The chief executive of the National Housing Finance and Investment Corporation (NHFIC) Nathan Dal Bon’s message to Australian super funds – no one is expecting them to accept less than market return if they take the jump to invest in the Federal Government’s ambitious social and affordable housing plans.
As the industry awaits the passage of the Federal Government’s $10 billion Housing Australia Future Fund in the Senate, Dal Bon has been travelling the country talking to super funds, taking in their feedback and trying to get them comfortable with what is becoming a new asset class in Australia.
While funds such as construction industry super fund Cbus, UniSuper and HESTA, have already invested in NHFIC’s Triple A rated bonds in the past, others are cautious about becoming involved in the low cost side of the domestic housing market, acutely aware of the need to invest in the best financial interests of their members.
But Dal Bon sees attracting super fund capital as critical in delivering the Albanese Government’s ambitious plans to build another 40,000 social and affordable houses in Australia, estimate to cost $20 billion to $25 billion in total.
“We are building a new asset class in Australia,” Dal Bon says in an interview with Investment Magazine.
“We’ve been talking to super funds about how we can potentially tap into the different parts of their business – the real estate side or the infrastructure side. They all have different risk profiles and different rates of return commensurate with the risk.”
“But we want to be clear none of this is predicted on super funds taking a haircut on their rate of return. They have legal obligations to get the best possible rate of return for members.
“We are saying to the super funds, what are your rate of return thresholds or benchmarks and we will look to structure things within those rate of return benchmarks.”
Tackling the housing crisis
Dal Bon is chief executive of the Federal Government’s bond aggregator which generates finance for the not-for-profit community housing providers (CHPs) to build social and affordable housing. The agency is overseeing the delivery of the Albanese Government’s plans to tackle the housing crisis for Australians on welfare and low incomes.
As he awaits the passage of the enabling legislation in the Senate, he has become the marriage broker, talking to super funds to see just how he can bring their money to the table and looking for ways to structure investments to meet their return criteria.
“We’ve got the objectives from government, and the objectives of institutional investors like the super funds, and we are trying to marry them up,” he says.
After extensive consultations with funds as well as industry organisations, the agency has appointed Macquarie Bank as an adviser to turn the concerns and investment parameters of super funds as potential investors, into financial models which could make the deals potentially viable.
It has also set up an advisory panel to liaise with the super fund sector on potential ways to structure the financing.
Over the past few years, NHFIC has raised $2.2 billion in six bonds with maturities of up to 15 years.
The money has been used to finance $3.4 billion in long term loans to 38 community housing providers around the country, which have helped develop more than 17,500 new and existing homes.
As Dal Bon points out, all of NHFIC’s bonds are socially responsible bonds.
For those super funds which have invested in them, they are effectively government-backed senior debt which pay a slight premium of 20 to 60 basis points above Commonwealth Government securities.
Emerging asset class
Dal Bon sees part of his role as getting super funds comfortable with what is effectively a new class of assets in Australia – an education process for super funds which have been wary of investing in the sector.
Affordable housing is a well-established asset class in Europe and the US, thanks to long standing tax breaks, but has yet to really get off the ground in the much smaller Australian market.
For many Australian super funds, it can be easier and more profitable to invest billions into infrastructure and property deals offshore than to take the riskier step of looking at small deals in the low cost end of the housing sector in Australia, which traditionally has not been attractive for institutional investors looking for big ticket deals with predictable returns.
“To get them comfortable with social and affordable housing in Australia there needs to be a combination of education as well as market development,” he says.
What has been missing in the past, he says, is a steady pipeline of developments in the sector to create the scale needed for it to be taken seriously by super funds.
But if the government can get its legislation through parliament, there is the potential to create a sizable pipeline needed to develop the asset class in Australia through the combination of the new $10 billion Housing Australia Future Fund and the Housing Accord between the Federal and state governments. These two new initiatives are targeting to deliver a total of 40,000 new social and affordable houses, going some way to alleviate the housing crisis.
“A lot of super funds are looking for scale in projects,” he says. “The community housing provider sector is still relatively nascent in Australia and hasn’t got that sort of scale. We have got to look at ways we can get that scale and aggregation.”
Complex investment
There are two sub-sectors within the affordable housing industry – the more financially attractive sector of affordable housing which is often used for key worker housing, where rents are around 75 percent of market levels and the less financially attractive social housing with lower rents for those on welfare.
Dal Bon knows looking for ways to make social housing attractive to super funds will take a lot more work and financial structuring with the complexity of having equity investments in social housing as well as debt.
He says the projects will also have to work as long term investments, not dependent on being sold after a few years to generate profits.
“At the moment, if people buy our bonds, they are guaranteed, and they don’t need to do any due diligence.”
“But if you are looking at equity-like investments, that’s when the super funds tend to get a bit nervous.
“When you are getting direct exposure to the projects, it is a different dynamic and there is more hesitation. It’s a problem for the banks as well as the super funds.”
But Dal Bon sees potentially structuring some of the projects to be undertaken as infrastructure projects is one way to appeal to super funds.
“We have done a lot of the preparation work and consultation and we are now taking it to the final stage.”
“What we have got to prove up is the pricing of different options – from the debt to equity-like pieces, and if they can be made attractive from an infrastructure point of view or a real estate point of view.”
“The other thing we need to firm up is volume and how much each super fund is likely to allocate.”
Challenges
His challenge is much broader than that including talking to state governments about providing access to low cost land needed to make the economics of the projects work, as well as the construction sector.
Dal Bon says the new federal government backed housing could prove attractive to the construction sector at a time when higher interest rates will slow down future private sector projects.
But bringing the super fund sector to the financing party is a key part of the challenge.
He is confident of getting offshore pension funds, which have had a lot more exposure to the sector, to put money in and potentially some offshore sovereign wealth funds.
But Dal Bon is asking for “a degree of openness and flexibility” from super funds in Australia to work with him along the journey.
“It is getting people familiar with an asset class that they haven’t been able to make work in the past,” he says. “There’s a bit of exploration we need to do, to find the solutions which satisfy their requirements and our requirements.”
“We are literally building a new asset class in Australia. We don’t need all the money up front. The plan is for it to happen over five years.”
“But let’s build up confidence in the first round which can pave the way for them to come in at scale.”
