A $6.7 million allocation to social and community housing in Queensland looks like small beer for HESTA, but the $35 billion industry fund hopes it will be a stepping stone to figuring out how it might form a bigger part of both its debt and equity portfolios in the future.
The beneficiary is Horizon Housing, a social and community housing provider in Queensland, focused on increasing the supply of social and affordable housing and helping low-income earners achieve home ownership.
Horizon Housing has management rights on the rent roll of existing social and community housing, with any surplus cash flow used to build a target of 60 to 70 new homes.
Typically an institutional investors would not find it worth their while to complete the due diligence required to make a property investment for as little as $6.7 million.
But, as HESTA general manager of unlisted assets Andrew Major told Investment Magazine the fund wants to help drive momentum in the sector.
In supporting some small, but institutional investment grade, social and community housing deals HESTA is hoping it will help foster a future pipeline of opportunities of greater scale.
Building scale
“Part of what we’re doing is addressing the barriers and creating solutions, albeit at a small scale, but were showing it can be done,” Major said.
In the future super funds could provide an alternative to bank funding for such projects.
“We do not compete with them [banks] on price, but we can generally demonstrate more flexibility around terms that the borrowers find more attractive than traditional bank lending,” Major said.
The allocation to Horizon Housing is the first deployment of capital from a broader $30 million mandate HESTA has with social impact investment specialists Social Ventures Australia (SVA).
Like most social impact investments the Horizon Housing deal has been structured under a debt model, to achieve both commercial returns and social impact. It sits in the “core pool”, HESTA’s main portfolio.
SVA presents its latest due diligence on the pipeline of quality social impact investment opportunities in the market to HESTA each month.
Measuring success
“You can’t measure something unless you can define it, so that’s why we take some time upfront to really understand what the impact is going to be,” Major said.
“In the case of Horizon Housing, we got comfortable with the fact that the capital would be used to restructure the business and ultimately lead to additional free cash flow which will allow a number of additional housing units to be built.”
And so far the financial returns have been “pleasantly surprising”, coming broadly in line with the similar unlisted debt investments in the credit portfolio.
Major said he was interested in exploring how other social housing deals might be assembled under an equity structure, providing diversity and greater scale, however this presents myriad challenges.
The largest issue is that by its nature, social housing gives below market rates. To make it commercially viable, the government needs to step into the gap between the rent and required returns.
Space heating up
HESTA are watching with keen interest the NSW government’s development of a Social and Affordable Housing Fund, which could see $1.1 billion in seed capital used to deliver 3000 additional social houses.
HESTA senior investment analyst Josephine Toral will be presenting on the fund’s $6.7 million foray into social housing at the Impact Investment Summit Asia-Pacific in Sydney October 26-28, 2016.
How social and affordable housing can be developed into an attractive asset class for institutional investors is sure to be a hot topic at the gathering given recent interest from super funds. AustralianSuper and First State Super are among other cheerleaders.
Earlier this week Infrastructure Partnerships Australia and KPMG said the government should consider establishing a “Social Housing Future Fund”, which would put the proceeds of the sale of legacy social housing stock into a ring-fenced fund to earn a return that would subsidise the difference.
