High rates of inflation and global economic headwinds are becoming increasing obstacles to property investment with a social impact, alongside residential property more generally, pension funds and real estate specialists told AsianInvestor.
AustralianSuper, which has invested extensively in affordable housing in Australia and elsewhere, has emphasised the shortage of opportunities in the sector as global economic conditions have made the fund more wary of investing abroad and in property more broadly, its head of property, Bevan Towning, told AsianInvestor.
“In general, we’re cautious about the outlook for valuations across most sectors of property,” he said, adding that there was a more positive economic outlook in Australia than in other major developed markets.
Paul Schroder, chief executive of the A$261 billion ($176.7 billion) fund has repeatedly noted the shortage of opportunities for investing in residential property, including affordable homes, at sufficient scale even in Australia to provide the fund’s desired investment returns.
In November, he said the fund was “not going to take anything less” than 6% to 11% returns for investing in housing under Australia’s National Housing Accord, a government-led initiative that AustralianSuper signed up to in October that aims to build 1 million homes, in part with help from the country’s super fund sector.
Last May, the country’s largest super fund told AsianInvestor it was looking to follow up its first affordable housing investment beyond Australia – a March 2022, £290 million ($347.6 million) purchase of half of British Land’s shares of London’s Canada Water Masterplan, a UK regeneration project that includes a large element of social housing.
“Certainly, we would consider the east and west coast of the US,” Towning said at the time. “But independently of [our social] requirements, there has to be demand for it.”
The fund’s efforts since then have focused on the domestic market, with construction beginning recently on more than 370 units as part of a joint venture with affordable housing developer Assemble Communities to create two new developments in Melbourne.
Raphael Mertens, chief sustainability officer at Allianz Real Estate, responsible for investing the assets of the Allianz Group, among other institutions, echoed Schroder’s concerns, noting that property sectors that had an explicit social dimension, such as affordable housing, offered limited investment opportunities and were challenging from a returns perspective, meaning that the company instead focussed its efforts on improving social performance across the portfolio.
“We have invested in affordable housing in Germany, but it’s hard to find projects that make a commercial case in that sector. And we need a certain size of investment,” he said.
Mertens said the company’s current focus was on how the design and running of a building contributed to the physical and mental wellness of users – a topic which has taken on new urgency since the outbreak of Covid-19. “We spent a lot of time over the last 12 months working to come up with better social measures across the portfolio,” he said.
Meanwhile, at a time when high inflation and low economic growth have precipitated a cost-of-living crisis in many countries, the social risks of owning residential rental housing are coming to the fore.
Short leases found in residential property make the sector attractive in a period of high inflation, since rents can soon be adjusted in response. However, inflation also affects what tenants can afford to pay, meaning rent rises could have adverse social impacts.
Robert-Jan Foortse, head of real estate for Europe at APG Asset Management, told AsianInvestor that in 2023 the company would once again cap rent increases on its Netherlands portfolio.
“Like last year, our residential platform in the Netherlands, Vesteda, will not raise its rents for 2023 [in line] with current inflation. Instead, a more balanced increase will be charged to tenants,” he said, although he declined to name a figure.
Last year, the largest Netherlands investors, in consultation with the Association of Institutional Property Investors in the Netherlands (IBVN) and the government ministry responsible for housing, set a limit on rent increases this year of 3.3%. The latest data show inflation in the Netherlands at 9.9% in November.
But Foortse said that the fund remained committed to increasing its allocation to multi-family sector housing abroad, including in Asia – where the fund already has allocations in China, Japan and Australia, adding that it was open to investing in the sector in China.
“Except in Japan, the sector in these countries is less established, as was once the case in the UK. But the investment case is similar: driven by urbanisation, affordability and other social changes, people are increasingly comfortable to rent,” he said.