The housing crisis: Key priorities for investor action
We are in the midst of a startling global housing crisis, with 100 million people homeless due to a lack of adequate and affordable housing. In the United States alone, 23 million people—including children, seniors, people with disabilities, and veterans—live in households that pay more than half of their income on rent and utilities in 2019.
Population growth, wage stagnation, a lack of public investment and government oversight, and decades of local opposition to the building of new affordable housing have all played a role in the housing crisis. Yet one factor has come into focus: the role of institutional investors.
In the first three months of 2021, 1 in 7 US homes were purchased by institutional investors—including private equity firms, pension funds, and publicly listed companies. In Europe, the rate at which institutional investors are buying up housing is also accelerating, driving up house prices. Financialized landlords often rent out or sell these units to new buyers at inflated rates—causing individuals to divert funds from other basic needs like food or clothing to avoid eviction.
As investors increasingly consider environmental, social, and governance (ESG) principles that are aligned with UN Responsible Investment Principles (PRI), Limited Partners’ (LPs) expectations, and emerging due diligence and disclosure regulations, there is no better place to start than with housing.
Earlier this month, The Shift Directives: From Financialized to Human Rights-Based Housing were launched in the EU Parliament, which call on governments to regulate financial institutions in the housing market. Regulatory and public policy pressure is also growing and organized political and social movements against financialized housing are emerging. Meanwhile widespread media coverage is zoning in on investors’ role in the housing crisis.
As investors increasingly consider environmental, social, and governance (ESG) principles that are aligned with UN Responsible Investment Principles (PRI), Limited Partners’ (LPs) expectations, and emerging due diligence and disclosure regulations, there is no better place to start than with housing. The Universal Declaration of Human Rights sets out adequate and affordable housing as a fundamental human right.
Unanimously endorsed by governments in the UN Human Rights Council, the UN Guiding Principles on Business and Human Rights (UNGPs) clarify that all companies, including institutional investors, should take action to respect human rights. The UNGPs provide a process-based due diligence framework that helps investors identify and address human rights risks, recognizing that where risks to people are greatest, material risks to business often follow.
The most effective efforts will be founded upon a human rights-centered approach to housing that considers how the purchase, maintenance, and sale of real estate assets impact people—including renters, homeowners, and community members-at-large. Here are key actions for investors to consider:
I. Make a public commitment
Commit to upholding adequate housing as a core policy commitment that is integrated into investment-level policies and subsequently integrated into ESG screenings, including human rights risk assessments, real estate asset allocations, and stewardship. Ensure third-party operators also commit to these principles.
II. Assess risks and impacts by engaging stakeholders
Listen to the people most impacted by housing shortages and rising costs, including engaging tenant associations, renters and homeowners, NGOs, and local officials. Come to the table not to defend your investment portfolio, but to learn about systemic risks to adequate housing, the role your investments may play, and workable solutions grounded in people’s lived realities.
III. Establish fair housing practices, including:
- Fair Rent Levels—Set rents commensurate with income levels (e.g., no more than 30 percent of wage levels), and the costs associated with housing should be at such a level that other basic needs are not compromised.
- Tenant Protections—Establish tenant protections including missed payment grace periods, rental freezes for warranted cases (e.g., sickness, temporary joblessness), and the removal of ‘hidden’ fees, such as administration fees and payment convenience fees.
- Pathway to Ownership—Create a path for renters to become homeowners, including via rent-counting, fair and transparent rent-to-own models, financing options for tenants, and waiving of early termination fees.
- Accountability and Access to Remedy—Ensure tenants can easily identify who owns and manages their home, can raise grievances and receive remedy in a timely and efficient way, and have an active say in housing decisions affecting their lives. Hold third-party operators accountable for their human rights performance.
IV. Align policy advocacy
Support pro-housing affordability policies and be transparent via external and internal communication where policy dollars are being spent related to housing issues.
V. Track and disclose performance
Track and disclose, on a consistent basis, efforts to ensure adequate housing, as well as efforts of third-party operators. Such disclosure should be accessible and decision-useful for affected communities and LPs. Specific metrics for disclosure should include rent levels (compared to median wages), grievances/complaints received, and tenant engagement activities.
The housing crisis is not the fault of institutional investors alone and can only be solved though system-wide approaches. However, with their unique financial leverage, investors have both a responsibility and an opportunity to play a key role the solution.
Paloma Muñoz Quick (Associate Director) and Cassie Collier (Manager), BSR