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From blind gambling to visible impact

Making housing finance work for society

Brussels, 31 October 2017 | Economy
The Big Short (2015) The risks of overleveraged financialization of housing and speculation on homes of low income households in countries like the US, UK, Ireland, Spain and the Netherlands are clear after the financial crisis. This might have been adverted if the social outcomes and impacts for households and communities would have been tracked and would have re-diverted financial means into more socially responsible investments.
The Big Short (2015) The risks of overleveraged financialization of housing and speculation on homes of low income households in countries like the US, UK, Ireland, Spain and the Netherlands are clear after the financial crisis. This might have been adverted if the social outcomes and impacts for households and communities would have been tracked and would have re-diverted financial means into more socially responsible investments.

Finance and housing are both crucial for the functioning and wealth of our societies. However, they can form an explosive mix for our economies. The financial crisis clearly unveiled this. Two trends explain this. First, housing gradually lost its initial function: provide a home to households. Gradually it became a financial commodity. Secondly, the financialization of economies led to a disconnect between financial assets and societal needs In the real economy. Things are evolving, however. There is a now a new movement in the financial sector that explicitly wants to direct more financial means towards impactful investments for society. An excellent opportunity to remarry finance and (affordable) housing.


By Sébastien Garnier, EU Public Affairs at Aedes, the Dutch Federation of Social Housing Providers


Away from destructive financialization of housing

What can be done to improve the housing situation in Europe? In another article I reflect on two important elements: 1) strengthen the institutional settings and organizational capacities to better capture and manage investments in social and affordable housing and 2) re-direct financial resources from the speculative real estate to responsible housing investments that have higher societal benefits.

Especially countries with less developed housing systems would benefit from this. It would contribute to overcoming pressing societal challenges: inequality, safety, social segregation, environment, energy, health, ageing, poverty and housing younger generations. Not surprisingly adequate and affordable housing has been recognized as one of UN’s Sustainable Development Goals (target 11.1).

The UN Special Rapporteur on adequate housing is very clear about the risks involved in housing and finance. Leilani Farha recently denounced the impact of financialization of housing on human rights. She recommends that States, international financial institutions, human rights bodies, civil society organizations and relevant experts come up with a strategy to engage financial regulatory bodies and actors to reach the adequate housing target by 2030.

Financing impact investments

More financial resources could be channelled to fulfil society’s housing needs if the real impact of investment would be more visible for society and investors. Enter the concept of impact investments[4]. More and more financial organizations and institutional investors are using this concept. Beyond maximizing financial returns they explicitly look how their investments create positive outcomes for other beneficiaries in society.

Although the bulk of (private) investors have a purely profit-maximizing objective figure 1 shows there is a range of investors whose motivations include social value creation. This is good news for social and affordable housing investments. The last 12-24 months we have witnessed a surge in the interest of impact investors to finance such investments and proud reports on the societal outcomes achieved.

Impact Investment for affordable and social housing

In fact, impact investment in social or affordable housing is nothing new.

Most well-established social housing or affordable housing systems in European countries benefit from special financial intermediaries and organizations that could be labelled as impact investors. In many ways, the impact investment trend provides a great opportunity to highlight socially (think vulnerable groups) beneficial housing investments and set them apart from the more common or even socially harmful ones (think purely speculative finance).

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A few factors explain the natural match between social housing and impact investment. The scale and long-term nature of the financial needs of social and affordable housing providers is adapted to what larger investors, such as institutional investors, are looking for. The financial risk and transaction costs are often limited through reliable regulation/regulators, public guarantees, fiscal exemptions, subsidies, housing allowances, social rental agencies, etc.

Also, housing providers (associations, foundations, limited companies) often have a long track-record – some are more than a century old and need to be accountable for their social and financial performance towards their main stakeholders (tenants, local and governments, general public).

Transaction costs linked to impact reporting can be relatively small because of already existing reporting obligations and monitoring by regulators. This can take the form of voluntary CSR reports or compulsory reports for regulators. Existing indicators are often detailed and contain financial metrics and social outcomes. Some housing organization sometimes perform (costly) impact studies to assess the long-lasting SROI of housing and community investments. Such investments should be interesting for any portfolio manager in search of an optimal balanced between risk-return-impact (see Figure 2).

Zooming in on impact indicators for housing

There is no generally accepted set of impact indicators for social and affordable housing investments. At this stage, this is not surprising.  Social entrepreneurs, like social housing providers, need sufficient freedom to decide on the social problems they want to tackle and the most effective measures to take. Their activities are also strongly rooted in local and national (legal, economic and political) frameworks and depend on cultural preferences.

Even if the comparability will never be the same as or financial indicators social and affordable housing would gain by working towards a common basic set of social indicators. These would include figures on outcomes and impacts that would be generally accepted as being socially relevant. 

This way impact investors would be able to monitor the social achievements of their investments and benchmark the most effective and efficient risk, return and impact combinations. They would also find it easier to differentiate between those housing investments that deliver an additional social impact from those that prioritize financial returns and perform poorly on their social impacts indicators. If both investments have equal risk-return profiles, it would help investors to choose the former one.

Here, it is important to make the distinction between outputs, outcomes and real social impacts (see figure 3). When we talk about impact investments we should realize that most indicators rarely arrive at proving social impact in the stricter sense. This is mainly due to the cost of those assessments and the difficulty to isolate and attribute causalities. So actually most impact investment can only claim to be social outcome investments. This is a step forward, but should not be confused with the impact as meant in certain detailed assessments of social or public projects (see figure 3).

Working with generally accepted definitions and indicators is still a big challenge in impact investment. This is shown by the different concepts and criteria used in the frameworks the financial sector uses to assess impact investment in social or affordable housing. The Global Real Estate Sustainability Benchmark (GRESB) refers to affordable housing as ‘housing units that are affordable by the low-income section of a society (for example, whose income is below the median household income).’

IRIS from the Global Impact Investment GIIN definesaffordable housing’ as: ‘housing for which the associated financial costs are at a level that does not threaten or compromise  the occupants' enjoyment of other human rights and basic needs and that represents a reasonable proportion of an individual's overall income.’  The Construction and Real Estate Sector Supplement (CRESS) from the Global Reporting Institute (GRI) defines affordable housing as ‘dwelling units whose total housing costs are deemed “affordable” to those that have a modest income [and] thresholds of affordability (…) often according to median household income.’ Social housing is defined there as “a form of housing tenure in which the property is owned by a government authority (which may be central or local) or community organizations, to assist low income families”, which is a rather narrow look, since many private not-for-profit organizations are also involved in social housing in Europe and elsewhere.

Finally, according to the Social Bond Principles from the ICMA (International Capital Market Association) Social Projects should provide ‘clear social benefits, which will be assessed and, where feasible, quantified’ by the bond issuer. This is illustrated in affordable housing by seeking to achieve “positive socio-economic outcomes for target populations.” Examples of target populations include those that are: living below the poverty line, excluded and/or marginalized populations and/or communities, vulnerable groups, people with disabilities, etc.

This overview shows there is a wide variety of definitions but also that it is so open that most social and affordable housing scheme will easily fit the criteria.


The growing interest in impact investment opens up new opportunities to finance social and affordable housing projects. On the one hand, investments in social and affordable housing can be strengthened by (re)directing traditional real estate investments towards more responsible housing. Even if work needs to be done to agree on a set of common indicators, the wealth of data existing in social and affordable housing is a benefit to access impact investments and provide reliable and relevant social reports. In a time of increased demand for transparency and accountability, this is key for both housing and financial organizations.

An example is the NWB Bank in the Netherlands which recently issued the biggest social bond ever (EUR 2.2bn)  to finance affordable housing projects. This was possible because the Dutch social housing sector already has strict reporting instruments on financial and social outcomes; and because social housing is embedded in a strong institutional framework.

The second opportunity is the strengthening of institutional settings and organizational capacities of social and affordable housing providers – especially in upcoming regions and systems. This is key to capture additional financial means and increased social and affordable housing investments – especially in less developed housing systems in Europe. Contrary to the more developed systems, these underdeveloped housing sectors would mainly profit from impact investments in the form of private equity in combination with grants for technical advice and capacity building.

This article shows that the impact investment trend provides a great opportunity for social and affordable housing and financial institutions to work more closely together. Investment opportunities – in social and financial terms – will require both sectors to understand each other’s needs and risk perceptions. That might create more accessible, adequate and affordable housing sectors that benefit society and it might decrease the risk of blind house price speculations and devastating real estate bubbles.

Further Reading

  • Alex Nicholls, Rob Paton, Jed Emerson, Social Finance, Oxford University Press, 2015, page 284-285 The authors stress the distinction between value creation (outcome) and value appropriation (objective) which, contrary to capital allocation by mainstream financial actors, are not necessarily aligned. The value creation is still maximized but does not necessarily need to be appropriated via an individual financial return.
  • Green not the only colour for ethical bond investors - Growing popularity of social debt issuance prompts flurry of standard-setting moves, Financial Times, July 17, 2017
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