FEATURE: There’s a flip side to Australia’s housing market stress – it’s created an attractive investment proposition for patient capital that has an eye for long-term value and sound sustainability credentials. AXA IM Alts for instance, a global investment manager with more than $A300 billion of assets under management. The fund has just secured an equity investment from the Clean Energy Finance Corporation. Willow Aliento spoke to both sides of the deal to understand, the strategic thinking behind the move.
When AXA IM Alts secured a $100 million investment from the Clean Energy Finance Corporation (CEFC), it took total equity commitments for the global fund’s build-to-rent affordable housing strategy in Australia to $320 million.
The initial goal of the investment was to fund the development of up to 3000 apartments, with more than half allocated as affordable key worker housing. The first project at Westmead in Sydney’s west, is already under construction, with 397 apartments across three buildings being developed in partnership with St George Community Housing.
All projects would be designed and delivered with an eye to long-term value, with AXA IM Alts stipulating design for full electrification, 100 per cent renewable energy supply and a minimum 5 star Green Star Buildings certification and an average 7.5-star NatHERS home energy rating.
The fund is also looking for more sites close to major employment hubs in Sydney, Brisbane and Melbourne.
AXA IM Alts head of Australia, Antoine Mesnage, told The Fifth Estate that ESG was part of every investment decision his company makes.
He said all projects would be designed and delivered with an eye to long-term value, with AXA IM Alts stipulating design for full electrification, 100 per cent renewable energy supply and a minimum 5 star Green Star Buildings certification and an average 7.5-star NatHERS home energy rating.
Its portfolio spans forestry, carbon sequestration, renewable energy and sustainable property.
While Mesnage observed Australian property was still largely “market driven”, this was likely to change, and that would likely mean poor-performing assets will lose value.
This includes managing about $4 billion affordable housing investments globally, with the majority in France where AXA IM Alts has partnered with the local equivalent of a community housing provider.
There are also affordable housing assets under management in the US, the UK and the Netherlands.
High performance investments, low carbon assets
“The energy and carbon efficiency of assets is critical when we build, and we increase the efficiency of assets we manage,” Mesnage said.
Taking the high road for sustainability also addressed the growing number of regulations relating to emissions in markets such as the EU.
Measures such as insisting on 100 per cent electric operation were “just basic” in terms of protecting client interests, particularly institutional investors.
While Mesnage observed Australian property was still largely “market driven”, this was likely to change, and that would likely mean poor-performing assets will lose value.
The assets manager had a “fiduciary duty to clients” to ensure assets were well designed, well operated and would maintain longterm value, he said.
Measures such as insisting on 100 per cent electric operation were “just basic” in terms of protecting client interests, particularly institutional investors.
“Energy efficiency benefits the user especially in affordable housing. And has benefits for the investor, for the long-term sustainability of the investment and impact on the long-term value of the assets. In France, below a certain level of energy efficiency you can’t even rent a residential unit to a tenant anymore.”
Long-term returns and market value
According to Mesnage, the “patient capital” of institutional investors can achieve institutional grade returns from affordable and mid-market housing in Australia.
Current frameworks enabled affordable housing to deliver similar returns to market housing, he said. The public-private partnership model was also a positive, as it enabled the fund to achieve both the desired financial and non financial outcomes.
Property in general is a long-term investment, so affordable housing is a long-term investment strategy.”
“In Australia the market conditions are right. There is an affordability challenge.”
There was also demand for both affordable and mid-market dwellings. This was compounded by the shortage of regulated – social or public – housing.
Mesnage said that while in Australia it was somewhere around 5 per cent of stock, in France it was more than 20 per cent.
“As an investor, that is an element of the decision making. There is a pool of demand under very strong pressure, there is a challenge in the market, and we can play a role.
“Property in general is a long-term investment, so affordable housing is a long-term investment strategy.”
Institutional investors running hot for resi
Mesnage said there was a growing amount of institutional investment capital looking to move into the residential sector, with a growing share of funds deploying dollars into student housing, BTR, retirement living and affordable housing.
“Some institutional investors have 30 to 40 per cent exposure to residential, we think there are many in the process of rebalancing portfolios to residential.”
It comes back to the fundamentals of ESG – environment, social and governance.
“When we deliver quality and security of tenure and location, (as a fund) you are preserving yourself in terms of value and income. That’s where we believe there’s value in Australia.”
Strategic move by CEFC
For the CEFC, the investment is another way to advance the decarbonisation of buildings.
“To effectively reduce emissions in the property sector, sustainability needs to be at the heart of all developments,” Ian Learmonth, chief executive of the CEFC said.
“Tenants can face challenges in implementing energy efficiency and emissions reduction measures in their rental properties. This new strategy is an important step in an equitable energy transition, taking an integrated approach to leverage global best practice and drive clean energy outcomes to provide benefits to tenants, and more broadly to help to address housing supply and affordability.
“This investment brings the benefits of sustainability to an important segment of Australia’s residential sector, at scale.
“Making homes more resilient, healthy and comfortable by lifting sustainability standards helps meet our current and future housing needs as we move towards net zero emissions and unlocks the advantages of sustainable living for more Australians.”
Proving sustainable is affordable and doesn’t compromise financials
CEFC head of property Michael Di Rosso told The Fifth Estate that patient capital coupled with a long-term ownership model was “best placed to demonstrate the value proposition of ESG in the built environment.”
Exemplar BTR projects demonstrated for other models, such as build-to-sell apartments, that sustainability does not compromise project financials or housing affordability
This is why the commercial property sector had been leading in the incorporation of ESG for a long time, he said. Now the move of BTR into the marketplace was an opportunity.
“Residential has always been a really interesting sector and a focus area for us, but the BTR movement has allowed transition of that long term, patient capital and long term ownership model into the residential space, so that allows projects to go further and push standards higher because of that long term ownership model.”
Exemplar BTR projects demonstrated for other models, such as build-to-sell apartments, that sustainability does not compromise project financials or housing affordability.
This also generates the data points on value and return on investment that the banks and residential property valuation have been lacking.
Di Rosso said the exemplar BTR projects also demonstrated for other development models, such as build-to-sell apartments, that sustainability does not compromise project financials or housing affordability.
CEFC’s first equity investment with an affordable housing component
According to Di Russo the investment was a first for the CEFC.
“The social housing and affordable housing historically have been more of a debt investment for CEFC, so it is a progressive, new investment for us in a field that we’ve had a focus in for a long time.
“We’ve done a little over $3 billion of total investments in the real estate market. Two thirds of that have been debt investments, acting like traditional banks or non-banks, but a billion of that has also been in equity into unlisted funds with managers, and that’s right across all the asset classes.
“So, we’ve got a really good grasp of relatively relative risk adjusted returns and how to actually invest across that capital stack.”
The underlying fundamentals of the current residential market make for a strong investment rationale, he said. There’s a situation of undersupply and affordability is an issue.
“But with all these investments commercially, it’s still got to stack up. The cost of delivering these projects and the cost of attracting capital still needs to be within what the market can pay. And I think that’s where the scalability issue has always come about for residential is, how do you how do you do that at scale and still maintain that relationship where all parties are sort of getting what they need to out of that transaction.”
When the goals and the money align
For the CEFC, that includes deploying its capital to drive down emissions, and the built environment was a prime candidate for continued reductions in emissions from energy use and embodied carbon emissions.
All electric is a good alignment
The stipulation for all-electric developments in the AXA IM Alt strategy aligned well.
While in Victoria it is now becoming standard to opt out of gas, and regulatory settings encourage this, in other states, its still a voluntary initiative.
“The CEFC’s role in the market is really around driving behaviour change, so that’s using capital to drive an outcome,” Di Russo said.
Sustainability doesn’t have to come at the cost of affordability – and that’s exciting!
“So our success factor has been working in the voluntary space and with private developers, private capital, demonstrating the commercial opportunities that sustainability and projects can drive and building momentum, or building off the momentum in the marketplace, to show that critical mass and uptake in the broader market is going down this path, and ultimately that creates a really healthy environment for policy to then fill in the gaps and capture the laggards.”
He pointed out that choosing to connect for gas to a new development was “not the best outcome” from a financial perspective, as five years or so from now, the market or regulations were likely to require it to be removed and electrical infrastructure put in to replace it.
Leaving out gas also contributes to making other sustainability aspects such as passive performance more achievable simply through saving on the gas infrastructure costs.
“The exciting part of this investment is not necessarily doing something brand new or doing something sort of exemplar, but it’s showing that sustainability doesn’t have to come at the cost of affordability.
“That you can deliver high performing assets that drive benefits, not only to the asset owner, but the underlying occupants, without impacting the commercial relationship of delivering those assets.”