Investing in Australia's affordable housing market: the current state of play

Thursday 29th March 2018

Affordable Housing

There is a huge waiting list of people seeking social housing in Australia and with evidence showing that impact investing in this space can reap reasonable rewards, we ask managing director of Affordable Housing Australia, Michael Kerans to bring us up to date with the current state of play.

Michael tells us a little about some historical solutions, shares his concerns for the current government bond aggregator model and, on an upbeat note, tells us why he feels Australia is doing better than most when it comes to affordable housing investment options.

Michael Kerans

Q&A with Michael Kerans, MD Affordable Housing Australia

There have been a range of research forums, public discussions and reviews on the topic of affordable housing in Australia, including the Affordable Housing Implementation Taskforce last year. What do you feel has been achieved in terms of solutions?

The main outcome at the Federal level was that Government committed to the creation of a bond aggregator, the National Housing Finance and Investment Corporation. NHFIC will issue bonds guaranteed by the Federal Government and then lend the money to the not-for-profit sector. Institutions that buy the NHFIC bonds will be able to say that they are investing in social housing, but in effect they will be buying Government bonds. We are all hopeful that this scheme will work, but many people in the sector are not certain that it’s the best approach to solving what is a very complex problem.

Why is that?

NHFIC is predicated on the idea that there isn’t finance available for community housing projects. I’m not sure that is the case. It could be that there is already plenty of finance available, but that many community housing projects are simply uneconomic. That means that to have a positive effect on supply of housing, the NHFIC will need to lend money to uneconomic portfolios. That could mean that we will see Government having to foreclose on charities. That’s not a great place to be and won’t help make NHFIC sustainable. If NHFIC lends only to portfolios that are economic, there won’t be new supply because it will just be funding projects that would have been funded by other financiers anyway.

"We are all hopeful that this scheme will work, but many people in the sector are not certain that it’s the best approach to solving what is a very complex problem."

What other community housing financing initiatives has Government tried since you’ve been working in the sector?

Ten years ago the sector was dominated by the National Rent Affordability Scheme. Under NRAS property developers could apply for a Federal Government subsidy to build new properties for rent to low income tenants. The scheme was closed five years ago because it was expensive for Government without delivering a good supply of properties in the right locations. Ownership of NRAS properties was too fragmented and there was even evidence of rorting by some developers and promoters. While it did create an incentive to build affordable housing, the community housing sector does not consider NRAS to have been a great success. I think that NRAS had some merit as a concept but failed in implementation.

In the years following the GFC we had the Federal Government paying state governments to build new properties under the national stimulus package. The intention was to transfer title for the properties to the not-for-profit sector, and for the properties to be used as collateral to finance even more properties. This is not working well because not-for-profits don’t generally have enough income to support new debt. The problem is a P&L issue, not a balance sheet issue. We are seeing some not-for-profits handing back the properties they were given because they don’t have the revenue to support financing.

Where is government getting it right?

In the last year or so there has been a lot of activity in NSW around social housing. Family and Community Services has SAFH, the Social and Affordable Housing Fund, which is looking like it will be a success. Social housing differs from affordable housing in that tenants receive some social support services as part of their arrangements. With SAFH, the State Government will enter into service agreements with housing providers to supply social housing over a 25 year period. Housing providers use these long-term cash flows to underwrite their financing. It’s a good model.

Cbus, due to the nature of the membership base, have been actively involved in the affordable housing debate. Do you feel this is an area that all super funds, regardless of their membership, should be investing in?

It’s great to see super funds like Cbus advocating for government attention and better policy for affordable housing. I know that people in the community housing sector are extremely grateful for their efforts. My concern is that some super funds are committing to the bond aggregator model when it may not generate new supply. I appreciate that the bond aggregator model is an easy option, in that risk transfers to government, but I think that super funds need to argue for alternatives if they are to help the community housing sector get policy settings that make a genuine difference.

"I think that super funds need to argue for alternatives if they are to help the community housing sector get policy settings that make a genuine difference."

Do you see (or is there already) an investment vehicle for retail investors? What could it look like – or what does it look like?

No, there is not much out there at the moment that I’m aware of, other than some offerings related to defence housing. It’s difficult to see what a retail investment structure might look like while Government policy is in flux.

Companies like MIRVAC are now being given the green light from councils to incorporate ‘affordable housing’ within new developments. Do you have an opinion on whether this is moving in the right direction?

Pretty much all stakeholders in the sector like inclusionary zoning. So yes, it is headed in the right direction, but much more needs to be done on the planning side. If we are to make a meaningful difference in the supply of housing, we will need Governments to do more. Here we would be talking about things like value capture, where Government receives the rezoning premia that currently accrue to private titleholders.

Late last year, Cananda released its very first national housing strategy which outlined housing as a basic human right. Do you think Australia should follow in Canada’s footsteps in this respect?

That’s more a political question than a financial one. I’m a big leftie and very much agree with the idea that housing is a basic human right. As a society we have some emerging trends around not just access to housing, but inequality issues generally. We are going to see more focus on these question as the trends play out.

"If we are to make a meaningful difference in the supply of housing, we will need Governments to do more."

Do you know of any other countries that have set up a system for Affordable Housing that have proven to be successful for institutional investors?

It depends on how you are judging success. Some countries, like the UK and Canada, report some good headline numbers for institutional participation. This is a success in that investors are getting money put to work in the sector, which looks good in annual reports and press releases, but there is not a great deal of evidence that this is resulting in new supply of dwellings. The USA is doing well in some cities, where institutional impact investing programmes have delivered new supply.

Despite our false starts, I think Australia is doing better than most. We have been willing to try different models and have learnt some good lessons along the way. We have some really good people working in the community housing sector, super fund interest, and political will for finding innovative solutions. Perhaps in years to come other countries will look to Australia for lessons on institutional investment in community housing.

Michael Kerans worked in property funds management for more than 20 years before starting Affordable Housing Australia in 2008. AHA helps not-for-profit community housing providers finance property portfolios with non-bank institutional capital. Michael is currently advising St. Vincent de Paul on the project financing of a portfolio of 600 dwellings in NSW.

Find out more about Affordable Housing Australia here.

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