resulting in a loss of more than 100,000 housing units each year—typically in the workforce and affordable categories.

With lower vacancy rates (often accompanied by waiting lists) and steady rent growth over extended periods, affordable, multifamily housing generates strong, risk-adjusted returns. Affordable housing investment produces total returns in the high single, low double digits, similar to what investors would earn from traditional core investment funds.

Today’s institutional investors need only look at the influx of near-term and future renters to strongly consider an affordable/ workforce housing investment strategy. In addition to solid returns, partnering with knowledgeable developers experienced in the affordable business can provide a “halo effect,” allowing institutions and individuals to invest in positive social change.

Impact investing is now estimated to be a $250 billion market and growing as many investors successfully drive profits via socially responsible investments. Affordable housing is appealing as it is one of the few issues of the day enjoying strong bipartisan Congressional support. It is also a natural draw for millennial investors who have grown up with a strong sense of social justice and philanthropy.

Fund managers and CIOs thinking seriously about catering to investors, who want a sense of purpose along with their dividends, would be wise to invest in the future of America’s affordable housing.

Tags: Housing, Investors, Tax Laws

The Australia Future Fund’s Q4 report showed not only a small hiccup in its financials, but that the nation’s sovereign wealth fund is more than meeting its long-term goals.

Due to year-end volatility, the group lost 1.2%, or $1.3 billion, of its A$147 billion ($103 billion) portfolio. The slip came from equities, but that didn’t stop the Future Fund from meeting its one-year return target of 5.8%.

“Over the past year the Future Fund’s diversified approach has continued to control risk levels whilst our management of the portfolio, particularly across private markets, has driven strong returns,” said David Neal, the organization’s chief executive officer.

In fact, the fund’s performance shows how risk resistant the investment team really is when it counts, as it’s beaten all of its targets soundly going back to its 2006 inception.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

That is achieved by the fund’s goal of taking “acceptable but not excessive risk,” which it does via diversification. The fund allocates most of its portfolio to stocks (29.4%), as most investors do, but loads up on alternatives such as private equity (15.8%), real estate (7.2%), infrastructure and timberland (8.5%), and hedge funds (14.6%). Cash and bonds make up the rest at 14.5% and 14.6% of the portfolio.

According to the investment mandate, which established the return benchmarks, the fund has returned 7.5%, 8.8%, 10.5%, 9.7%, and 7.6% over the three-, five-, seven-, 10-, and annual periods. The goals for the timeframes are set at 6%, 6.1%, 6.3%, 6.6%, and 6.8%.

“We are focused on long-term performance and dynamically manage the portfolio so that is as robust as possible to a range of scenarios. In the current environment we retain high levels of portfolio flexibility to both withstand − and potentially take advantage of − any market dislocations that might arise,” Raphael Arndt, the Future Fund’s chief investment officer, told CIO. “Around a year ago we commenced a process of slowly reducing risk in the portfolio and increasing portfolio flexibility in preparation for an expected increase in volatility of financial market returns as the business cycle matured.”

The Future Fund’s portfolio didn’t shift a whole lot from Q3 to Q4, but the Australian sovereign wealth fund noticeably cut and levered in a few places. It shaved some of its weight in equities (about 2.4 percentage points), infrastructure and timberland (0.3), and hedge funds (0.4). Private equity, property, bonds, and cash got a little boost in the quarter, as they added one, 0.2, 1.3, and 0.1 percentage points. Emerging markets stocks were the outlier, as the organization left that area’s 7.3% allocation alone.

“We have continued to gradually reduce risk in the fund’s portfolio,” said Neal, who added that the organization unloaded about A$5 billion of illiquid assets in 2018 “to prepare for potentially increased volatility and to increase portfolio flexibility.”

Tags: Australia Future Fund, performance, Q4 2018, Sovereign Wealth Fund