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January 06, 2003
Investment in Affordable Housing Generates Market-beating Returns
    by William Baue

CalPERS' highest returning investment category over the last ten years is its Single Family Housing Program. The pension giant is not the only institutional investor that has had success with community investing.

The positive social returns of community investment have often overshadowed its financial returns. Recently, however, the financial returns are garnering more attention. The California Public Employees' Retirement System (CalPERS) is the nation's largest pension fund with assets totaling more than $132 billion. Late last month, CalPERS announced that its Single Family Housing Program has been its single highest returning investment category over the last decade. The program has earned more than 20 percent annually since inception.

"Ten years ago we believed that we could invest responsibly on behalf of our members and still help build communities at the same time," said CalPERS Board of Administration President William Crist. "This program has shown us that we can diversify and add value to our investment portfolio while supplying [housing] to California's real estate market and generating jobs and services for state and local economies."

The positive social returns of CalPERS' Single Family Housing Program are impressive. Because of the program, 32,000 homes have been built in 200 Californian communities. More than 75 percent of these houses were built for first and second time home buyers. The program's financial returns are equally impressive, earning the pension fund and its members more than $500 million over the past ten years.

Although CalPERS is one of the few pension funds invested in single family housing, it is not alone in generating attractive financial returns on its community investments. The General Board of Pension and Health Benefits of the United Methodist Church, whose investment portfolio contains $11.6 billion in assets, has also experienced significant positive returns on its community investment programs. Whereas CalPERS has focused on single family housing, the General Board has focused primarily on multi-family affordable housing, although it has allocated some assets to affordable single family housing in the last year-and-a-half.

The General Board's affordable housing program has fared particularly well in the past three years, generating total returns (including income as well as capital appreciation) of 16.8 percent in 2000, 8.1 percent in 2001, and 12.8 percent in 2002 (through September).

"Historically, the affordable housing program has performed quite well," said Michael Lohmeier, the General Board's investment manager for Community Development and Affordable Housing. "Our return since inception was calculated at 7.5 percent."

The General Board made its initial investment of approximately $25 million in affordable housing in 1990, and its commitments now total almost $1 billion. The General Board values that its community investments provide portfolio diversification.

"The affordable housing program is filling a niche in our overall diversification of assets, and that role is to be a long-duration asset," Mr. Lohmeier told "That is why it's part of our fixed income allocation. Additionally, one of the reasons that we haven't gotten into the single-family market is that those assets have a much shorter duration. Individuals repay much faster than multiple family mortgages do, so it doesn't match what we're trying to do. We feel that these loans provide an excellent asset/liability match to our long duration pension liabilities."

The strong performance over the last three years of these community investments has helped insulate against the poor performance of equity investments. In fact, the General Board's community investment portfolio has performed well historically compared to equity and fixed income investments in general.

"Our affordable housing investments have outperformed our equity and fixed income instruments over the last three years," said Mr. Lohmeier. "And performance through the lifetime of the fund has been comparable, given the risks we're taking."

Accounts such as these from CalPERS and the United Methodist Church's General Board of Pension and Health Benefits testify to the value of community investment in affordable housing. This vehicle serves not only to diversify portfolios and shield against downturns in equity markets but also to generate attractive returns in its own right.


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