International capital markets should channel investment capital to the challenge of affordable rental housing in developing markets more easily. Housing for sale aimed at lower and moderate income segments is already a prominent business driver for commercial real estate in most major emerging markets for the last five to ten years. Despite shortcomings, at least the channels and the models exist for new housing for sale.
By contrast, affordable rental housing in major developing market cities doesn’t figure at all in the portfolios of long-term investors who have started to show interest in emerging markets housing. A few innovators like RETNA Ingeniera Inmobiliaria, one of the presenters at the World Bank’s 7th Global Housing Finance Conference, suggest a new opening for rental housing investments.
Capital markets and affordable housing now. Last year, companies listed on public stock exchanges in the emerging and frontier stock markets of the world derived more than $150 billion in revenues from home building, development and investment activities. This only includes homebuilders, residential real estate owners and developers and the investments of funds called real estate investment trusts, more commonly referred to as REITs. Even so, this formal commercial activity probably captures no more than 20% of homes built in these markets: most new homes are built by small- and medium-sized private entities not listed on stock exchanges – or by households themselves.
Inadequate though it may be, a larger percentage of this commercial activity is aimed at building “affordable” housing than most would imagine. Out of the 31 companies in the FTSE EPRA/NAREIT Emerging Residential Index, the most investable emerging markets residential developers, companies representing about 70% of the index’s market capitalization have large affordable housing businesses. This universe includes giants like MRV Engenharia in Brazil,Vanke in China, Consorcio Ara in Mexico and Emaar Misr in Egypt.
Rental housing assets don’t figure. Only a small handful companies in this universe report any rental residential revenues. Most of what’s classified as rental housing on these balance sheets consists of high-end serviced apartments. One Chinese mega-developer, China Overseas Land, highlighted a small allocation to low-income rental housing as an example of their alignment with government policy. In developed markets, publicly traded REITs or real estate private equity funds are natural long-term holders of these rental housing assets, sometimes called “workforce housing” in the US.
As an indicator of relative scale, housing REITs in emerging markets generated revenues of only about USD 500 million vs. homebuilders’ USD 46 billion and housing developers’ USD 105 billion. That financial market investments directed at housing for sale generates 300 times the revenue of funds that develop, acquire, hold and manage housing assets points to both the gap and the potential.
Emerging markets investors seeing rental housing. Real estate investors and developers are starting to find investable entry points to affordable rental housing. TUHF in South Africa (The Trust for Urban Housing Finance), an early successful example, finances inner city rehabilitation of existing buildings for affordable rentals, enabling entrepreneurs to become owner-landlords. Also in South Africa, the private equity fund, International Housing Solutions, whose mandate focuses on affordable housing, keeps a proportion of new developed units on its balance sheet as rental investment properties for later sale.
Recently launched Indluplace, a South African REIT, has the investment objective to generate long-term cash flow yields from a diverse portfolio of well-located, transit accessible affordable rental housing (see our interview with Indluplace’s management here). Indluplace can act as an exit for real estate developers who execute residential real estate projects from start to finish but can’t hold leased property as investors.
RETNA at the World Bank Housing Finance Conference. This is the context in which Mexico’s RETNA Ingenieria Inmobiliaria, a FIBRA (the acronym for REITs in Mexico), is presenting at the 7th World Bank Housing Finance Conference. RETNA is the first fund and operator to respond to the Arrendavit program of Infonavit, Mexico’s federal institute for worker housing. Arrendavit launched officially in 2015 to enable Infonavit members to rent housing if they haven’t yet accumulated enough credit in their accounts to buy a home. Using automatic salary withdrawals, Arrendavit secures members’ tenure in rental housing, can find them another rental home in case of job relocation and also has a lease-to-own program.
RETNA’s unique model is investable via the FIBRA, the vehicle that develops, acquires, renovates and manages apartments for rent in its portfolio. RETNA’s strategy seems to focus, like Indluplace, on well-located apartments with a core urban focus in contrast with the distant peri-urban focus of single-family housing oriented developments in Mexico. RETNA’s declared intent is to go above and beyond asset management. The organization points to residents’ quality of life as core to its business model, a means of improving the quality of its earnings, raising occupancy rates and securing long-term yields. The organization is also partnering with academics and researchers to develop tools and programs to improve access to rental housing. RETNA has even developed a “rental club” (Club de Rentas) to aggregate and manage the properties of individual owners or buildings for rent.
No doubt we’ll hear more at the conference about how RETNA is channeling private capital to tackle this next urban housing frontier. To grow and be viable, these new REITs need a supply of leased, stabilized projects to generate the dividends that REITs must pay their investors by law. These developing urban real estate markets still need capital at an earlier stage to take development and construction risk to drive new rental housing projects that these REITs can acquire and hold. Without that, REITs that focus on affordable residential rentals may remain unique, small and illiquid for some time to come.
Note: Financial markets data was sourced from Bloomberg.