In a market starved for yield, many traditional fixed-income strategies either aren't producing the desired income in a low-rate environment or seem to be fraught with risk as corporate debt levels balloon.
Institutional investors are challenged to meet rising liabilities as overall return expectations trend lower. As the economy attempts a cold start after the COVID-19 outbreak, fixed-income investors find themselves confronting a "lower for longer" interest rate environment. Affordable housing debt is an area many neglect to consider in their hunt for current long-duration income and asset preservation. Those with an ESG lens also won't object to the social impact of a strategy addressing such a pressing societal need, one that only became more acute amid a pandemic that has disproportionately affected lower-income communities.
At first blush, the affordable housing asset class may not seem like an obvious choice for fixed-income investors. The investment thesis, characterized by stability and attractive yields, isn't as intuitive as more traditional categories, such as bond funds or municipal bonds. Representing just a sliver of the mortgage-backed securities market, the largest fixed-income managers have little or no exposure to the sector.
Those who take the time to understand the opportunity will discover that affordable housing debt represents a unique and uncorrelated fixed-income exposure. It provides immediate current income and stable cash flows, with returns generally comparable to investment-grade bonds, albeit without similar levels of credit risk. Some may view affordable housing debt as a countercyclical strategy, but these assets are better described as being "acyclical" due to the demand that exists in both good times, when real estate prices climb, and bad, when economic distress becomes widespread.