Building affordable belonging

Now, let's discuss that: Addressing housing affordability

Is there an opportunity for investors to fund the delivery of new affordable housing?

You're right. There is an affordability crisis in housing. The cost of accommodation and affordability will become a greater challenge for many young adults in the coming years.

In Britain, for example, young adults are facing a combination of weak wage growth, job insecurity, and demand-supply imbalance in residential property. Dissatisfaction with the availability of affordable housing is not only an issue in Britain, but also in other countries. Sustainable economic prosperity requires employment stability and income equality, as well as housing.

We know that affordable and safe housing improves standard of living of families.? Housing is a precursor to enabling people access to employment opportunities, education, good nutrition and healthcare – and to improving the social and economic vitality of communities. In short, real estate will be critical to achieving greater social equality.

Now comes the hard part. With stretched housing affordability, is there an opportunity for institutional private capital to play an important role in providing high-quality affordable residential housing stock both in Britain and elsewhere?

The point I am making in this newsletter is that real estate investors can directly contribute to increasing the supply of affordable housing. Private capital from real estate investors can be a force for positive change, delivering measurable social outcomes in addition to attractive financial returns (so-called Impact Investing).

Currently, institutional investor interest in residential real estate markets (such as student housing, build-to-rent, etc.) is increasing, driven by sound supply-demand fundamentals and the attractiveness of dependable cash flows and strong liquidity metrics. We are seeing investors become more committed to quality and affordable (social) housing in developed markets. For example, the recent Patrizia Sustainable Communities strategy offers an option to commit capital to social and affordable housing projects across Europe. However, investors need to be aware of local challenges with this asset class, such as interest rates, construction costs, and regulatory barriers.

As it happens, I recently spoke to my good friend, Jay Oberai , Founder and CEO of Swiss-headquartered Synergy Asset Management SA. He is adamant that the benefits of investing in affordable housing in developing markets, such as India, cannot be overlooked. As the world's most populous country, with a sizeable young population, India has its own unique proposition for real estate investors. There are a number of sectors that correlate with that expected dynamics, such as retail, housing, and logistics.

Impact of Urbanisation

“What is a home?” asks Jay, before addressing his question with a personal flourish:? “A home is about people.? Home is where housing and belonging come together." For many of us, a house provides a centre for an individual and a basis for family life; emerging as an important symbol of social standing and aspiration.

You may recall Marlow’s famous hierarchy of needs where after fulfilling our most basic need for physical survival and the next level of security and safety need, we have a need for love and belongingness.? As Matthew Desmond eloquently wrote in his 2017 Pulitzer Prize winning book, Evicted: Poverty and Profit in the American City: “…without stable shelter, everything else falls apart.”

In 2008, 50% of the global population lived in urban areas, whereas it’s predicted that by 2050 the figure will be more like 80%. Despite the rise of cities, along with it comes a number of unintended consequences, including rising house prices, affordable housing shortages and inflexible housing stock. Due to growing urbanisation and worldwide development, the demand for dwellings that are accessible to those in society who earn less than the average household income has increased.

The case for Indian Affordable Housing

Jay is the right person to talk about India being of Swiss-Indian heritage. He has seen India’s economy growing rapidly in recent years, aided by meaningful structural reforms introduced by Narendra Modi’s ruling Hindu nationalist BJP government and significant infrastructure investment. Its long-term growth path will be powered by a fast-growing young population and rapidly expanding middle class. India's real estate market will be pivotal in the country's determined journey to become the next great economic power. There have been many positive steps, including various government initiatives to promote affordable housing.

India is expected to become the third largest economy by the end of 2028. As India continues to urbanise, solving the affordable housing crisis will ensure continued growth and social stability. Indians, like us in Europe, have aspirations for affordable, safe and secure accommodation.

An Economic Opportunity

As I listen to Jay, I sense his excitement with India’s economic transformation. He points towards growing urbanisation and the changes in the regulatory environment helping to stimulate a housing boom. As per recent Census of India, around 31% of the Indian population (380 million) live in urban areas.? It is apparent that substantial housing shortage looms large in urban India.? There is a wide gap exists between the demand and supply of affordable housing, both in terms of quantity and quality.? He states that India’s urban housing shortage is estimated at nearly 18 million households.?

Traditionally, the big developers in India have focused on the high-end and upper-middle segments of the housing market as those fetched high margins.? He explains that the Economically Weaker Sections (EWS) and Low-Income Group (LIG) together accounts for around 96% of the total urban housing shortage.? To address the significant affordable housing shortage, the current urban housing policy and supportive measures have taken steps both on the demand and supply side to improve home ownership.? For instance, the Government of India initiated the Interest Subsidy scheme for home buyers from the EWS/LIG segments.? Cheaper debt and external commercial borrowing? are important steps in addressing India’s urban housing crisis.

Positive Social Impact with attractive Financial Returns

Let me defer to Jay’s local knowledge on the best way for an investor to participate in this space.? Having the experience and contacts to select the right location, design of dwelling units, improved technology and modularity to achieve scale and a profitable proposition in affordable housing seems important.? He and his real estate team seek locations where the residents from the EWS and LIG group get maximum access to labor market in poly-centric Indian cities, as well as the sustainable social infrastructure and transportation network.?

There's no doubt that institutional investors are aware of their significant role in funding comprehensive affordable housing solutions in developed and developing countries.? Urbanisation marches on and demand for residential housing is only going to get stronger. Investors may benefit from diversification into different residential housing sectors and geographies. For some European institutional investors, I've observed, affordable housing in India is consider a financially viable impact investing proposition, but India remains daunting for the majority given a lack of confidence in the regulatory and political environment, as well as in corporate governance. Hence the need to work with good locak partners and to understand the finer details of the Indian real estate market.

I expect large institutional investors to increasingly view affordable housing as an extension of their overall residential real estate strategy; whether domestically or further afield.

Until next time,

Chris Elsmark

March 12th, 2024

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