Affordable rental housing: increased focus on social impact investing in the context of the post-pandemic recovery
By Jana Bour, EPRA EU Policy Manager, David Moreno, EPRA Senior Analyst Research & Indexes and Dilek Pekdemir, EPRA Research Manager
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In 2020, EPRA analysed the key trends observed in residential listed real estate in Europe and elaborated on the changes the sector experienced during the past ten years. From initially consisting of a very few companies, the sector has remarkably grown in representing 35.2% of the FTSE EPRA Nareit Developed Europe index in 2020. As EPRA showed, the European recovery after the Global Financial Crisis (GFC) in 2007-2009, strong urbanisation trend and the new developments in property markets have created the perfect conditions for such expansion.
In 2021, we could observe similar challenges in many European countries. Rising housing prices, stagnating wages, demographic pressures and declining public investment in housing have been challenging housing affordability for a while. These challenges, including a lack of funding for social needs, have been aggravated by the COVID-19 pandemic. The Organisation for Economic Co-operation and Development (OECD) shows that economically vulnerable families are being hit harder by the coronavirus pandemic, and they also point at possibilities to trigger long-awaited policy changes. The International Monetary Fund (IMF) has equally done its review and reported that the pandemic heightened the urgency for comprehensive, affordable rental housing policies as it has exacerbated existing trends that risk leaving low-income earners and the young further behind. The IMF points to a particular need for increased investment in affordable rental housing, which could counteract socioeconomic divergences, boost employment in the short term, and even lower carbon emissions if investment targets greater energy efficiency.
Considering all these elements, the listed real estate industry might be at the forefront of yet another great opportunity for an expansion of the residential segment. In the context of developing the EU Taxonomy, which includes the ongoing preparatory work on the Social Taxonomy, it will be important to engage with policymakers to explain what is needed to accelerate the financing of affordable housing. Understanding the investment gap in social sustainability, the sector’s own evolution in housing and policy incentives to enable REITs to step up in their efforts will be crucial to not only meeting social needs but also to sufficiently equip the LRE sector to further expand the affordable housing segment of the residential listed real estate.
Investment gap in the social segment of sustainability
On average, more than a third of low-income renters spend more than 40% of their disposable income on housing in the OECD countries, thus considered overburdened by housing costs. Focusing on longer-term trends in house price and rentals, house prices have risen faster than incomes since the Global Financial Crisis. In a study released in 2020, Oxford Economics identified that except for Italy and Spain in most of the countries in western Europe, real house prices had already reached levels at the end of 2019 that were very close or above the 2007 prices, even with some important cases like Germany, Switzerland and Sweden with house prices more than 30% higher than the pre-crisis peak, also having a significant impact in indicators such as price-to-income and price-to-rent ratios. This trend became more evident with the COVID-19 crisis, where house prices were raised up by 5.4% in the Euro area and by 5.7% in the European Union in Q4-2020, compared with the same quarter of 2019.
On the other hand, there was a declining trend in the size of social rental dwellings in some countries, partly related to a slowdown in new social housing construction, as well as the privatisation of the housing stock.
Public investment rates in advanced economies are at a historic low. Social infrastructure investment represents a relatively small part of the public resources, of which only 0.4% of the EU’s GDP, representing just EUR 28 billion, is allocated to affordable housing annually (2018). However, according to the World Bank’s 2020 Poverty and Shared Prosperity Report, COVID-19 is likely to have pushed between 88 and 115 million people into extreme poverty — which means living on less than USD 1.90 a day — around the globe in 2020.
While there is a clear declining trend in public investment in housing, investors’ appetite may be on the rise. There are signs that the continuously increasing interest in sustainable investments also translates into a continuously increasing interest in social investments. For example, since the beginning of the pandemic in Spring 2020, there has been a substantial rise in social bonds issues. According to Bloomberg, proceeds from these bonds have risen from about USD 20 billion in 2019 to USD 47.7 billion in 2020.
LRE market evolution in housing (residential sector)
When it comes to the listed real estate sector, we could define social housing as any rental housing owned by property companies with the aim of providing affordable housing to vulnerable people in society, where the counterparty to the lease is a housing association or a local authority that provides the household to the specific citizens. Furthermore, the term social housing could also imply more specific assets classes with specific adaptations for people with different types of disabilities.
The presence of this asset class within the FTSE EPRA Nareit Developed Europe Residential Index is currently starred by two market leaders within the sector: Civitas Social Housing (UK) and Triple Point Social Housing REIT (UK). Both companies launched their IPOs recently, in 2016 and 2017 respectively, and joined the Index in 2018. Today, as of July 2021, they represent a combined full market cap of EUR 1.358 million.
However, social housing is just a niche subset of the affordable housing universe. Beyond these pure social players, there are other companies within the FEN Developed Europe Index that count with significant affordable homes exposure in their portfolios. LEG Immobilien (Germany) currently provides affordable homes to 365,000 people and is planning to invest in new construction projects to help ease the urgent need for additional affordable living space in high-demand metropolitan areas. Also in Germany, Vonovia has created some projects with job centres and refugee organisations to hire young tenants and refugees as well as its own technical staff and recently launched the ‘Vonovia Bewegt’ project, where they provide monthly cash subsidies to support social projects in Duisburg and Dresden; in 2020 the company reached 200,000 housing units reached through support programs and social projects. Grainger Trust (UK) owns 496 operational affordable units in its portfolio, and it is also planning to achieve a 40% exposure into the social housing sector. Also, after the acquisition of Hemfosa (Sweden), Samhällsbyggnadsbolaget (SBB) (Sweden) became the Nordic region’s largest social-oriented company and one of Europe’s largest owners of social infrastructure, covering a portfolio of 2.5 million m2 in building rights for properties specialised in community services, offices, schools, care and adapted housing and the judiciary.
Concluding remarks with recommendations to policymakers
As the OECD already identified, investments in social housing construction and renovation should be a central part of a more sustainable, inclusive economic recovery, reinforced by the EU’s ‘Renovation wave’ announced in early 2020 as part of the European Green Deal. Over the medium term, the IMF calls to increase the physical stock of housing to address structural demand pressures and boost rental supply. Aside from actual building social housing dedicated to rental, national governments should provide specific incentives for new construction and facilitate financing for retrofitting and repurposing the existing building stock, particularly in dense areas.
The important developments may be seen by the European Commission on that front as well, as they have tasked the Platform on Sustainable Finance with the exploratory work on the Social Taxonomy. It is therefore expected that the social dimension of ESG investing will increase its share in public policy debates. Considering that more than a third of low-income renters spend more than 40% of their disposable income on housing, it is likely that a great focus will be on the promotion of affordable housing that would meet certain minimum energy performance.
At this point, we need to stress that listed property companies and REITs are uniquely positioned to boost not only energy efficiency retrofits but also affordable housing supply. The ideal framework to facilitate investments inflow is the roll-out of the European Investment Trust Regimes in those European countries in which such regimes are still missing. In the remaining states, it will be important to review the existing regimes to extend or improve its application for the residential segment of commercial real estate. Besides, there are many regulatory constraints in the EU single market that hinder the progress LRE can make. For instance, the lack of mutual recognition of REIT regimes, which, if applied to the residential sector and enabled across all EU Member States, could serve as an excellent incentive for acceleration to finance affordable housing. In addition, greater considerations of the sector’s scale potential may be needed for the EU State Aid rules.
We, therefore, ask policymakers to work with us so we can ensure together that affordable housing provision is delivered by a wide range of stakeholders, encouraged by the right set of policy incentives and accommodated to the vulnerable population.
 Affordable housing is one of the considered essential ‘social infrastructure’ for the economic growth of the European Union (EU), the well-being of its people and a successful move towards upward convergence in the EU (apart from education and health). EC (2018) Boosting Investment in Social Infrastructure in Europe
 EC (2018) Boosting Investment in Social Infrastructure in Europe