a.s.r. real assets: Beyond the rent threshold - refining affordability
Affordable housing remains central to the Dutch housing debate and has become an established investment theme within private markets. However, defining affordability remains far from straightforward. Marsha Sinninghe, Senior Fund Manager Residential Real Estate at a.s.r. real assets, discusses the growing call for greater nuance in defining and assessing affordability, and reflects on a framework designed to incorporate this nuance into affordability assessments.
By our editorial team
To what extent has affordable housing become a theme within private markets?
‘Affordable housing addresses one of the most pressing societal challenges in the Netherlands: a persistent shortage of affordable homes and growing concerns about housing affordability. As institutional investors increasingly seek investments with measurable impact, affordable housing has become an established theme within private markets. Investing in affordable housing offers investors in private markets the opportunity to contribute to a clear societal objective while combining this with sustainable long-term financial returns, making it a prominent investment category within impact investing.
What are the main challenges for investing in affordable housing?
‘Challenges often associated with affordable housing include regulation, the investment climate, and the availability of suitable projects. Defining affordable housing remains a challenge in its own right. Investors, investment managers and policymakers all recognise the importance of affordability but often apply different definitions and thresholds. As a result, affordability can be difficult to assess, compare and measure consistently.
Hasn’t the Dutch government already defined affordable housing?
‘To a certain extent, yes. With the introduction of the Affordable Rent Act, the Dutch government introduced a definition of affordable housing by defining a mid-rental segment based on the Housing Valuation System. This has been an important step in creating a common reference point for the market. In our view, however, the government definition has an important limitation: affordability cannot be captured by a single threshold alone. It also depends on factors such as household income, location and housing-related costs. As a result, we see a growing call for greater nuance in the definition of affordability.’
So how should affordability be assessed instead?
‘As affordability cannot be captured by a single rent threshold, it should be assessed through the relationship between housing costs and a household’s financial capacity. This requires a more nuanced approach that starts with a prudent housing cost ratio, identifies the relevant target group and takes local market conditions and broader housing-related costs into account. Importantly, what households can spend on housing is not necessarily the same as what can be charged as rent. Rather than focusing solely on rent levels, affordability should reflect what households can reasonably spend on housing and how this translates into an appropriate affordable rent level. As a result, affordability assessments should be project-specific and informed by local context.
Can you make that more concrete?
‘To translate these principles into practice, we developed a layered framework for assessing affordability. The starting point is a Housing Cost Ratio (HCR) of 35%, which reflects the share of disposable household income that can responsibly be spent on total housing costs. The HCR is a widely used affordability metric and provides a useful national baseline. However, on its own it overlooks local differences and may create the false impression that the full amount can be charged as rent. Therefore, additional layers are needed.
The second step is identifying the target market. Our framework focuses on middle to upper-middle income households that are not eligible for social housing but face increasing barriers to homeownership, and therefore increasingly depend on the mid- and free-sector rental market.
Affordability is inherently complex and cannot be captured by a single metric or threshold.
The third step is applying a local lens, using the median disposable household income of the relevant agglomeration. Median income provides a more accurate measure of affordability than average income and avoids overestimating what households can afford. The agglomeration level is used because local housing markets often extend beyond municipal boundaries, shaped by commuting patterns, shared labour markets and interconnected housing supply.
The final step is translating the HCR into a Rent Ratio. While the HCR provides a useful starting point, it is based on total housing costs rather than rent alone. Energy costs, local taxes and service charges all reduce the income available for rent and should therefore be deducted first. This step is frequently overlooked in affordability discussions, while in our view it is essential. An affordable HCR does not automatically translate into an affordable rent level. Shifting from HCR to Rent Ratio is crucial because a dwelling’s energy efficiency and service costs are not secondary details, but direct determinants of how much households can sustainably pay in rent. By deducting these structural housing-related costs, affordability can be assessed in a way that is both locally relevant and practically applicable for individual assets.’
Are you proposing a new definition of affordable housing?
‘We see this as a more refined and practical approach to assessing affordable housing rather than as a new universal definition. Affordability is inherently complex, influenced by location, household characteristics and housing-related costs, making it difficult to capture this in a single metric or threshold.
Our framework builds on existing concepts and responds to the growing recognition that affordability requires greater nuance. By combining household income, local market conditions and housing-related costs, it provides a structured and transparent way to assess affordability in practice. The value of the framework lies in its ability to offer investors, investment managers and policymakers a practical point of reference. It enables affordability assessments to be made in a more transparent, comparable and consistent manner, contributing to a stronger shared understanding of what affordable housing means in practice.
While the discussion on affordability will undoubtedly continue, we hope this framework helps move the conversation beyond simplified definitions towards a more nuanced assessment of affordability in real-world housing markets.’
|
SUMMARY Affordable housing has become an established investment theme within private markets, yet its definition remains contested. While the governmental mid-rental segment offers a reference point, affordability cannot be captured by a single threshold alone. A framework combining household income, local market conditions and housing-related costs provides a structured, transparent, and more nuanced way to assess affordability in practice. |