Real Estate

Institutional Investing And Affordable Housing: A Brief History And Vision For The Future

When President Lyndon Johnson signed the Housing and Urban Development Act of 1968 calling for public-private partnerships as a way to fund housing, he didn’t use the terms “socially responsible investing,” “environmental and social governance investment (ESG)” or any of the current buzzwords that we use today. He simply saw the power of private industry joining with government to strengthen our economy, offering housing opportunity to those in need.

More recently, for-profit and not-for-profit providers of affordable housing have benefited from the subsequent housing legislation, most importantly the Low-Income Housing Tax Credit (LIHTC) program, created in 1986. The LIHTC program is still the nation’s most productive affordable housing tool, allowing corporations to receive returns on capital derived from federal tax credits, which offset federal income tax liability. Many traditional funders have successfully entered the affordable housing market, including a variety of private equity and private debt funds.

In the past several years there has been a sizeable increase in investors who specialize in “impact investment,” “mission-related investment” and other closely related specialty practices with nuanced differences. But all subscribe to the theory that making investments that contribute to society’s well-being will also benefit their bottom line. These investors acquire and rehabilitate existing affordable housing or invest in the new construction of affordable housing. They also invest in naturally occurring affordable housing (NOAH), all of which can generate returns in the mid to high single digits.

Today, these enlightened financial investors trust affordable housing developers to put their money to work, helping the country’s most vulnerable communities while smartly guiding the invested capital. Affordable housing providers have a long and credible history of leveraging flexible and catalytic capital to produce rental units with very low vacancy rates, often with the help of rental assistance programs. According to the Federal Rental Assistance Fact Sheet, currently, 10 million people in over 5 million low-income households receive federal rental assistance. These staggering statistics illustrate how serious the need is for a steady supply of rental housing and how critical it is to continue the legacy begun by President Johnson.

As president and CEO of an organization devoted to preserving and creating affordable housing for low- and middle-income Americans that has been able to successfully leverage LIHTC funds for the past 30 years, l appreciate what this singular governmental legislation has done for the industry. But it is precisely because a government program cannot do it all that we at The NHP Foundation are looking to boost impact investment.

Crafting creative public-private partnerships to shoulder the affordable housing burden is a solution rooted in past success and primed for the future. Our industry currently benefits from the capital provided by a number of institutional investors, but how can we inspire more?

Fortunately, the facts speak loudly.

In addition to realizing solid, reliable returns, investors can also reap the rewards that social investing brings to a company’s reputation. Research highlights the desire of many investors for projects that align with social good. A 2018 Global Impact Investing Network (GIIN) study found that over 90% of impact investors say their investments were meeting or exceeding expectations. And even beyond the tangible financial metrics and social benefits, there is strong evidence of economic and societal transformations for the families and seniors experiencing housing security, often for the first time.

The need — and the opportunity — will only increase as we age.

According to our organization’s recent survey results, the need will only increase as our population continues to age. Half of seniors polled said housing and stable income are the most important factors for ongoing health, yet nearly the same amount are highly concerned about their ongoing access to stable housing. This means opportunity for investors in a “product” that will always struggle to meet the demand.

Generations X, Y and Z already ‘get it.’

New, up-and-coming investors seem to see this need as a particularly strong inducement for smart investing. A recent study by Fidelity Charitable concluded that “a large majority of affluent millennials (77%) and Generation X investors (72%) have made an impact investment.” Younger investors are much more grounded in current real-world issues and very concerned about the future. Investments in natural and financial resources including housing for low-income families seem to fit this generation’s philanthropic philosophy.

As I see it, long-term investment in affordable housing can be profitable, reliable and rewarding on several levels, and the industry has plenty of room for new approaches. We recently called upon our peers to become part of an “affordable housing reboot.” Now is the time for that reboot. Fresh thinking, creative financing approaches and resourceful partner possibilities will pave the path to increasing our nation’s much-needed affordable housing while furnishing stable, predictable returns for investors.

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