The growth of urban middle-income households worldwide is propelling an increase in global demand for affordable housing, a market that is projected to grow to $502 billion by 2020, up from $468 billion at the end of 2015, according to research firm MSCI.
MSCI’s new report on this investment strategy, shared Thursday with PERE, defines affordable housing for the “middle of the pyramid” as urban housing that does not exceed 40 percent of a household’s annual disposable income, with a maximum of two people per bedroom. New York-based MSCI found that 10 percent of the global cities surveyed comprise more than half of the affordable housing market opportunity, with Shanghai, New York City and Washington DC considered the biggest potential markets for this opportunity.
The report also said that investors in the residential sector may not be poised to take advantage of this growing space because investment is concentrated at the top of the market in many cities. The firm analyzed 161 companies in the real estate space and found 25 that are exposed to cities where median housing costs more than 100 percent of median disposable income, with 14 of these firms based in Hong Kong.
“The luxury market has already started to decline (in some major cities), while the opposite has happened with the more affordable housing segment,” Mario Lopez-Alcala, the author of the report, told PERE.
The senior analyst at MSCI said investors should expand their portfolios to affordable housing, which can act as a defensive hedge in a downturn. Lopez-Alcala said investors have not fully explored this mid-tier housing segment as an investment strategy, largely because the market has been undefined and lacks a risk and return profile. For would-be investors, he recommended tailored investment strategies.
“An institutional impact investor concerned with generating the widest positive impact could give more weight to the number of households in a particular location that could potentially benefit from capital deployment,” Lopez-Alcala wrote in the report. “Conversely, a strategic investor could pay more attention to the aggregate magnitude of the potential spending on housing costs that households could afford in a certain city, together with the size of potential monthly payments to gauge market depth and prospective revenue.”