Making Housing Affordable Series. HAL PAWSON. Can Institutional Funding be Channelled into Rental Housing?May 3, 2017
Channelling institutional finance into affordable rental housing has long been a ‘holy grail’ urban policy aspiration. Recent developments suggest that this may be edging towards reality.
Scott Morrison last month re-stated the long-professed ‘holy grail’ ambition to engage institutional investment with rental housing. ‘Institutional investment’ here refers to capital finance provided at scale by super funds, insurance companies, sovereign wealth vehicles and the like. Such a model differs fundamentally from the small-scale ‘mum and dad investor’ landlordism that remains overwhelmingly dominant in Australia’s private rental market, just as in most other comparable countries such as the UK.
Ramping up investment scale
In part, the ambition to draw on institutional investment here is simply a matter of scale. Certainly all too plain is that government appetite to invest directly in expanding affordable rental housing is greatly diminished, if not entirely extinguished. More broadly, regarding the wider rental market, it has been argued in the UK context that harnessing extensive institutional investment will be essential in enabling private rented sector (PRS) expansion to continue along its recent growth path. Similarly, in Australia, the leading contention is that a large volume of preferably long-term finance will be needed to meet forecast demand for additional rental housing of over 50,000 dwellings per annum – a target unlikely to be met by existing suppliers.
While Australia’s superfunds alone now control over $2 trillion in invested funds – including appreciable interests in infrastructure facilities like road tunnels and ports – there is as yet little if any input to rental housing provision. However, it is not only the potentially available quantum of funds that makes this a matter of interest. It is also the possibility that diversifying the ownership structure of our private rental market towards institutional funders could better match the quality of the ‘tenancy offer’ to the sector’s changing role and demographic profile.
Re-shaping the private rental tenancy offer
This refers to the fact that – as shown by our recent research – the PRS now houses a growing cohort of long-term tenants and, among them, a rising number of families and older people. Especially for these kinds of households, the very limited security afforded to private tenants under Australia’s rental laws is made particularly unsuitable by the standard ‘mum and dad investor landlord’ priority on capital appreciation. Maximising the ‘tradeability’ of the asset (the ability to sell at short notice, and into the owner-occupier market) is therefore paramount for these investors.
This is in marked contrast to the way that rental housing investment would likely be viewed by institutions looking for long-term, low-risk rental returns. Within this context, as seen by one UK commentator, ‘Institutions could [not only] support the necessary expansion of the sector …[but also] shift the nature of the product the sector is able to provide because long-term security for tenants translates into predictable returns for investors’.
In a similar pitch, the Treasurer’s 10 April housing policy statement noted that ‘as institutional investors tend to take a longer-term position on their holdings, this would create greater scope for longer-term leases’. Less palatable to Mr Morrison as a case for reducing reliance on ‘mum and dad investor’ provision is that the generous tax breaks which currently incentivise this activity represent an entirely untargeted – and in that sense wasteful – subsidy. If you’re going to ‘spend’ $12billion a year on supporting rental housing supply, far more effective ways could be devised to do so.
A move by institutions into holding large rental property portfolios could also be expected to give rise to new professional housing management services once a market develops.
The Build-to-Rent phenomenon
Arguments of the kind rehearsed above have been increasingly to the fore in post-GFC Australian housing policy debates. As yet, however, the only significant institutional investor moves into our rental market have involved student housing (e.g. Unilodge with over 10,000 units) and a few developer builders (e.g. Meriton reportedly now leasing out some 5,000 apartments in Sydney alone, while Mirvac has recently announced plans to enter the ‘build to rent’ market). In the UK, by contrast, recent years have seen a dramatic take-off in so-called ‘build to rent’ schemes such that BTR projects recently completed or in the pipeline are now said to total nearly 70,000 homes.
In summary, institutional investor engagement with market rental housing would be desirable for a number of reasons, including:
- Directly adding to supply (and thus dampening price effects)
- Facilitating a new long-term rental product suited to many who can’t afford home ownership and to those who prefer to rent in well-located areas
- Encouraging stable long-term investment, unlike the existing speculative investment regime, and
- Encouraging a more efficient and professionally managed rental sector.
Engaging institutional investment in affordable rental housing – no free lunch to be had
Beyond this, however, a far more important policymaker ambition is the goal of channelling large-scale private capital into the affordable rental sector, which has been in long term decline as a result of dwindling public and private investment. Indeed, we have been here before – and not so very long ago. Achieving just such an outcome was a central aim of the National Rental Affordability Scheme (NRAS) launched by Kevin Rudd in 2008. While de-funded short of its original 50,000 target, NRAS remains on track to generate a not inconsiderable 38,000 new affordable rental homes across Australia. Damagingly, however, at the very point where engagement with large-scale institutional investment was on the verge of success the scheme was abruptly terminated by the Abbott government in 2014.
Crucially, NRAS incorporated a government subsidy stream to bridge the ‘funding gap’ inherent in the economics of affordable housing – that is, the difference between the returns needed to attract private finance and the amount that low-income tenants can affordably pay in rent. As Mr Morrison’s own Affordable Housing Working Group made crystal clear in their 2016 report, ministers cannot pretend that there is any free lunch here. Only if aided by NRAS-style or other government support is there any realistic prospect that institutional financing of affordable rental housing can be made a reality.
Our 2014 research demonstrated that, with the right policy support, super funds and other large scale investors remained willing to invest in much-needed new supplies of rental housing – by offering a mix of market rentals and (subsidised) affordable rentals provided key conditions were met as follows:
- Yields comparable with competing (risk-matched) investment options
- Improved industry data on rental housing performance
- Larger scale ‘infrastructure style’ deals, and
- Predictable and enduring government policy settings.
In addressing these issues, we called at that time for renewed Federal Government leadership and set out some essential steps needed for decisive progress. Crucially, these included:
- The establishment of an industry-government expert Task Force to shape a long-term rental investment strategy suited to different classes of investors
- Replacement of NRAS with a new incentive scheme designed specifically for institutional players.
- Dedicating a share of public land sales and windfall gains from residential rezoning for affordable housing developments.
In the shape of his Affordable Housing Working Group the Treasurer has arguably already fulfilled the first of these key recommendations. Last month’s speech moreover saw him creditably backing the AHWG’s central proposal for the setting up of a government-backed financial intermediary to channel cost-effective private finance into affordable rental housing. More recently, in a welcome but all-too-rare instance of bi-partisanship, Chris Bowen has lent Labor’s backing to this plan. However, only if the other essential steps highlighted above are meaningfully addressed is a genuine policy breakthrough possible. Given the government’s fiscal constraints and with better targeting of housing tax expenditures apparently ruled out, an adequate funding source remains to be revealed.
Professor Hal Pawson is Associate Director of the City Futures Research Centre, UNSW. He is also Australasian Editor of the international academic journal, Housing Studies