10 April 2014 — An affordable housing investment pathway that would deliver triple-bottom-line benefits has been outlined in a groundbreaking report published this week by RMIT University and the Australian Housing and Urban Research Institute.
The report recommends the establishment of an Affordable Housing Finance Corporation combined with a well-structured guarantee to make it more attractive for long-term managed funds to invest in new affordable and well-targeted social housing infrastructure.
If adopted by government and embraced by the managed funds sector, this model would lift supply and provide a mechanism for addressing the nation’s chronic shortfall in affordable rental housing, the report researchers have argued.
The research was led by Honorary Associate Professor Julie Lawson and Professor Mike Berry from RMIT’s Centre for Urban Research, with Carrie Hamilton and Professor Hal Pawson (UNSW).
Dr Lawson said home ownership rates were declining, especially among the young but also among established households, with renters now making up more than 29 per cent of Australian households.
“While the number of tenants is growing, the number of those renting social housing has almost halved – despite burgeoning waiting lists – from 5.8 per cent of households in 1998 to 3.9 per cent in 2010,” Dr Lawson said.
“Strategic investment is needed to increase the quantity, quality and security of affordable rental housing accessible to low and middle income households.
“Private investment will only flow when the risk weighted returns are right for investment funds.
“A specialist intermediary such as the AHFC combined with a guarantee helps achieve this balance.”
How it would work
The AHFC would pool the aggregated investment demands of the growing and professional community housing sector (currently managing 45,000 dwellings) to provide a suitable scale of and pipeline demand for bond issues attractive to Australia’s rapidly expanding managed funds sector.
The proposal draws on well-established and successful international models from the UK and Switzerland that have been adapted to meet Australian needs and market conditions.
The UK’s Housing Finance Corporation and the Swiss Bond Issuing Co-operative both participated in the study.
AustralianSuper is showing interest in the proposal. John Hopper, head of AustralianSuper’s fixed income portfolio, said, “If the government guarantee proposed by AHURI can be structured in the right way and the return was attractive relative to comparable investments, these types of housing bonds could be part of our portfolio.
“An appropriate guarantee would bring the risk and return profile more in line with government bonds and could be more attractive to long-term investors like AustralianSuper.”
Why current investment trends leave tenants out in the cold
Professor Mike Berry told The Fifth Estate one of the issues that contributed to the current supply issue was investment being largely the domain of individuals and couples. He said these investors, while keen to have an income from tenants in order to service a mortgage, were also focused on maintaining a degree of flexibility in terms of ability to sell at short notice.
“This is why residential leases in Australia are typically from six months to one year,” Professor Berry said.
“In some cases, such as the purely speculative investors, like some Chinese investors, they are happy to park their capital in that [property] investment and leave the property vacant for significant periods of time.
“Our argument [in the research] is that managed funds are much more likely to be able to invest for the long-term.”
He pointed out that for super funds in particular, which have long-term, long-dated financial liabilities, investing in housing that provides security of tenure in turn gives those funds security in terms of financial returns.
“Super is over-invested in shares and equities,” Professor Berry said.
In the AHURI proposal, long-term, highly-rated secure bonds would provide a capital pool for debt financing at a low interest rate for the Community Housing Trusts to provide sub-prime rentals. The returns for the investors would be reliable, given the community housing sector’s proven ability to manage the specific type of rental and tenant group, and due to the stability of the individual tenancies.
“There is currently a shortage of 200,000 low-rent properties,” Professor Berry said.
“And often the lower rent properties have higher income people in them, as they are the ones who are attractive to real estate agents and landlords.
“Low income people with special needs, such as disabilities – or Indigenous [people] – are always at the back of the queue. The [community] housing associations have a particular mandate to help [those] people find private rentals, but there is not enough.
“The current government policies are not providing the right investment architecture.”
He pointed out that the massive demand pressure itself worked to increase the price of rents, therefore making the affordable rental housing gap even larger for low income people.
Security for both investors and tenants
Professor Berry said that given the difficulties they face in finding a rental, most tenants will go to “great lengths” to keep a roof over their heads. This is also a point in favour of the proposed investment model, as once in a home tenants want security of tenure, which means for the housing trusts and the bond investors, they provide security of returns.
“At the moment, incentives for property investment are aimed towards small-scale mum and dad investors. [This new model] aims to create a more mature market where housing providers deliver for the long-term. It’s moving landlordism away to a professionally managed rental market.”
Making sustainability part of the bottom-line
The current rental market is also one where there are few incentives for improving the sustainability on either the part of private landlords or of tenants.
Professor Berry pointed out that because tenants were generally on short-term leases, there was no incentive to undertake initiatives such as installing solar panels or adding shading. Even if they were to seek, and obtain, landlord approval, there would be no guarantee they would be in the property for long enough to achieve the point of payback, which is generally far longer than a six or 12 month lease for many major upgrades. There is also no incentive for landlords, as they receive no direct return, and the current market does not place a premium on sustainability measures in terms of value at sale.
For the community housing providers, however, there is a clear motivation to have sustainable housing stock.
Housing Action Network associate Carrie Hamilton, another of the key researchers for the AHURI bond proposal, told The Fifth Estate that it is in the self-interest of community housing providers to take sustainability on board.
“[Then] community housing starts to save on operational costs and also in terms of the long-term lifecycle of materials,” Ms Hamilton said.
“Community housing has to show [in its financial reporting] that it is making long-term reserves for systems replacement, and they have to look at their portfolios in a long-term operating sense.
“The ethos [of the sector] is in line [with sustainability], and it is just better business for the long-term. Sustainability will come naturally… and in terms of things like wear and tear [on dwellings], some sustainable specifications are better [in terms of performance].
“With the community housing sector, sustainability is mandated because it is a long- term asset base, as opposed to a short-term one [like the general rental market]. Some of the National Rental Affordability Scheme guidelines put a tremendous standard of sustainability in the requirements [for applicants].”
Ms Hamilton said affordable housing was a “fascinating story, in that it will see innovations in financing and sustainability”.
“At this point in time, 30 per cent of Australia’s housing stock comprises rental properties, but only [generally] in granular [house by house] investment. Wouldn’t it be great if people could invest in this sure thing, and have the risk spread?” she said, noting there was a certain irony in it affordable housing creating a better property investment model.
Community housing has a track record for delivering
Carol Croce, chief executive of Community Housing Federation of Australia, told The Fifth Estate that the not-for-profit housing sector had grown in capability and professionalism with the transfer of state government public housing to the community housing providers and also due to NRAS.
The difficulty remains, however, expanding their asset base to house more people, especially with NRAS looking increasingly unlikely to continue.
See our article Affordable housing: NRAS under attack
“The problem is there is not much we can do to use [state housing under our management] to leverage anything [in terms of debt financing for new housing]. If the states transfer them over with title, we can leverage new houses based on their value,” Ms Croce said.
“Many community housing providers are on a growth trajectory in response to high demand for affordable housing.
“Better financing options will mean more affordable homes can be provided by community housing providers that will reach households not served by the current market.”
She said a healthy side-effect of NRAS had been stronger relationships between developers and the not-for-profit housing sector. She said the general attitude of developers had become, “this [community housing] sector gets it, they are good at dealing with the clientele and they understand my [development] business model, they’ve got development nous”.
And it means jobs, lots of jobs
Developers and the construction industry are another key part of the AHURI picture, with the report stating that one of the rationales for taking action is: “increased productivity through new housing supply, responding to demand and generating sustainable employment in the construction sector, supporting local economies and lifting regional and national GDPs.”
As part of the launch of the report, AHURI is holding a public seminar Private sector finance: increasing the options for affordable rental housing on 15 April at the State Library of Victoria, which will feature experts from the superannuation sector, researchers, government and the housing sector. More information on this event is available here in The Fifth Estate event listings.
The full report can be downloaded here.