Access to decent housing and basic infrastructure – a social and financial opportunity
Social investment and performance
If the coronavirus crisis has had one virtue, it is that of putting societal priorities into perspective. The health of individuals has been established as a non-negotiable value, states have attempted to preserve – as far as possible – the jobs and resources of individuals, and companies have sought to ensure the safety of their employees and the maintenance of their value chains.
The growing concern for environmental and social issues has found an accelerator in this pandemic, while the debate around individual and collective responsibility has helped shape the public and private response.
This period has also clarified the value proposition of responsible finance and its role in society. There are many sectors, topics and philosophies that have had to be reassessed – access to housing is a case in point. For an investor, it is possible to act with a double objective: To allocate capital for a financial return while having a positive and measurable impact on social issues.
The emergence of the middle class may benefit part of the real estate market
In the classic pyramid of human needs set out by the US psychologist Abraham Maslow, housing sits squarely in the first tier: A fundamental need and a significant part of any household budget. Even before the COVID-19 crisis, housing costs had risen substantially in countries belonging to the Organization for Economic Co-operation and Development. This was especially so for renters, as the supply of affordable housing had failed to keep up with demand.
Finding affordable housing can be difficult, especially for people with low or unstable incomes, for young people, families with children and the elderly. This has required action. As an example, to prevent the middle classes from being forced to leave city centres, the German government is trying to put in place urban policies aimed at controlling or even capping the price of rents in certain areas of the country.
TAG Immobilien is a listed German real estate company operates in the low-rent segment that does not exceed €6 per square metre (m2). Owner of more than 90,000 residential properties in Germany, TAG Immobilien has, in our view, a stable growth profile and high occupancy rates. With revenues rising to €323m in 2020, the profits generated by the real estate company are reinvested in new projects, which allows it to develop in new markets, such as Poland.1 We consider the sector to be resilient and relatively lower risk, as well as retaining medium-term revaluation prospects.
In Japan, real estate prices are high. According to the World Bank, if the price of a house or an apartment exceeds four times the annual salary of an individual, then access to housing is considered unaffordable – in Japan, that ratio was 8.1 according to Tokyo Kantei2 , a Tokyo-based real estate market research firm. We think this offers a supportive environment for Katitas, a company specialising in the renovation and marketing of older properties at affordable prices. We believe this differentiated operator could take market share from more traditional property developers. These houses are generally intended for a segment of the population whose income or pension is no longer increasing and who therefore wish to adjust their expenses as closely as possible to their needs.
In the US, one prospect is Sun Communities, which aims to provide quality, low-cost housing in the southern and Midwest regions where the demographic outlook for low-income families and retirees remains favourable. Sun Communities is expanding its community of mobile homes and motorhomes across the country and is playing an important role in offering tenants and home buyers very affordable housing options.
- In the case of a purchase, the cost of a mobile home represents about two times the median annual US salary, while a traditional house will cost about seven times the median salary.
- In the case of a rental, Sun Communities claims a tenant of one of their mobile home could benefit from 25% more space and a price per m2 about 51% lower than for another traditional rental3 .
In emerging countries, our approach has been limited by an investment universe that does not yet fully meet the impact criteria that we have set for ourselves, with listed real estate companies often positioned in high-end segments.
To respond to this social issue of housing and to invest in real estate, our conviction is that we must focus more on the business models of companies than on the assets they own or market. Access to housing can therefore be a real driver of social progress and growth for companies that take these issues head on.
- Sun Communities, Investor Presentation, June 2021