Addenda Capital sees financing gap as fiduciary duty and thin bond pipelines hold back institutional affordable housing investment
Affordable housing may dominate headlines across Canada, but for institutional investors, translating interest into meaningful institutional capital remains a challenge.
According to several investment executives at Addenda Capital, limited public market instruments, early-stage financing risks and the tension between fiduciary duty and social impact continue to constrain capital flows into the space.
Fixed income strategies in affordable housing
Carl Pelland, vice-president of fixed income and head of corporate and impact bonds at Addenda Capital, explained why the firm’s fixed income strategies hold a small number of affordable housing positions in the public bond market.
Addenda invests directly in bonds issued by the Toronto Community Housing Corporation, a nonprofit responsible for affordable housing in the city, and has also bought into a social bond from the City of Toronto whose proceeds flow to the same organization.
On the community bond side, Addenda will soon be investing in Gather Housing Communities, a Hamilton-based subsidiary of Indwell that targets housing for households earning between $30,000 to $90,000.
But as Pelland acknowledges, affordable housing remains a small slice of institutional fixed income portfolios. The public bond market offers limited entry points as issuers need to be large enough to bring bonds to market, as in the case of the City of Toronto.
While labelled bonds from banks or private credit funds focused on general affordable housing and for Indigenous communities occasionally surface, the pipeline is thin.
"In a pure fixed income traditional public bond there's very few opportunities and that's why we're trying to promote that," he said, adding the core structural problem is that institutional investors need market-rate returns.
Fiduciary duty remains critical gap for affordable housing
"People want to do good but they still want the return because of their fiduciary duties to their clients. So, if we charge market rates, it doesn't make the affordable housing work," said Pelland.
Tyler McKinna, vice-president of commercial mortgages at Addenda, echoed his remarks.
“While our investor clients want to get the outcomes of helping to finance more affordable housing in Canada, they don't necessarily want to forego market returns to do so,” McKinna said.
While community bonds offer another channel, Pelland emphasized those are non-public issues with smaller ticket sizes that can't absorb large institutional allocations. Still, Pelland suggests there are a select few opportunities.
Market affordable housing
To that end, according to McKinna, Addenda's commercial mortgage team operates primarily in what he calls “market affordable housing,” which consist of apartment buildings where rents fall below Canada Mortgage and Housing Corporation (CMHC)'s threshold of 30 per cent of area household income.
The properties are typically older rental stock with larger units, financed through conventional mortgages or bridge loans that allow owners to renovate and then qualify for CMHC programs like MLI Select, which has “accessibility, affordability and building efficiency requirements in order to meet those programs,” he said.
The bridge financing, structured on a prime-plus basis for one to three years, helps borrowers retrofit buildings to meet accessibility, affordability and efficiency requirements, stabilize rents and ultimately secure lower-cost insured takeout financing from CMHC.
Even after renovation, McKinna said, the older buildings tend to offer more space than new construction.
"What you typically end up with is a building that looks and operates more like a new building, but the units are larger," McKinna said. "The newer buildings typically have smaller units which aren't suitable for couples or small families.”
Réjean Nguyen, senior director of impact investing at Addenda, said the firm has encouraged municipalities and other issuers to bring new structures to market. He pointed to the City of Toronto's social bond as a model that could be replicated.
"We could see that type of structure in other major cities like Vancouver, Montreal and others that have these types of similar issues with rents that are now way too expensive for most regular people," he said.
On the equity side, he said large-cap holdings offer almost no exposure to affordable housing, and while some REITs operate in adjacent spaces, they’re not building affordable units at meaningful scale. As a result, the nature of affordable housing - local, ground-level projects tied to specific communities - makes direct lending and community bonds more natural channels than public markets.
Nguyen said Addenda began exploring the community bond space last year through investments in Gather and Groupe TAQ but noted that few institutional investors currently participate in the instrument because it is issued by community organizations at small scale.
No clear sign for investment action yet
To that end, he emphasized institutional investors who sit back and wait for affordable housing opportunities to materialize will be waiting a long time. He said Addenda has taken an active approach, engaging issuers and other market stakeholders to build blended finance structures where a public organization can enter a project to reduce overall financing costs and make room for institutional capital in the stack.
But rising construction and labour expenses have made that work harder.
"It's hard for new units to be affordable because everything is so expensive now," Nguyen said, pointing to projects that originally earmarked a portion of units as affordable but ultimately abandoned those commitments and sold at market price.
McKinna identified where the financing chain breaks down, noting CMHC programs require certain conditions to be met before they engage, but developers need capital well before that stage - particularly for land acquisition and early development. Charitable organizations that pursue affordable projects often lack the balance sheets to guarantee loans on bare land.
"That's where we get stuck as traditional lenders,” he said. “If some of these organizations are charitable, they don't have necessarily strong balance sheets or the ability to provide a guarantee," McKinna said. "And when you have a bare land and you're trying to finance that, even if there's a project on the horizon that's planned, you're often relying on the developer's guarantee and experience in order to underwrite that loan."
He said Addenda wants to participate more in that early stage because it represents a gap where market-rate returns remain possible.
“We could potentially provide a market level return at that stage of the construction financing because ultimately, almost every subsidized housing project is going to have CMHC involved in some form or fashion. That's just the way it is and how the market operates. So, we need to be very precise in how we participate and where we want to participate.”
Blended finance the clearest path for affordable housing
Pelland suggests the government needs to redesign programs so that public support arrives at the start of a project rather than after construction is complete. Early involvement, he argued, would draw in far more institutional capital.
All three pointed to blended finance as the most plausible path forward - structures where government guarantees, foundation grants and institutional capital each take a different position in the capital stack. Pelland said such an approach could deliver reasonable returns for developers if all parties come to the table.
Nguyen, however, flagged a basic coordination bottleneck.
"There's a lot of people interested to get involved into that space - foundations, institutional investors and all. But they’re not aware of each other," he said, underscoring without mechanisms to connect capital providers, affordable housing projects and grant-making foundations, the financing gap persists.
"The need is there and the interest is there but how do we build the bridge between those willing to contribute and those types of projects?" he said.
