Morgan Stanley
  • Sales and Trading
  • Sep 12, 2017

Sustainable Investing: Affordable Housing

Discover how investors can fund affordable housing projects for lower-income families and the homeless through green bonds, from Morgan Stanley experts.

Imagine a market where you could choose a particular environmental or social investment, just like any other market security. As improbable as that sounds, there’s a corner of the U.S. municipal bond market where investors can do that, at least when it comes to tackling homelessness and the affordable housing crisis in big cities.

The New York City Housing Development Corporation (NYC HDC) and the New York State Housing Finance Agency (HFA) are now issuing sustainable  and green bonds, to tackle the city’s worst affordable housing and homelessness crisis since the Depression1. Affordable housing projects listed in the bond documents are paid for by the proceeds of the deals. 

“How often do we hear of social inequality and feel that any major change is out of our hands?” asks Geoff Proulx, Head of Municipal Housing Finance at Morgan Stanley. “What these bonds provide is a chance to direct your investments to specific housing developments. You know where your money is going and for what development, right down to the neighborhood and street number.”

You know where your money is going, right down to the neighborhood and street.

A National Issue

So far the NYC HDC has issued $2.8 billion of sustainable neighborhood bonds, says Proulx, and a further $274 million of green bonds have been issued by the HFA to finance energy efficient affordable housing. This is just the beginning.  The NYC HDC  plans to refurbish and construct 200,000 affordable apartments by 2024 at an estimated cost of $41 billion. The HFA plans to finance 100,000 affordable units in five years costing around $20 billion.

Other municipal housing authorities are also considering similar issuance, says Proulx, now that New York has provided the document templates. 

“Housing affordability is a national issue that affects broad demographics,” says Proulx. “Studies suggest Americans spend more of their pay checks to keep a roof over their heads than people in other developed countries. The problem is that incomes haven’t kept pace with the cost of housing in most parts of the country2.”

A Sweet Spot

Proulx first heard of the sustainable bond structure from London global capital markets colleagues, who had just sold sustainable bonds linked to public housing projects in Europe.

He also discovered that although the green bond market is fueled by a surge in sustainable investing demand, retail investors, for the most part, miss out on being allocated bonds when they’re first issued.

“Pretty much all of the green bond issuance we’ve seen in the corporate new issue bond markets is allocated to institutional investors,” says Proulx. “Yet we are also seeing ever increasing demand for sustainable investing products from retail accounts, especially from millennial investors.  We give retail investors priority when we sell bonds, so the muni market is the perfect place to satisfy their needs and the needs of our housing clients.”

Proulx works with colleagues in the Morgan Stanley Wealth Management group, to inform brokers on the firm’s Investing With Impact platform of upcoming deals.  As city or state-owned authorities, his clients are keen to use social and green bonds to highlight their sustainability efforts, and that tax dollars are being put to good use.

To be sure, the sustainable and green bonds issued so far by housing authorities are a drop in the bucket in the whole scheme of things. But it’s a start.

“Five years ago the corporate green bond market was only $3 billion in size, and now it’s expected to hit new issuance of around $130 billion this year,” says Proulx. “Given the affordable housing needs around the country, we think it can grow exponentially, and especially if we can continue to connect our clients’ needs with the sustainable investing spigot.”

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