Making Housing Affordable Series. ROB KOCZKAR. How institutional investment could help housing affordability03/05/2017
Competition between first home buyers and investors is dominating the discussion about housing affordability, but it’s what’s happening a few rungs down the property ladder that is perhaps the greatest cause for concern – the challenges for people trying to rent in major cities and low-income earners waiting for social housing.
Paradoxically, greater institutional investment could be key to easing their housing stress.
It’s official, housing affordability is topic du jour again. It is water cooler and barbeque stopper, all rolled into one. For many Australians, having a place to call home is unattainable or seemingly out of reach.
Shortage of social and affordable housing stock
There is a shortage of 400,000 homes across the country that are both affordable and available to low and very-low income earners.
The reasons for the shortfall are complex but there are two core issues.
First, there is not enough suitable – by design, location and type – social and affordable housing stock. In this context ‘affordable housing’ is housing which is rented out at a discount to the market price and only people with an income below are certain threshold are eligible to apply.
Second, where there is available affordable accommodation for those on low incomes, the homes aren’t available due to higher income earners occupying the lower-cost end of the rental market.
Social housing waiting lists are also long, and there are now over 200,000 people eligible for social housing who are unable to access a home. This means people are staying in short stay accommodation like motels or transitional arrangements or spending larger amounts than they can afford on rent. On any given night, there are also over 105,000 people experiencing homelessness, whether that be sleeping rough, couch surfing or sleeping in overcrowded, unstable environments.
State governments are currently experiencing unsustainable operating deficits on their aging public housing and are seeking innovative ways of providing financially sustainable social and affordable housing.
This complex situation requires a whole range of solutions, which means that government, the private sector, institutional investors and non-profit organisations all need to work together in new and collaborative ways to achieve housing affordability in Australia.
Need to improve access to institutional funding
Currently, Australia has a mismatch between the supply of appropriate capital and the underlying demand for social and affordable housing. While restricted funding is not the only contributor to the chronic shortfall in social and affordable housing stock, improved access to capital is an important piece of the puzzle in addressing the challenge.
There is tremendous potential to unlock institutional capital to help bridge the gap in supply. The case study below provides an example of this.
|Case Study – HESTA
In 2015, HESTA committed $30 million to create a dedicated fund managed by SVA which is the largest single commitment to the local impact investment market made by an Australian superannuation fund to date. SVA and HESTA designed a dedicated fund, the Social Impact Investment Trust, to allow HESTA to make direct and indirect investments in a range of businesses, housing projects and social impact bonds that deliver both financial returns and identifiable and quantifiable social impact. HESTA’s commitment therefore represents a milestone in terms of size, source and social commitment. The fund is also notable for several innovations, its impact-based incentive structure in particular. In 2016, HESTA made a $6.7 million investment in Horizon Housing, a community housing provider operating in south east Queensland, which is focused on increasing the supply of social and affordable housing and helping low income earners achieve home ownership in targeted areas.
Compared with overseas jurisdictions including the United Kingdom and United States, the scale and sophistication of social and affordable housing finance in Australia is limited. Australia’s largest non-profit community housing providers (CHPs) each typically own or manage around 2,000 to 4,000 dwellings, compared to CHPs in the UK managing between 20,000 and 150,000 dwellings.
This fragmentation results in less economies of scale for providers and a perception of increased credit risk from institutional investors, limiting the ability for CHPs to access low cost capital over longer terms. Institutional investors are seeking large scale (greater than $100m) transactions lending (or investing) to organisations with a recognised credit rating.
By contrast, non-profit housing associations in the UK have secured £62 billion in loans from two million dwellings that have been transferred from the public sector. The housing sector in Australia is not yet at this size or sophistication.
The other challenge in attracting private capital is that rental yields are significantly below market returns, making it a less attractive investment. For this reason, there’s a key role for government to play to enable the flow of private capital, particularly institutional capital, into the sector. As housing policy is being developed between the Commonwealth and the States, governments should determine which combination of these levers will optimise social impact investing to stimulate and deliver new social and affordable housing stock. Our suggestions for these levers are highlighted below.
Levers for new social and affordable housing
|Lever||Details and examples||Gov’t role||Scale of Impact|
|Construction or development costs||– Innovative design and build concepts such as modular housing– Large scale development capability of CHPs to reduce project costs||N/A||LOW|
|Financing costs||– Interest rate subsidy – equivalent of 2-3% as a cash transfer– Government guarantee administered by a financial intermediary||Federal and State||MEDIUM|
|Financing terms||– Long dated financing tenor up to 15-20 years (funding certainty for borrowers)– Lower debt servicing hurdles where prudent||Federal and State||MEDIUM|
|Management rights transfer||– Leverage rental income stream to develop new stock– Limited by maintenance liabilities on existing stock||State||MEDIUM|
|Planning regulations||– Inclusionary zoning – 10-15% based on LGA needs assessment– S.94 contributions waived for CHP residential development projects||State||MEDIUM|
|Income support||– Commonwealth Rent Assistance moved to floating mechanism linked to market rent||Federal||MEDIUM/ HIGH|
|Tax incentive||– Replacement mechanism for National Rental Affordability Scheme– Tax credit for new social and affordable housing||Federal||HIGH|
|Land costs||– Partnership between non-profits, land banks and CHPs with alignment of mission and purpose– Land gifted or leased at peppercorn rent from the State||State||HIGH|
|Land or stock ownership transfer||– Title transfer of social housing to CHPs with leverage commitments– Medium-long term leases (20-30yrs) of social housing to CHPs with land swap||State||HIGH|
Public policy inconsistency
Over the past 20 years, respective governments have pulled several of these different levers with varied levels of success. One of the big frustrations of both the social and affordable housing sector along with institutional investors is the frequency in which public policy has changed and therefore created uncertainty for all stakeholders. Putting aside the technical difficulties of the policy initiative, the National Rental Affordability Scheme is a recent example of a program designed to provide incentives to investor to build new homes rented out at below market rate. While there were undoubtedly issues with NRAS, the decision to wind it down without a replacement undermined investor confidence.
Institutional investors are attracted to markets and assets with stable regulatory environments and reliable cash flows. Short term measures and inconsistent policy direction creates uncertainty that makes investors nervous and unlikely to invest in such a market.
Unlocking institutional capital at scale
Social Ventures Australia (SVA) has had a view for some time that institutional funds can be part of the solution to the affordable housing challenge in Australia. From the Treasurer, Scott Morrison’s recent remarks at the Australian Housing and Urban Research Institute event, it appears the Commonwealth Government may also have reached a similar conclusion.
The UK has successfully implemented a housing finance aggregator which has proven to be an effective and practical financing solution. It would be an efficient way to make a significant contribution to the pipeline of social and affordable housing in Australia.
A housing finance ‘aggregator’ is one solution for attracting more private capital into the affordable housing market. This model addresses two of the levers in the above table, financing costs and financing terms, that could contribute to a better flow of capital into the sector.
From our research and work with institutional investors, there is strong interest in the private sector to invest in social and affordable housing if the right conditions and regulatory environment is in place. The Treasurer outlined that there is a natural alignment between superannuation funds who are managing retirement savings on behalf of police, nurses and teachers to invest in key service worker housing targeted at these same people. This is demonstrated by HESTA’s commitment to the sector and ongoing investment into social and affordable housing through the Social Impact Investment Trust.
Whilst not a silver bullet, this model is a viable solution that would essentially aggregate housing providers’ finance needs. The model would enable housing providers to access funding at lower interest rates and for longer terms, unlocking desperately needed ‘fit-for-purpose’ funding into the sector, whilst contributing to the stock of social and affordable housing across the country.
Importantly, this solution is affordable for the Federal Government and encourages them to act as an enabler to improve housing outcomes rather than just as a funder, landlord or developer.
The proposed model operates within the larger housing ecosystem, so government has the potential through policy changes within that broader system to support the model’s operation. The best outcomes will be achieved through mutually enforcing initiatives at both the state and Commonwealth levels. For example, the value of a finance housing aggregator is increased if there are planning policies that encourage large scale mixed tenure redevelopments as in NSW (Communities Plus) and support for rental income (Social and Affordable Housing Fund).
Explaining the Australian Housing Finance Aggregator
The Australian Housing Finance Aggregator (AHFA) would be a similar entity to the Housing Finance Corporation in the UK which has demonstrated the successful role of an aggregator in stimulating social and affordable housing finance.
The Housing Finance Corporation is the foremost aggregating funder to UK housing associations. It has held an A+ credit rating since 2003 and as at 31 March 2015, had outstanding loans exceeding £4.15 billion in value.
A not for profit entity, the AHFA would liaise with social and affordable housing providers (including CHPs, and others) to determine the amount of debt they seek to raise. It would aggregate these funding needs and source from superannuation funds and other institutional investors. The funds would be loaned to the relevant social and affordable housing providers in return for ongoing interest payments and the return of capital at the end of the loan life.
Proposed aggregator model
The AHFA would have both sector and financial expertise and resources and would:
- carry out credit assessments on appropriate housing providers;
- issue debt instruments of different maturities to institutional investors;
- liaise with regulatory bodies to ensure improved governance and regulation of the social and affordable housing sector; and
- ensure compliance to guarantee housing providers can meet their debt obligations.
Benefits of the AHFA
The establishment of the AHFA would generate a series of benefits for various stakeholders, generating improved outcomes for those most in need:
- Housing providers would have access to capital which is more fit-for-purpose, that is over longer tenor (of 15-25 years) and on lower cost terms.
- Institutional investors would have a financing vehicle to achieve long term secure and stable returns as part of their portfolio whilst also supporting the social and affordable housing sector. The AHFA would have investment characteristics such as a Government-backed credit rating with appropriate risk adjusted returns that are like other asset classes that institutional investors are familiar with.
- The Commonwealth Government would likely play a short-term support role to help establish the AHFA. This would require some form of credit enhancement, potentially a full or partial guarantee, for a finite period as the AHFA scales up and builds a portfolio of stable, predictable and risk-weighted investments. The administrative cost of the Government increasing regulatory oversight could be minimised by providing the AHFA with powers of intervention over poorly-performing borrowers. This would provide de facto regulation of CHPs who use the aggregator until funding to the sector increases in scale and sophistication and an independent regulator could be established.
- There are several state government initiatives currently underway that would complement the AHFA’s function. These include but are not limited to the Social and Affordable Housing Fund (NSW), the Communities Plus Program (NSW), the Connected Living Initiative (WA) and the Renewal SA transfer program (SA).
An AHFA model is only one piece of the puzzle of the larger housing system required to address the chronic shortfall in social and affordable housing. However, this model is a proven and practical solution that could greatly contribute to increasing the pipeline of social and affordable housing across the county.
State and Federal governments have expressed a desire to increase the supply of affordable housing as a means of achieving better and more sustainable economic and social outcomes. Given the budgetary constraints that governments face, the private and non-profit sectors have an opportunity to collaborate in this solution.
The investment decisions of Australia’s $2 trillion superannuation industry could positively impact the lives of real people who are struggling to find a place to call home. Even a small slice of this institutional capital invested into the social and affordable housing sector could make a significant contribution to the 400,000 properties needed across the county, but more importantly, it has the potential to also improve prosperity, inclusiveness and social outcomes for vulnerable Australians who do not currently have a home they can afford.
Rob Koczkar is the CEO of Social Ventures Australia (SVA), Managing Director of Adamantem Capital and a non executive director of Goodstart Early Learning. Rob has extensive experience in investing and management consulting along with a deep understanding of the social purpose sector.