Affordable Housing Providers See More Money Coming From Pension Funds, International Sources
Pension funds hold trillions of dollars in assets and invest heavily in commercial real estate, but many have historically viewed the affordable housing sector as too risky.
That is beginning to change, according to affordable housing professionals speaking Wednesday at Bisnow's Los Angeles Affordable Housing Conference. They said they are seeing greater interest from pension funds and international investors, two major capital sources that could help address the housing shortage.
Avanath Capital Management President and Chief Investment Officer John Williams said that of the firm’s $1.5B open-ended fund focused on purchasing existing affordable assets, about half came from international investors, mainly in Europe – the Netherlands, Germany, Switzerland – but also in Canada, Japan and Australia.
“You might think that's rather odd, but there are a lot of factors,” Williams told attendees at the DoubleTree by Hilton Downtown Los Angeles. In Europe, they really understand covenanted affordable housing, whereas American pensions “have a bad image of what affordable housing is,” Williams said.
A 2023 study from the Federal Reserve Bank of New York found that a group of seven pension plans it surveyed committed about $388M on average to affordable multifamily housing over the previous five years but expected to commit about $178M on average in the coming two years.
Just this week, New York's largest pension fund invested $60M in an affordable housing fund that officials said would keep 35,000 units affordable. And Los Angeles-based executives said they are seeing new interest from pension funds.
“We just finally got our first public pension funds this year for $50M,” SDS Capital Group CEO Deborah La Franchi said, and she expects to see more investment as the attitude of American pensions shifts and they start to see “affordable housing as an asset class that makes financial sense.”
La Franchi’s firm has $1.48B in assets under management and focuses on impact investing, which has enjoyed more popularity with international pension funds that don’t have to contend with a politicized climate when it comes to ESG.
American funds have “had allergies to impact. I never say the word impact with them,” Franchi said.
“We're really putting our sights on the international pension funds, for the same reasons you've heard. They do have an ESG and an impact focus, they understand this much better, [and] they’re not allergic to it,” La Franchi said.
“I think people equate impact with risk, Community HousingWorks CEO Sean Spear said. “It's actually the opposite of that.”
Spear, whose nonprofit organization holds regulated affordable housing properties across California and Texas, touted the incredible demand for affordable housing and the less than 1% foreclosure rate for LIHTC-financed properties.
“Even coming out of the pandemic, you still have relatively significant safety in affordable housing,” Spear said.
Other types of affordable housing are showing signs of strength. Langdon Park Capital targets purchases of existing unofficially affordable properties — those that aren’t deed-restricted or regulated as affordable units but are renting to moderate-income or lower-income families, such as a 138-unit West Covina property the firm bought in 2022. There, the average resident makes about 25% less than the area median income of $80K.
As units turned over, they were able to increase rents and “get rid of some bad debt,” but the best thing for them, what has made this asset the best performer in their portfolio, is that it didn’t have many lender-required capital expenditure costs, Langdon Park CEO Malcolm Johnson said.
“Real estate fundamentals in our asset classes, I think all of us could attest, have been really strong,” Johnson said.
