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

Following is part 2 of an edited transcript of the Surround Sound on Housing: affordable/sustainable/disruptive held on 5 December in Sydney.

PANEL TWO

David McFadyen, Fund Manager, Development and Opportunity Funds, ISPT
Garry McLean, Partner, National Real Estate Leader, Social and Affordable Housing sector specialist, PPB Advisory
Jason Twill, Innovation Fellow, School of Architecture, UTS; Director, Urban Apostles
Jessie Hochberg, General Manager, Nightingale Housing; Robert Pradolin

MC Patrick Fensham, principal and partner, SGS Economics and Planning

CAN WE AGGREGATE COMMUNITY HOUSING ASSETS?

Pat Fensham:

Wendy Hayhurst mentioned the discussion that the treasurer was having with state counterparts on Friday about aggregating the assets of community housing providers. Does anyone here have a view on whether that might assist community housing providers to gear up with their stock and their obligations.

Pat Fensham (right)

Garry McLean:

We spent probably the last five to six months on a social and affordable housing program in Sydney, were looking for a couple of hundred million. So that was a significant amount. With every bank we went to, and certainly the major banks, it was an enormous struggle –number one, when the banks aren’t lending construction finance and number two, when they don’t clearly understand social housing.

So from that point of view when we did a bit of a roadshow around them all, what we did understand at the end, was it always going to be a challenge when you’re looking at trying to pull together three to four departments in a bank – like the government advisory side, infrastructure and the property group.

Garry McLean (second from left)

But out of that journey what they all did say, which was quite compelling, and that is that the cooperative housing groups will need to merge; we need to see scale, we must see scale and if we don’t have scale it will be very difficult to bank a lot of the proponents. So that’s probably where it sits. It’s going to be inevitable. We already heard Wendy mention the need for some sort of intervention in regards to getting scale and size and supply. And I think we’re going to see a lot of mergers, amalgamations and coming together of those sorts of groups to ensure we can have a sizeable operation that can deliver scale.

Pat Fensham:

Jason, you mentioned some innovations from the States before. What are you seeing? What is the global perspective?

AVOIDING THE DEVELOPERS AND DOING DELIBERATE HOUSING

Jason Twill:

I’m a big fan of mixed-income tenure, where you have market rate, moderate rate – which is key worker – then low. There was some great finance mechanisms in New York that were easy for me to access as a young 20-year-old working for developers. Fast-forward 10 years to the affordability crisis, and even with those great programs, you have so many key workers being displaced from cities around the world.

I think the affordability crisis merged with the emerging sharing economy has generated these new models where I feel a lot of young, smart, intelligent people are creating their own little urban colonies – what I called deliberate housing, where groups of people are coming together as collectives. They’re avoiding developers altogether. They’re working directly in partnership with the government.

Jason Twill

It’s a very mature market in Berlin, Germany with Baugruppen. London has a self-built collective where you can go in and get partnered up with an architect or a developer to help facilitate that sort of project. It’s participatory design very much akin to how Nightingale is evolving here in Australia, which I think is Australia’s response to the same issue.

The end users, the homeowners, get to work together with the architect, with the development facilitator and a team to design something that theywant. It’s not just speculative open market, estate agents telling you what kind of kitchen you want. It’s directly going to the people who want to buy these units. So you can design out a lot of superfluous features, and drive the cost down to a point where it serves what I call intermediate housing.

I think Australia has some fantastic community housing providers, and it’s got a huge open market, speculative, driving crazy prices – I just bought a house here and I got hosed, and stamp duty is insane.

I became an urban refugee in Manhattan with a wife and child. We had to move to Seattle, Washington, which is 30 per cent lower cost of living and lower housing costs. My salary was a bit lower but it went a lot farther in that city. Austin, Texas; Cleveland, Ohio – all these other cities are capturing that urban migration of key workers. That’s what I said earlier is that it’s an economic strategy, because Australia only has like five major cities. They’re amazing cities, but there’s a lot less choice in this country, so people in that bracket becoming an urban refugee might fly across the world somewhere else.

THE NIGHTINGALE MODEL

Pat Fensham:

Peter Phibbs before told us before about two-bedroom apartments with 12 students, and you’re mentioning here that there’s this gap in the market. I think Jessie is working in the space looking at innovations in terms of product.

Jessie Hochberg:

What I want to do is frame this discussion a little bit more. So housing is a human right. And what we’re doing, and we’ve been talking about it like an asset class, like a product. So there’s fundamentally something wrong there. Where you talk about this 5-10 per cent of affordable housing. What’s the other 90 per cent? Seriously, it’s completely unaffordable housing.

Jessie Hochberg (left)

Wendy talked about her kids, that they’ll probably be alright, and they probably will while they’re working. But recently research by an academic called Dr Andrea Sharam found that our housing system is the single biggest factor contributing to impoverishment. We’ll provide maybe 10 per cent and you’ll have maybe that other 40 per cent who can afford to rent while they have good incomes, and then what happens in retirement? They will radically slide into that bottom 10 per cent, which will grow much larger, then 50 per cent of our entire population will need this subsidy. So Nightingale is looking at addressing this in a very grassroots way, and within the market.

It looks at the whole market, the system for provision of housing – I shouldn’t really say that because it doesn’t really provide housing, it provides assets. Jeremy [McLeod, Breathe Architecture], wanted to challenge this from a designer’s perspective.

But honestly I think it was just from a citizen’s perspective – seeing the system was broken and using your profession to try to address that. So looking at the system – what are the inputs to housing? You need money to buy land, you need equity, and it’s reasonable to pay a profit on equity. That’s totally reasonable.

But what’s not reasonable is to scale it up as high as you possibly can, taking away this service of housing from somebody, or making it so crap that it’s the dog-boxes of Melbourne that we’ve talked about before.

And I’ll just make a comment on that, Nightingale Housing, we looked at the plans of 30 developments within eight kilometres of the CBD in Melbourne, and we found that 100 per cent of them don’t meet any of Sydney’s design requirements. Wow.

I’ve personally gone to see one of these as someone trying to rent an apartment close to my workplace in the CBD. And I had to ask the real estate agent if it was possible to fit a bed in the bedroom. And do you know what he said to me. “I’m not sure. Is it a queen bed or double or single?”

And then, literally, this is what he said to me: “This place is sort of just built to sleep in, if you’re like mainly living in the city.”  I couldn’t find the kitchen because it was behind the door! And I’m not in any way disadvantaged, but that’s my own experience within the housing market.

So Nightingale Housing looks at all of the inputs then tries to address every single one of them in a compassionate way towards the community who will be living there. And I think if it does one thing – and I don’t want to talk about all of the aspects of the model in detail – but it gives agency and decision-making who will live in the homes, or occupy those homes whether they’re purchasers or renters – we mainly deal with purchasers. And that’s the fundamental between Nightingale and other development models.

HOT SEAT: ROBERT PRADOLIN ON HOUSING AS ECONOMIC INFRASTRUCTURE

Pat Fensham:

Robert Pradolin, this idea Jessie is talking about as housing being more than a product, I think you might have something to say about affordable housing as economic infrastructure.

Robert Pradolin:

One morning a financier was talking to us [about affordable housing] and said, “Look, we see this as key infrastructure.” And a lightbulb went on. SGS have done some reports that have said the cost-benefit ratio of well-located social and affordable housing is 7-to-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, and I’m working with a group of super funds and others to try and fund something – it’s probably going to cost a couple of hundred thousand dollars – to say, “It’s actually good business to set up a low-income housing tax credit model.

Because the biggest problem I’ve had with some of the things we’ve discussed is that you’re linking all this affordable housing to developers.

When the market is flat, no one does anything. What a great time to build. And you need to de-link it from the developers because they’re only going to do stuff when the market is heating up. If I was government, and running government as a business, I’d be getting things together now. When the market turns down you stimulate growth and get great value for money, with a cost-benefit ratio far greater than any road that I’ve seen.

We need to be smarter. We need a paradigm shift. I was just talking to Nigel. You’re 60,000 dwellings short in Sydney. How the hell are you going to reach the target to provide stable shelter for people to form a life on? And to form economic productivity and happiness?

It’s all about productivity and economic benefits.

Robert Pradolin

GETTING THE SUPER FUNDS IN

Pat Fensham:

I’m going to move onto David. Now what you’ve introduced is the idea that there’s an external benefit from providing housing. That means presumably the government should be interested in providing a subsidy to the likes of super fund managers to invest in housing. What are you seeing David in that space, and where are we at with the incentives that super funds might require to invest in affordable housing as economic infrastructure?

David McFadyen:

We’re looking at it as an asset class, and that’s the lens I come here tonight with. Why it has an attraction to us is it’s purely the scale of it in the domestic context, in the Australia context. I think the rough numbers are, the worth of the residential assets in Australia is about $5 trillion.

From our perspective, in an industry that’s around $2 trillion and offers about 10 per cent of its allocation to property, it becomes a key opportunity to us tothink about other than commercial, retail and industrial. And the reason for that is there’s a lot of capital chasing those prime assets, and we’re looking for other asset classes that can supplement what we see as diminishing returns out of the traditional commercial sectors of office, retail and industrial.

The impediment we have at the moment is to get commensurate-style returns, and the big issue for us – and again I make no bones about it – we have a fiduciary obligation to invest on behalf of our members, so we are chasing return.

And the return profile from residential is very heavily skewed to the black box of forecast capital growth, and income yields around 2-3 per cent. And probably on a net basis less than two per cent. I think Defence Housing quote about 2.15-2.5 per cent for their portfolio.

So therein lies a bit challenge for us. It’s to have the bulk of the return coming from capital growth rather than from income, and therefore it struggles to match off. Then you put another overlay in, which is this affordable housing component, and indeed down into social housing.

For us to take a long-term view on this we will need to see some change in market conditions. And we’ve been studying cost, we’ve been trying to strip cost out of projects, we’ve studied the multi-family model in the US. For us to take a long-term view, I think we do have to have regard to the communities we’re building, so like for our commercial assets – our retail, industrial, office – we take a 15-20-year view for those assets.

For residential, we’ve participated in the development sense but the developer leaves once the project is complete. Our focus is not only on generating a return profile that’s attractive to our investors but it’s also to have a product on the ground that will be sustainable in an investment sense.

So we are subscribing to the view that you can’t have an exclusive condominium style. We think you need to salt-and-pepper residential developments with affordable/social housing to give a community benefit. Or to establish a sense of community. And I think from an investment perspective the economics will take care of it once these things are established.

And I know some of the activity that’s been occurring down in Melbourne has demonstrated some great examples. The Frasers development Rob was involved in in Carlton was a case in point. You have a mix there of affordable housing, private market housing, aged care and a retirement complex going on.

David McFadyen (second from left)

Robert Pradolin:

Super funds invest in America’s affordable housing. But they don’t invest in ours. Because it’s not economically viable. The government has to wake up.

Pat Fensham:

Garry, have you got anything to say on this issue of getting the super funds active, and what it might take to get the government interested?

Garry McLean:

I think we can look to the US experience. Until the federal government stepped in and really provided tax credits there was no real investments.

Pat Fensham:

Can you tell us what tax credits are?

Garry McLean:

Well the one in America probably came on board prior to 2000. And that was really a one-for-one. So anyone investing in social or affordable housing was given a substantial tax deduction. I’m not sure what’s there now. But without doubt for it to become an investment class we need capital. For capital to come into it, it needs to have some attraction.

We do need tax incentives, tax credits, but we also need scale. And the thing that worries me in NSW is where do you create scale? In Queensland and Victoria and WA you probably have half a chance. But in Sydney it’s very, very hard, as most developers would know in this room. It’s very hard to find reasonable tracts of land let alone large tracts of land.

Pat Fensham:

What constitutes scale? How many dwellings?

Garry McLean:

I think, David, you’d be looking at 500 or something like that. So we’re not talking 50. We’re not talking 100. It has to have a lot of scale. And with that comes cost efficiencies and capability with resourcing.

So there’s a lot of compelling issues that need to be addressed before you’re going to see it become an investment class. But we’ve seen it with student accommodation. We’ve seen it with other sectors. And I do honestly feel we’re at the cusp of that now. And yes we are looking at homes and providing social homes for the needy.

It is very hard to justify suitable return, particularly when you get into the social rental side of it. But we do need tax credits. And we do need the federal government to provide that enhancement. And until we do that I really think it’s going to be a struggle for the big institutions to come in with any sort of scale at all. And that’s probably where it sits.

MIXED EQUITY MODELS

Carmen Osborne:

I’m from the community housing sector, and my day job is property development so I understand this. I think this is economic infrastructure. What we find in the community housing sector is people come in the door as social housing tenants, very low rents. But once people have that security of tenure, they can train, they can get a job, and they move up to market rent.

Our problem is we can only have 35 per cent of people at market rent and we have to transition them out. So what we’re interested in doing is mixed equity model where we can invest in affordable housing – so people come in as social, when you move to affordable you’re paying pretty close to market rent but also you’ve got that sort of community supporting you. And that’s the sort of model that we think as the co-op sector is really where we should be going.

And I understand the understanding of affordable housing as an asset class, but long-term rental accommodation, we should be doing it. You go to the UK and other places in Europe, it’s there. Why haven’t we been developing this sector?

Carmen Osborne

INNOVATIVE MODELS AND THE PLANNING SYSTEM

Pat Fensham:

There’s a whole other topic there around rental tenure and all sorts of other things. But we might not have enough time to go there. Just before I go to Sue, Jessie, how does Nightingale confront zoning laws and planning laws and local council in its innovative product? How do you get on with the typical mainstream zoning and planning system?

Jessie Hochberg:

We’ve been lucky on one hand and unlucky on the other. Because it’s community led we don’t have these big funds to drive things really hard. Basically the community who live in the first apartments, they’ve said either they don’t want car parking because the projects are located next to three modes of public transport and they all have access to cars through share-cars.

So it’s not that they don’t drive, it’s just that they don’t need private car ownership. But the council has been incredibly supportive of all the projects. So they approved it.

HOT SEAT: SUE WEATHERLEY, DIRECTOR STRATEGIC OUTCOMES AND DEVELOPMENT, PARRAMATTA CITY COUNCIL

Pat Fensham:

I’m going to get Sue Weatherley up. Sue’s from Parramatta Council. You’ve heard a bit from the audience tonight. There’s been 5-10 per cent inclusionary zoning introduced by the GSC, probably some challenges around planning laws to accommodate affordable housing. What’s the landscape looking like for planners in the local government sector?

Sue Weatherley:

I think the mistake the GSC has made is to say it’s 5-10 per cent. Because it’s going to be five then. They would have been better out saying a minimum of 10; they would have had somewhere to move. I think it’s going to end up being five. That’s all they’ll get across the line, from a policy point of view.

Pat Fensham:

Just expand on that. Why? What plays out?

Sue Weatherley:

Well some of the debate we’ve already heard tonight. I think the feasibility of projects, I also listened to the commentary around the problem is land bought without the upzoning, but at the upzoning rate.

The other conversation was around transparency. And if it was clear there was going to be some sort of capturing that increased value back for the community in some way, whether or not it was affordable housing, or infrastructure to support new communities. Because we don’t put these things in the middle of paddocks. We put them in places where we want to have good access to community facilities and services and all those sorts of things. Someone has to pay for that, and I think if there was a transparent mechanism that was clear to people – so when the developer is taking the risk, purchases the land, they say, “I know you want that for the site but it’s actually worth half of that because I’m going to have to put this, this and this into the project to make it work.”

Sue Weatherley

Anyone who has any doubt about why we need a transparent, clear process just needs to think about the Northwest Rail Link. A significant piece of infrastructure where a lot of individual landowners who bought their land for $400,000 in 1996 were able to sell it for $12 million. That $12 million was funded by the taxpayers of NSW. Simple as that.

No money went back into the rail infrastructure and now it’s the debate across now other developers will have to pay for it in some other way, and all sorts of things.

This is the best example we’ve got as to why we do need a transparent mechanism so it can be captured at the sale stage, and if then as a consequence you get a further upzoning it’s captured again. Because we need to make that system work in NSW. Speculation on land I think is part of the problem causing house affordability issues, as well as infrastructure affordability issues.

I’m also a fan of the notion that this is about supply and demand. You can’t just pull one lever and think you’re going to solve the problem. As a simple example there’s a pipeline supply of about 10,000 dwellings just in the CBD of Parramatta.

When I first went to work at Parramatta eight years ago an apartment cost you about $400,000. Well you won’t get a bathroom for that now. And there was stories in the paper on the weekend – some of the penthouses have gone for $3 million. That’s got nothing to do with supply, because there’s plenty of supply. It’s about the demand. Parramatta is seen as a more desirable location. The quality has improved and people want to buy there.

You can get an affordable house in Sydney but it’s not necessarily where lots of people want to live. So it is a lot about demand but improving the liveability across Sydney, particularly from a Western Sydney point of view, will help to spread some of that demand out across Sydney.

It might very well deal with these things. I’m thinking the example of their children wanting to move to Melbourne, they could probably still have afforded somewhere in Sydney, but not somewhere where they necessarily want to live. They want to be in the vibe and close to the centre of Sydney. And that’s also part of the problem for Sydney.

ON CAR PARKING AND INNOVATION

Pat Fensham:

How are you going on innovative product, even minimising car parking rates for example? Just on that point I see one of the tragedies and the pity of urban renewal projects is the lower income housing, which is often displaced in and around stations through redevelopment, often doesn’t have much parking, so sometimes you’re replacing good low-income housing with higher income housing with lots of car parking. So there’s a perversity going on at times in some of those developments.

Sue Weatherley:

More so in the CBD of Parramatta rather than some of the other more suburban locations, we have a maximum car parking rate. It is fair to say that all the statistics are telling us that people in one-bedroom and studio apartments generally don’t own a car. So actually there’s no particular need to provide additional car parking. We’ve left it to the market to decide. We’ve not insisted on a parking number in those locations. In some other locations which are not anywhere near as accessible, we’re still maintaining the need for parking.

I think there’s a real perception problem with some of the policy makers about what the needs are in terms of car ownership. It’s also on the reverse. Renewal in Telopea, which in theory has railway station but the train runs once every six years, it’s not terribly accessible.

More recent social and community housing built there was built with very little car parking, but actually there was a need for it. The people there didn’t own Mercedes. They did own small cars that are now causing problems in the street, because it wasn’t an accessible location. You can’t have a blanket policy in terms of what’s needed and then apply it across Sydney. Because they’re distinct, locational areas.

Another thing is we can build lots of housing stock but actually build it in the right place. We’ve got build it with the right amenity, services and facilities, because housing is simply an element of the city. It’s not the end. It’s part of the total system. In terms of the quality and amenity for people’s life, it’s really, really important.

David McFayden:

We’ve been working on this for quite a few years now, and I made a statement in an international property conference down in Melbourne a little while ago, which goes along the lines of, as long as my career continues, we will try to focus on cracking the nut on institutional investment in residential. It’s very dear to the heart of ISPT and its constituent funds that support it. But I’d just remind everyone there is a fiduciary obligation we have to stand behind, which means there’s got to be a return.

One of the other discussions we’ve had with Rob and others in round table forums with government is on the social housing side of things rather than the affordable, but why are you trying to dress it up as property and therefore require a higher level of return?

Can we take it down the risk/return profile to have it operate more as a bond? Then that gives rise to issues with governments and treasuries about liabilities.

But if we can take it out of the property asset class and bring it down into a lower level return environment that obviously has the security around it that government might be able to offer, I think there’s a far better prospect for the social housing side of things, and then leave it to us, I’m sure we’ll sort something on the residential investment class.

The Surround Sound crowd

Pat Fensham:

Who do you talk to in government about this stuff?

David McFayden:

Depends who listens. Our challenge there with the politicians is in terms of government changeover. The bureaucrats are pretty interesting.

But what’s also happening with government at the moment, particularly in Victoria, is that there’s a portfolio of housing and assets owned by the government that amounts to $26 billion, and 30 per cent will be structurally obsolete in the sense that it cannot be sustained within 10 years. So there’s a major issue emerging.

One of the opportunities then becomes to introduce some private housing into that environment. There was an announcement in Melbourne that they’re kick-starting some of that activity. But there’s a massive obligation that sits there to not produce new housing, but to maintain the existing housing stock. And it’s very problematic.

PRIVATE AND PUBLIC SECTORS

Jason Twill:

I’ve been on the development side for a long time in different cities, and for all the issues here between the development industry and government and planning around inclusionary zoning and other mechanisms … it always works out.

When the private sector comes to the table and partners with government it works out in the interests of society, and it has to happen. One model I don’t hear enough about is … as long as you have land speculation, you’re going to have affordability crises.

For the economists in the room, I read a really powerful book called Progress and Poverty a long time ago and a really interesting figure in history saw this speculation happening in San Francisco in the late 1890s and called for land value tax back then to get the speculative housing cooled to keep land prices from inflating too much and really drive more equitable outcomes for cities.

When government owns a lot of land, and I’ll speak from New York’s Economic Development Corporation’s perspective, they don’t always have to dispose of it.

BATTERY PARK CITY

One of my favourite models for urban generation is Battery Park City, where the state government and city government partnered and maintained ownership of the land and did ground leases with pretty innovative developers.

They also put forward the first high-performance building district in the country. The first LEED-certified building. Affordable housing galore in that project. And there’s about $10 million a year that goes back into the community purse to fund perpetual affordable housing. So there’s different models to look at than just selling land all the time. I think it’s another option to consider in Australia.

THE LINK BETWEEN HOUSING AND LOWER HEALTH COST

I did most of my projects for multi-family housing. That model definitely has to come about. I would get below market financing, again mixed tenure. Mixed-income housing is the way to go. And from the economic infrastructure side, a recent study in the US at this macro level shows the more the government invests into mixed-income social, affordable housing, the less they’re spending on healthcare in those same communities. Because it’s addressing mental health issues, it’s addressing physical health issues, so it is a systems change. It’s a paradigm shift.

And Australia’s got a huge opportunity right now to leap-frog a lot of the failings of some of these models from the 20th century and just kind of take it to to the next level.