Pension funds increasing in-house asset management: survey

As the financialization of the real estate sector comes under increased scrutiny from the general public, institutional investors must mitigate the systemic risks posed by housing inequality issues, says Tamara Herman, program manager of capital strategies at the Shareholder Association of Research and Education.

“There’s a lot of discussion about the role of institutional investors in housing and a growing intolerance on the part of the public of certain business practices. Housing is intrinsically linked to inequality and institutional investors are becoming more aware of inequality as a systemic risk to their portfolios.”

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Herman recently completed the first phase of an initiative called Investors for Affordable Cities. In a discussion paper published at the end of the pilot stage, she identified systemic operational and reputational risks facing institutional investors that fail to consider the affordability of housing in real estate portfolios.

“Some institutional investors buy old buildings and displace tenants to renovate the buildings,” she says. “They’ll then raise the rents significantly for incoming tenants.”

According to Herman, this strategy leaves institutional investors vulnerable to serious reputational risks. As an example, she points to a 2017 rent strike from the tenants of a Toronto apartment whose rent was raised nine per cent over three years. Rather than focusing their ire on the property management company, the tenants’ messaging highlighted the role of the building’s owner, the Alberta Investment Management Corp.

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To mitigate these risks, Herman believes institutional investors should imbed policies into environmental, social and governance practices in order to curb housing inequality. She also suggests investors engage with asset managers in order to ensure that these policies are being followed. “For every ESG issue, there have been reasons why investors have been compelled to consider the interests of other stakeholders. It’s why investors are looking at climate and sustainability.”

As much as certain practices have been criticized for exacerbating housing problems, Herman is convinced institutional investors have a role to play in making Canada’s major cities more affordable. “There’s a need for more capital investment into housing. With the right policies, institutional investors can play a role in a healthy housing market.”

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