Rising inequality

Rising global inequality can be seen as a key megatrend with major implications for the future of commercial real estate. Among these are the opportunities tied to affordable housing. With an increasing population facing a cost-of-living crisis, below-par financial literacy and unequal access to local grocery outlets and healthcare, affordable housing investors have an opportunity to tap into this global demand while bridging the gap on various societal inequalities.

The current state of global wealth

The top 10% of the global population accounts for 52% of total income and 76% of total wealth, according to the World Inequality Lab (Figure 1). Concurrently, the bottom 50% of the global population accounts for a 8% of total income and 2% of total wealth.¹

While a small portion of the global population controls a significant amount of total wealth, inequality varies by region. The top 10% of the population controls 59% of total wealth in Europe, 67% of total wealth in South and Southeast Asia, and 70% of total wealth in North America. In the U.S., 39% of adults do not have sufficient non-retirement savings to cover one month of living expenses and nearly one-third of adults report they are not confident they can come up with $2,000 if an unexpected need arose within the next month.²

Tapping into a global demand with affordable housing

Affordable housing initiatives help regenerate communities when they provide sustainable places for people to work and live; moving from redundant to repurposed places can reduce geographic inequality across many of our towns and cities.

For example, installing grocery, healthcare and other amenities provide meaningful support to underserved communities. Government schemes differ from region to region, though the common thread is that to support this global demand for affordable housing, investment is needed.

We have seen a widening wealth gap across regions, leaving the majority of global wealth in the hands of a few, while many people in lower-income areas are facing the same challenges globally: a cost-of-living crisis, poor financial knowledge and difficulty in accessing necessities such as grocery and healthcare facilities.

Real estate focused on affordable housing is tapping into a sector that offers substantial, global demand, backed by government schemes, providing a potentially low volatility model for investment. Alongside this, affordable housing presents an opportunity to mix meeting a global demand by delivering housing and facilities which positively impact daily lives, from grocery shopping to education at all levels.

Improving economic equality

Among the most challenging obstacles to addressing wealth inequality is the cost burden many renters face. The rising price of rental housing prices, almost globally, has meant many are finding it tougher to keep up with rent and other bills, making it unlikely that lower income individuals can save money each month. Tackling the cost of rental prices is one component of this issue, though another is improving financial literacy and educating tenants on the tools available to help ease financial burdens.

According to TIAA Institute's analysis, most U.S.-based adults are making financial decisions with a generally poor level of financial literacy. The TIAA Institute-GFLEC Personal Finance Index (P-Fin Index) assesses financial literacy among U.S. adults annually, examining the relationship between financial literacy and financial well-being.

According to the 2024 report, U.S. adults answered only 48% of the 28 index questions correctly. As such, there is a growing need to improve financial literacy. In our view, responsible rental housing owners can improve residents' financial well-being through financial literacy and employment aid programs within living communities. By offering these resources at affordable housing properties, for example, responsible owners can positively improve economic equality and promote upward financial mobility for lower-income households.

Recent insights from U.S. mortgage provider Fannie Mae indicate a growing share of the population is living paycheck-to-paycheck. The percent of U.S. renters who say they do this increased from 50% in 2021 to 63% in 2023.³ Addressing these challenges through social impact investments like affordable housing with education is one way of providing an effective bridge to improve the financial well-being of many.

To improve economic equality, responsible rental housing owners can initiate programs within communities that support residents' financial well-being. One example from the U.S. is partnering with an organization like The Flagstone Initiative, which allows residents to split their rent payment into two payments to better align with standard bi-weekly paychecks. This allows renters to free up funds for other essential items and experience less financial strain at the start of the month.

Other schemes exist that help to build credit scores for residents, while others offer rent-relief support for those who experience sudden financial hardship. These initiatives help to stabilize the rental and housing market, creating less tenant turnover and reducing the need for evictions. Providing essential support structures for tenants through different schemes can help to ease financial concerns and begin building a risk profile of tenants, putting them in a better position to get on the property ladder.

Improving healthcare and food accessibility

Nuveen Real Estate research indicates lower-income renters have unequal access to healthcare and necessity food retail than higher-income renters. Specifically, affordable housing residents are more disadvantaged than Class A apartment residents in accessing walkable healthcare and necessity food retail.

According to CoStar data, Class A apartments have more healthcare and food real estate within one mile of their property than affordable housing communities across 46 of the top 54 U.S. markets (Figure 2). This presents an opportunity for investors to develop regeneration communities that bring a sustainable ecosystem of necessity food, healthcare and education to affordable housing communities.

TIAA Institute's analysis of health disparities by income indicates that in the U.S., the difference in life expectancy between rich and poor is 15 years for men and 10 years for women.⁴ As such, there is a clear need to improve lower-income communities' access to healthcare access.

The creation of these ecosystems is an opportunity to enhance economic activity, create jobs and improve affordable housing residents' overall well-being, while filling a growing demand.

Global demand for affordable housing

Like the U.S., European life expectancy is intrinsically linked to income inequality. In the U.K., the life expectancy gap between the most and least deprived geographies has increased from 7.4 to 8.7 years.⁵ The rise in inequality is now entrenched across political agendas and in 2022, the U.K. government announced its long awaited 'Levelling Up' plan to address and close the gap between the rich and poorest parts of the country. By introducing funds to target direct investment into underserved regions, it acknowledged that private sector capital is required to help solve social and economic inequality.

Real estate investors have an important role to play in enhancing social infrastructure, which includes modern healthcare facilities and affordable housing. An asset's operational programs will be essential to further help address inequality and enhance the quality of life for lower-income renters, alongside ensuring locations consider safety, accessibility to local transport and needs-based services such as food, employment, health care and education.

European social infrastructure, including affordable housing, is often controlled by state authorities and can therefore be hard to access. However, a European Union study found a €7 billion annual investment gap in social and affordable housing. This means that investment in this sector needs to increase by 25%, supporting the case for stronger private/public sector partnerships to successfully address inequality.⁶

The U.K., for example, has seen a growing number of affordable housing providers (see Figure 3). Estate agent Savills predicts For Profit Registered Providers (FPRP) could commit up to £23 billion for affordable homes by 2026, enough to fund 130,000 new homes for shared ownership and general needs rent.

Income inequality has been severe in Asia Pacific, with the richest 10% earning more than half of the region's total income. Wealth distribution is even more uneven than income distribution and asset value appreciation has intensified this in emerging Asian markets such as India and Southeast Asian countries.

Conversely, advanced economies in Asia Pacific with higher levels of education and greater opportunities for social mobility will likely have policies in place to address the issue of inequality, such as providing affordable housing for lower income households. However, as in Europe, affordable housing is highly regulated by government authorities in the region. Only Australia has initiated pilot program that the state government partners with the private sector to deliver a predetermined portion of affordable housing in selected government approved residential projects.

Addressing inequality through affordable housing

The widening global wealth gap is made up of countless challenges. but across geographies, we see similar problems. Cost of living concerns make it difficult to keep up with rental prices and bills, meaning many are unable to save money. Other symptoms of this wealth gap are a lack of financial literacy among many and inadequate access to necessities like food, health care and education.

Government intervention to address this matter is at various stages of success in different regions, though across North America, Asia Pacific and Europe, there is a growing consensus that private investment is needed to meet the demand of affordable housing. Investors considering affordable housing, possibly to meet socially focused portfolio goals, are tapping into a market with global demand. Regenerating underserved communities will take significant capital, but through this route, investors will be helping establish infrastructure that directly tackles these avenues of wealth inequality.

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