Creating affordable housing is not just about building low-cost homes, but also about creating a space where people want to live, PATRIZIA says.
As housing prices and rents have risen dramatically in the past two decades, households have been forced to spend a larger share of their budget on housing expenses.
And while low income households have for long struggled to make ends meet, increasingly middle income households are feeling the burden.
“Housing has become unaffordable for many households in the OECD area, pushing the issue to the forefront of the policy debate,” the OECD said in its policy paper ‘Building For A Better Tomorrow: Policies to Make Housing More Affordable’, published last year.
The OECD found that less than half of the population was satisfied with the affordability of housing in the area where they lived. The COVID-19 pandemic has made the situation worse as people lost their jobs, while the extended lockdowns also highlighted the poor quality of many existing dwellings.
It has led the OECD to call for public and private parties to join forces in addressing the crisis.
“Renewed private investment in the affordable and social housing stock is needed, and can be a key lever to an inclusive economic recovery from the COVID-19 crisis,” the organisation said.
Real estate investment firm PATRIZIA has been working for some time on a way to make affordable housing projects work for both investors and those in need of such housing.
In most European countries, you see that the supply of housing has been behind what the demand has been for many years, so there is this pent up demand for housing in most of the major cities in Europe, not only in London but also in other cities
Marleen Bikker-Bekkers, Director and Head of Investments Europe at PATRIZIA Global Partners, has been leading the effort into affordable housing investments for the company in Europe.
Bikker-Bekkers says there are different ways of defining what affordable is, but in general terms it comes down to a maximum percentage of household income that people can spend on housing without struggling to meet basic living costs.
“We have done quite a bit of research on definitions and we look at it from an income perspective. There are many different definitions of this, for example, the European Commission uses 40 per cent of household income, but we decided to use 35 per cent of household income [as the threshold],” she says.
The causes for the lack of affordable housing are complex and differ from country to country. Different levels of un- and underemployment, the lingering effects of the pandemic on household budgets and a lack of wage growth all contribute to the problem. But a lack of supply is a key driver of this trend, Bikker-Bekkers says.
“In most European countries, you see that the supply of housing has been behind what the demand has been for many years, so there is this pent up demand for housing in most of the major cities in Europe, not only in London but also in other cities,” she says.
Affordable housing has come a long way since the social housing projects of the mid-20th century, such as the 1940s New York Public Housing initiatives, or the 1960s Bijlmermeer project in Bikker-Bekkers’ country of origin, the Netherlands.
A key to the success of today’s projects is not just building homes, but also creating communities around these developments.
“We have both affordable and social housing goals, but also goals on the environmental side and on inclusion and connectivity. That is about making the community good to live in by creating public facilities and community space – that’s probably what was missing when you look at the Bijlmermeer. It missed those other elements of the community,” she says.
One of the investments PATRIZIA has made in this space is in Dublin, Ireland, where it is building 290 homes, of which 90 are social housing with the balance being made up by affordable homes.
PATRIZIA invested in the project with the help of two Danish pension funds, PKA and AP Pension, which provided EUR 125 million in seed capital.
“We’ve been investing in Ireland quite a bit as the public sector just hasn’t been able to keep up with the demand,” Bikker-Beckers says. “I think there is a very big opportunity for the private sector to support that. A number of governments, like in Ireland, have started to create housing plans, where they have also started to work together with the private sector.
We did this analysis of the people working at the nearby hospital and in the business park, really the key workers in that area. At the moment, they cannot [afford to] live there. We looked at what kind of income levels they have and based the rents on that
Ireland requires new housing projects to include at least 10 per cent social housing, but Bikker-Bekkers says a lot of developers try to circumvent the rules and so the actual percentage of new build social housing has been much lower. For our project, to begin with we went to the housing association and said we wanted to do more than 10 per cent and now we’ve agreed on 30 per cent.”
The rest of the 290 homes will be affordable housing, which will target middle income households, including essential workers, and rents will stay below 35 per cent of their average household income.
“We did this analysis of the people working at the nearby hospital and in the business park, really the key workers in that area. At the moment, they cannot [afford to] live there. We looked at what kind of income levels they have and based the rents on that.
“We think about how we can create a community around it. What is missing? How can we interlink people better, prevent loneliness and make them get higher up the education ladder?
“We figured out that the library was on the other side of the city, so people in this neighbourhood are not able to go there easily . We asked the local government if we could create a branch of the library in our community and they have been very supportive, so one of the housing blocks may change into a community centre and a library.”
Risk versus Return
The affordable nature of these projects means that the tenant will not pay top dollar for rents in their new homes, and while the investments into some public facilities may be less profitable than commercial space, it does foster a thriving community that attracts a sticky tenant base and greater amenity to lower income groups. It creates low risk future proof projects with attractive risk adjusted returns with clear social and environmental goals.
But Bikker-Bekkers says every project will need to meet a minimum risk/return objective for PATRIZIA to take it on, as well as achieve social and environmental goals.
As these schemes are developed and purposely built for social/affordable housing, the rents are understandably lower than if we would market it as a commercial project only focused on financial return. But we also have a significant part of the project de-risked before we start construction, because we agree with a housing association that they either buy or rent part of it on a long-term lease contract
“It is a balancing act, but in our underwriting we really think about how much we can do to achieve our goals financially, socially and environmentally, otherwise we won’t make the investment. If we can’t reach our target return, or if we can’t reach our social and environmental KPIs, then we will not do the investment,” she says.
But Bikker-Bekkers also points out that the risks in these projects are arguably lower, since there is no shortage in demand, while tenants tend to stay much longer than in other types of housing.
“As these schemes are developed and purposely built for social/affordable housing, the rents are understandably lower than if we would market it as a commercial project only focused on financial return. But we also have a significant part of the project de-risked before we start construction, because we agree with a housing association that they either buy or rent part of it on a long-term lease contract,” she says.
“In addition, we have way less churn than if you have a market level project, as the rent is more affordable to people and they stay longer. For the social rent part of the project, the housing association is taking care of the ongoing rental and some people might even get additional subsidies, which is however not affecting our financial return,” Marleen says.
“So yes, it’s lower overall rent but the risk associated with the project is also much lower,” Bikker-Bekkers says.
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