A low-rent idea: investing in affordable housing

Australia is in the grips of a housing affordability crisis, in desperate need of large investment, while its superannuation funds are overflowing and running short of places to diversify. Making social infrastructure attractive to institutional investors could potentially solve both these problems, as STEPHEN SHORE reports.

Housing affordability has deteriorated rapidly since the mid 1990s. According to Julian Disney, chair of the National Housing Affordability Summit and panellist at this CMSF’s key ‘To Build A Nation’ plenary, about 750,000 lower-income households in Australia currently have housing costs above 30 per cent of their income. Most of them are private renters, and many of them in fact have housing costs above 50 per cent. The Government subsidisation of public and community housing has been cut by a third over the past decade, and while Prime Minister Kevin Rudd says there will be no further cuts, he has not made any promises to reverse the trend either.

Disney says the shortage is now so severe that it could not be reduced by public investment anyway, even with greatly increased funding. Ballooning superannuation funds struggling for new areas to diversify are perfectly positioned to fund the development of public and low-rent housing, but it just doesn’t provide enough return. Different governments at different times have talked about using the wealth of superannuation funds to do social good, but trustees have rightly argued that they have a responsibility to their members. As Brad Pragnell, director of policy and best practice at ASFA, says: “Superannuation is not a magic honey pot. It’s there to provide for peoples’ retirement.” Howard Rosario, chief executive at Westscheme, says the fund has been in several discussions with public housing initiatives over the years, but the commercial case is yet to add up. “It’s a great idea, but who makes up the shortfall? We are obliged to get the best returns for our members; we can’t expect them to absorb social costs,” he says.

For more than 20 years the US Government has provided substantial tax concessions to investors in low-rent housing for low-income tenants. Disney says that this has been successful in attracting large institutional investment and greatly increasing the supply of affordable housing in the US. “Overseas experience and detailed modelling show that appropriately designed incentives can attract several times as much private investment as the cost of the incentives themselves,” he says. Working with the National Housing Affordability Summit, Rudd announced plans in August last year to introduced a rental tax incentive as part of a National Rental Affordability Scheme. Investors would stand to receive up to $8,000 in tax incentives and financial support per dwelling (house or apartment) per year for up to 10 years, provided it is rented to households that meet an income test, and the rent is charged at 20 per cent below the market rate for the area.