Investing in Affordable Housing: A Strong Asset Class

characteristics of it,” says Reuben Teague, vice president of impact & responsible investing at Prudential. “You can see that in the size of vehicles or funds that managers are raising these days, and the interest from institutional man- agers and pension fund managers and others investing in those vehicles.” Prudential has had an impact investing group since the 1970s. Over that time, it has executed more than $2.2 billion of impact investments and currently manages a portfolio of impact investments for the company valued at about $1 billion. About half of the portfolio includes real assets that fall into three main categories: affordable housing, transformative development and sustainable infrastructure. The mission is to make investments that can produce both a social and a financial return. “I think institutional capi- tal in general has developed a greater appetite for affordable housing investments as a steady source of returns, particularly when they are managed really well,” says Teague. Similar to Prudential, many institutional investors are already at the table, putting capital to work in affordable housing projects. Accord- ing to a 2019 Perceptions of Affordable Housing Investment study commissioned by The NHP Foundation (NHPF) and conducted by Kingsley Associates, three out of four respondents (74 percent) currently invest in affordable housing. Survey results were based on confidential inter- views conducted with 31 key decision makers in the institutional investment world. Very simply, NHPF leadership was seeking answers to two primary questions: Do you currently advise cli- ents to invest in affordable housing? And, if not, why not? The survey found that a further 10 percent who do not currently invest plan to do so in the future, and 16 percent do not currently invest and have no plans to do so. The survey also revealed that the barriers for those who do not invest, those who invest because of require- ments, or those who wish to do more but aren’t fall into three very compelling categories. Spe- cifically, the three main hurdles are: • Miseducation, under-education or confusion related to affordable housing development • Views of “onerous” government regulations in the development and funding process •Investing only to satisfy mandates or require- ments, and not recognizing other value-add benefits One of the goals for NHPF is to expand the breadth and depth of capital commitments

from institutional investors to help move the needle on the housing crisis in this country. Driving that change starts with opening a dialogue with investors to help them better understand both the social and financial ben- efits to investing in affordable housing. “The lack of affordable housing is such a national crisis right now, and there is so much capi- tal looking to invest,” says Richard Burns, president and CEO of NHPF. “We need to find a way to marry the two, and I think that requires creative solutions and education of investors to the opportunities that are out there.” Overcoming obstacles Affordable housing stakeholders broadly agree there is more education needed to better inform the institutional investor community on the nuances of affordable housing, and to correct some of the misperceptions related

“The lack of affordable housing is such a national crisis right now, and there is so much capital looking to invest. We need to find a way to marry the two.” — Richard Burns

to challenges and opportunities. True afford- able housing is defined as housing for a renter population that earns 80 percent or below of AMI (area median income). This asset class is often confused with workforce housing, which is often defined as households earning 80 per- cent to 120 percent of AMI. Some groups, such as the Urban Land Institute, have an even broader definition of workforce housing that includes households earning 60 percent to 120 percent of AMI. Investors frequently use the terms affordable and workforce housing interchangeably. Further confusing the definitions is another subset, “nat- urally occurring affordable housing” (NOAH), which refers to unsubsidized rents that are rel- atively low compared to the regional housing market. Mixed-income projects is another sub- category under the broader affordable housing umbrella that can include a portion of units as a set aside for low-income renters at fixed and/or subsidized rents. Part of changing the dialogue on afford- able housing is getting private capital to look beyond the generic issue of affordable housing. The depth of affordability is a real issue in the


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