The Fifth Estate’s recent Let’s Hack Housing Surround Sound event was bursting with ideas on how to finance affordable housing – some we’ve heard before, others refreshingly new. There were floor space and tax incentives for developers, the re-labelling of affordable housing as economic infrastructure to attract super funds and other investors, pop-up communities subsidised by government and the private sector, and new projects containing everything from market-priced housing to disabled and aged care housing in the one development.

The ideas may have been wide ranging but the goal was the same – to grow the stock of social and affordable housing as quickly as possible.

And the search for solutions to Sydney’s housing affordability crisis inevitably circles back to finance. As a society how do we pay for it? This is a particular problem in a city renowned for property speculation largely unrestrained, and sometimes encouraged, by government policy.

Australia has super funds with an abundance of money to invest but an expectation residential property should achieve similar returns to commercial property. On the government policy side, incentives to invest in affordable or social housing have been in short supply, while mechanisms such as negative gearing have, many argue, fuelled rampant property speculation.

Redirect land profits to affordable housing

One way of funding affordable housing would be to clip the wings of property speculation and use some of the massive profit enjoyed by landowners when their land is rezoned for higher density housing, said Professor Peter Phibbs,  geographer, planner and social economist from the University of Sydney.

Professor Peter Phibbs (speaking) with panellists (L-R) Stephanie Barker, Greater Sydney Commission; Wendy Hayhurst, NSW Federation of Housing Associations; and Nigel Edgar, Frasers Property Australia.

“An example is in Marrickville, along the Sydney to Bankstown [train] line, where it has gone from single storey houses to four and eight storey apartments. The uplift there for a really crappy house is probably one million to three million dollars for the owner. You simply clip the ticket on that uplift and some of that goes into the affordable housing cost. You can get to 10 per cent [affordable housing] without whacking viability,” Phibbs said.

“A lot of small landowners would be happy with less profit. It is better to use the profit for the greater good than shovel it into the pocket of a landowner who’s pretty cashed up anyway because they own a house in Sydney.”

Carmen Osborne, development manager at Allam Property Group, agreed that a mechanism for capturing profit would make a difference.

Carmen Osborne

“Anyone who doubts we need transparency only has to think about the Northwest rail link – a significant piece of infrastructure where a lot of the landowners bought their piece of land for $400,000 in 1996 and were able to sell it for $12 million [when it was acquired to create the rail line],” Osborne said.

“That $12 million was funded by the taxpayers of NSW – no money went back into the rail infrastructure. This is the best example we’ve got of why we do need a transparent mechanism so it can be captured at the sale stage and then, if as a consequence you get a further upzoning, it needs to be captured again.”

Recognise the economic benefits of affordable housing

The recent announcement by the Greater Sydney Commission of a 5-10 per cent mandatory affordable housing target for all new housing developments when the land is rezoned for higher density was discussed at length.

Many thought the target was too low and that it was time to look at the economic benefits of investing in affordable housing.

Steve Driscoll, head of CBD projects portfolio at UrbanGrowth NSW, said as a government entity UrbanGrowth should go further than the minimum target.

Steve Driscoll, UrbanGrowth NSW

Wendy Hayhurst, NSW Federation of Housing Associations chief executive, said her organisation was arguing for closer to a 30 per cent target on government land, and that government needed to recognise the economic benefits of investing in affordable housing.

Wendy Hayhurst, NSW Federation of Housing Associations

There was an economic rationale for government investing in more affordable housing, she said. People were spending 60 per cent of their income on housing, but where could that money go instead?

“It’s going to be a virtuous circle, I think. If people pay more moderate amounts of rent, they’ll invest,” she said.

The audience also heard that Sydney was losing people to Melbourne and Brisbane in search of cheaper housing.

Repackage as economic infrastructure to attract super funds

Flowing on from this economic rationale is the idea to re-label affordable housing as “economic infrastructure” rather than property. Then you can recalibrate the financing expectations, said ex-Frasers Property executive Robert Pradolin.

Pradolin is now working with a group of super funds and others to try to find a way of funding affordable housing projects.

Robert Pradolin

“Frasers have been doing social housing for the last 10 years in Victoria so we gotten to understand a bit about that area … One morning recently a financier was talking to us and said, ‘We see this as key infrastructure,’ and a light bulb went on,” Pradolin said.

He noted a report from SGS Economics & Planning that found the benefit-cost ratio of well-located social affordable housing was 7:1.

“We should drop the word social housing and call this economic infrastructure – it’s actually good business. What we need to do is some modelling around this … the cost-benefit ratio is far greater than any road I’ve seen.”

Re-labelling affordable housing as economic infrastructure, along with some government incentives, may also solve the problem of how to attract super funds into the sector. Currently super funds compare the returns on housing to those they can get from commercial property and the numbers don’t stack up.

Specialist property funds manager for superannuation funds, ISPT, has been looking for a way of investing in social and affordable housing for super funds for some time. David McFadyen, fund manager, development and opportunity funds at ISPT, said he’d been asking developers and governments why social housing is “dressed up as property”, therefore requiring a higher level of return.

David McFadyen (centre), ISPT with Garry McLean, PPB Advisory (left) and Jason Twill, UTS and Urban Apostles (right).

“If we can take it out of the property area and bring it down into a lower return area with the security government can offer I think there’s a far better chance for social housing. And with affordable housing, leave it to us and we’ll sort something,” McFadyen said.

With the residential sector estimated to be worth around $5 trillion, super funds are keen to tap into the sector.

“From our perspective, in an industry worth $2 trillion that allocates about 10 per cent of assets to property, it becomes a key opportunity for us to think about property other than commercial, retail and industrial. We’re looking for asset classes to supplement what we see as diminishing returns out of the traditional commercial sectors.”

The impediment is investment returns. ISPT says it has a fiduciary obligation to invest on behalf of its investors so is chasing return.

Returns on residential are very heavily skewed to capital growth with income yields of around 2-3 per cent, probably less than two per cent on a net basis. Defence Housing, McFadyen said, quotes about 2.25-2.5 per cent for its portfolio.

“Therein lies a big challenge for us – to have the bulk of the return coming from capital growth rather than from income, and therefore it struggles to match off against commercial property. Then you put on another overlay, which is this affordable housing component and down into social housing.

“For us to take a long-term view I think we do need to have regard to the communities we’re building. For our commercial assets we take a 15-20 year view. Our focus is not only on trying to generate a return profile that’s attractive to our investors but also to have product on the ground that will be sustainable in an investment sense.

ISPT would like to see residential developments with a mix of market value housing and affordable/social housing to establish diverse, healthier communities. McFadyen points to the Fraser redevelopment of a Carlton housing estate as a good example  – a mix of affordable, private market housing, aged care and a retirement complex.

“It was a terrific mix. I think from an investment perspective the economics will take care of it once these things are established.”

Developer incentives critical to boosting supply

There was strong consensus that investor incentives were critical to attracting investment. Jason Twill, innovation fellow at UTS and director at Urban Apostles, pointed to investor incentives that had been successful in boosting affordable housing supply in New York, where the inclusionary zoning target was set at 20 per cent.

Jason Twill

These include private sector incentives such as tax-exempt bond financing, different ways of acquiring land and government property, and below market housing solutions where community housing providers partnered with developers.

“I think we need to go way beyond 5-10 per cent,” Twill said. “I’m a big fan of mixed income tenure where you have market rate and moderate rate, which is key worker and below, at 20 per cent. There are some great finance backers in New York. They had amazing transparent programs to create mixed-income tenure in the city. Fast forward 10 years, even with those great programs, you have so many key workers being excluded from cities around the world.”

He believes the affordability crisis has merged with the emerging sharing economy to generate new models where a lot of young smart people are creating their own “urban colonies”.

“I call these deliberate housing, where groups of people come together as collectives, avoiding developers altogether and working directly in partnership with government.”

International examples include Berlin-based Baugruppen and in London a self-built collective that facilitates residents partnering with an architect or developer to create affordable housing, or writing to the government to request land.

“That’s driving a full spectrum of participatory design very much akin to Nightingale in Australia,” Twill said.

“End users and/or homeowners can work together with the architect and development facilitator as a team to design something they want, not just speculative open market with estate agents telling you what kind of kitchen you want. You can design out a lot of superfluous features and drive the cost down to the point where it is intermediate housing, which is that gap between social and market value.

“I think Australia’s got some fantastic community housing providers and it’s got a huge speculative market driving crazy prices. There is a huge gap between these.”

Gary McLean from PPB Advisory said incentives from government were essential for affordable housing to become a serious asset class. He pointed to the US and Canada where once government brought in tax concessions this happened.

Garry McLean, PPB Advisory (speaking) with (L-R) Jessie Hochberg, Nightingale Housing; David McFadyen, ISPT; and Jason Twill, UTS and Urban Apostles.

“Without a doubt for it to become an investment class we need capital. And for capital to come in there needs to be some attraction. We need to move beyond community housing groups and we need incentives from the government such as tax credits.

But there also has to be scale if the institutions are going to come in. They want to invest but don’t know how its going to work for them, McLean said.

“What worries me in NSW is how do you get scale. In Queensland and Victoria you’ve probably got half a chance but in Sydney it’s very, very hard … to find reasonable tracts of land, let alone large tracts of land. We’re not talking 50 [units]. We’re not talking 100. We’re talking 5-10 times that.”

Making it viable

Nigel Edgar, general manager – residential at Frasers Property, said developers’ profits would be cut by around 30 per cent with a five per cent affordable housing component in a project. This means incentives such as 10 per cent extra floor area are essential.

Nigel Edgar addressing the audience

“If you do that you break even as a developer – I don’t think anyone’s going to notice an extra floor on a 10-storey building.”

Reducing costs through size, amenity and innovation

Another answer to making housing more affordable is reconfiguring size and focusing on liveability and amenity.

“In north-west Sydney 10 years ago the expectation of a lot size was 1000 square metres  – now we’ve got people in Blacktown buying dwellings on 120 square metres, in walking distance from the train station and they’re really happy to have shared amenity. It’s all about liveability nowadays,” Edgar said.

The expectation of the market is shifting – where developers used to build predominantly four bedroom homes they’re now doing a lot three and two bedroom homes and one bedrooms with fonzies [named after the Fonz character from the TV show Happy Days who lived in a unit above the garage].

“The market will adapt very quickly – it’s about getting the shackles off for innovation.”

A good example was the Clean Energy Finance Corporation helping Australand establish the first blackwater treatment plant in Sydney. Now operational, the plant is providing discounted water, both potable and recyclable, to residents. Another is the innovative energy regeneration and efficiency features at Central Park.

“There’s lots of opportunity when it comes to embedded energy in this marketplace. We just need the flexibility in regulation to be able to work our way through some of those pathways. So we’re embracing it,” Edgar said.

Innovation and creativity are the features of architect Alex Symes’s Big World Homes idea. Described by Steve Driscoll as the love child of a previous UrbanGrowth NSW event and Symes, Big World Homes taps into unused land across the city. Working with government and developers Big World aims to fill these pockets of land with DIY off-grid tiny homes made from CNC plywood and lightweight cladding and insulation materials.

Alex Symes explains Big World Homes

“It’s not seen as a large scale-change to financing, taxation, amenity, but it is seen as an intervention into unused lands,” Symes said.

“We want to create transitional housing so that people who are currently always in a renting cycle will be able to afford their first home after three or four years of living in a pop-up community.”

Abdul Khan, ASK Property
Consultants

And from Abdul Khan of ASK Property Consultants, who is part of a project to develop a vertical green mixed-tenure village in Sydney that includes market-priced housing along with affordable, disabled and retirement housing. It contains around 250 apartments and is “seriously green”, with an aim to be off-grid.

He also said there needed to be more of a focus on affordable ownership models, rather than just rental.

“We need to find mechanisms to allow people to go from social and rental housing into ownership and the superannuation funds need to take part in this. There are facilities out there where they can invest that will deliver ownership to these people. Given sufficient leeway in the planning stages, [it] allows you to deliver perhaps 20 per cent below market value,” Khan said.

Taking matters into their own hands

But citizens are tired of waiting for answers from government or the market. A group of residents from the inner city emphasised the need for more creative housing for retirees, their spokesperson pointing to the lack of options for retirees:

“We’re looking at our aged care, and we are looking at what’s available at the moment and going, ‘Not really keen on that.’ And we’re exploring options about co-housing … and trying to find a better way to live lightly on the planet, rely on each other as opposed to relying on the government … because there’s an awful lot of us coming.”

And that’s the real takeaway from this robust discussion – the demand and need is there in spades. So are the ideas and finance mechanisms. The missing piece is a serious commitment to meet that demand, from government, financiers and most developers.

It’s on the cards – the market won’t wait. The Uber of affordable housing may well be here already as innovators young and not so young get together and take charge of their own destiny and future housing needs.