In October 2020, under Citigroup's new Social bond Framework for Affordable Housing, the bank issued its inaugural social bond for housing. At $2.5 billion, it is the largest social bond issued by a private sector issuer. Citi's Richard Gerwitz, Elissa Steinberg and Phillip Brown spoke with Environmental Finance to talk about how the bond will finance affordable housing for low-and moderate-income populations in the US.
Environmental Finance: How does Citi's Community Capital Business finance affordable housing in the US?
Richard Gerwitz, co-head of Citi's Community Capital Business: There is an affordable housing shortage in the US, most dramatically affecting those at the lower end of the income spectrum. As a result, many families are severely rent burdened, spending more than 50% of their income on housing.
Citi's Community Capital Business is the primary means by which Citigroup provides community lending and investing in the communities in which we operate. This includes investing in factories that create jobs, healthcare facilities, schools and other social initiatives. Affordable housing finance, however, is where we focus most of our efforts.
In the US, public-private partnerships are the primary means used to build and preserve affordable housing and Citi has been the largest private lender for each of the last 11 years. We lent over $7 billion to affordable housing projects in 32 states and territories in 2020 alone.
The proceeds from the social bond issue are being used to fund the loans that finance the construction, rehabilitation and preservation of affordable housing. We offer acquisition, construction, and permanent loans. We also invest a considerable amount in the equity needed to finance such housing, although this is not part of this particular social bond issue.
EF: What has been the impact of the affordable housing social bond so far?
RG: We financed 229 affordable housing projects just last year. However, one that stands out for me is the $34 million construction loan we made for a project known as 833 Bryant in San Francisco. It features 145 new units of permanent supportive housing for people who are currently experiencing homelessness.
There is, unfortunately a large homeless population in San Francisco which, when coupled with the extremely high cost of construction in the City, makes it a difficult problem to solve. The cost of building a unit of affordable housing in the City can approach $800,000 a unit and, like any construction project, it takes a considerable length of time from inception to delivery.
To address this, 833 Bryant is being built with modular housing that is constructed offsite in a factory. Offsite built modular housing can bring the cost and production time down substantially. As such, the cost and time needed to build 833 Bryant is going to be about half what is typically required in San Francisco.
EF: Has the Covid-19 pandemic impacted the projects covered by the social bond?
Phillip Brown, Citi's head of sustainable capital markets: The pandemic has most dramatically impacted lower income populations and so we have been working with the developers to monitor the challenges facing renters. Where necessary, we have provided mortgage forbearance. However, our experience has been that – on a portfolio wide basis – delinquencies didn't increase dramatically, and we have not experienced any defaults specifically related to the pandemic.
RG: The developers we work with are mission-driven people. They know their residents quite well and, when problems arise, they can help their tenants work through the process of getting rent relief, working out a payment plan or filing for unemployment. For many of these projects, rent collection has stayed relatively constant and high.
EF: How did Citi support diversity and inclusion through this bond issuance?
Elissa Steinberg, Citi's head of funding: This offering is consistent with Citi's Action for Racial Equity initiative, which is a multi-pronged $1 billion initiative designed to help close the racial wealth gap. This comprehensive approach to advancing racial equity includes a goal to strengthen Citi's own policies and practices, including the expansion of the firm's own core business activities with minority-owned broker-dealers and depository institutions.
For our bond issuances, we often craft a syndicate of minority-, women- and disabled veteran-owned broker-dealers. This has been a hallmark of our programme and, since 2015, we have worked with over 30 firms owned by underrepresented minorities, women and veterans.
EF: The scale of this social bond impressed the Environmental Finance Bond Awards judges. What is the future for affordable housing as an asset class for social bonds?
PB: Affordable housing is a well-accepted use of proceeds within the social bond market and is becoming a well-established social asset class in the US. Investor support has exceeded our initial expectations. In the past two years we've seen a growing investor focus on addressing income inequality and the affordable housing theme resonates well with these social priorities. Much of the recent volume growth in social bond issuance has been in financing rising furlough and unemployment costs. With this bond we are bringing diversification in the social theme and doing it in benchmark size.