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.

Garry Weaven, chair of Industry Funds Management, says this initiative is the most promising thing he has seen yet in respect to tackling the affordability crisis. “On the face of it, it could actually trigger a new institutional investment class in providing rental housing,” he says. “To qualify for the grants, the housing produced by such an investment would by definition always have excess demand from potential tenants. It would create a fairly low-risk, long-term investment.” Whether the incentives will be enough is unclear; details are yet to be released that would allow super funds to calculate whether it would make the investment viable.

But many are wary. As one trustee who requested anonymity cautioned – “while the government providing incentives will always go into consideration, it doesn’t necessarily turn a bad investment into a good one.” First Home Savers Accounts With over 30 per cent of household income disappearing in rent, it is unsurprising that many people also find it difficult to save a deposit to purchase their own home. Another Rudd initiative, the First Home Savers Account, is scheduled to come into effect by July 1, 2008. While the First Home Owner’s Grant has arguably done more to aggravate house-price inflation than improve affordability, the First Home Savers Account is designed to put downward pressure on general inflation by encouraging saving. The government has described these as “superannuation-style” accounts that will reflect the arrangements of superannuation – allowing first home buyers to salary sacrifice from their pre-tax income and ultimately withdraw at a lower tax rate.

While the savings period would be only for a minimum of four years, the features of the account would be similar to retirement savings. Pauline Vamos, chief executive at ASFA, says super funds are well-placed to offer such accounts, with efficient administration, governance, and broad, diversified returns already in place. Labor claims that a couple with an average wage saving 10 per cent of their income over five years could amass $64,000 – 30 per cent more than could be achieved with a regular deposit account. It is estimated that after three years these accounts will hold $3.5 billion in national savings that could potentially be under the management of the superannuation industry. Despite the benefits of using a pre-established system, the government’s proposal warns that employers and the financial services sector will potentially face a series of compliance costs, such as the account providers needing to monitor pre-tax and post-tax contributions, although the Australian Tax Office will police applicants’ eligibility for the scheme.

The industry bodies are supportive of funds being able to offer these products, however according to ASFA the implementation and administration costs need to be kept under control for it to be viable. AIST says it believes the scheme needs to have caps on fees and charges, and be structurally separated or excluded from commission-based selling practices.

A number of superannuation funds that have spoken with Investment & Technology expressed interest in setting up a First Home Savers Account, but were unable to confirm any definite plans as the Government’s document had only just been released at the time of press. But one obvious positive the funds echo is the opportunity a First Home Saver Account would provide to develop relationships with its younger members. “We believe education and engaging members is important so that people become more active in managing their super,” ASFA’s Pragnell says.

“First Home Saver Accounts can help teach younger members how to save voluntarily and help them better understand concepts like risk and return.” Fiona Reynolds, chief executive at AIST, says that for the superannuation industry, there is a great deal of work that needs to be done to have the accounts up and running. “We look forward to working with APRA and the government to finalise the details making it possible for superannuation funds to offer the First Home Savers Accounts,” she says.