As the Federal Government looks to attract investment into affordable housing, a recent report has highlighted that financial return remains a key hurdle for superannuation funds’ involvement in the sector.

The report by the John Curtin Research Centre wants the government to guarantee minimum returns and provide targeted tax credits if it is serious about attract significant funding from Australia’s $3.4 trillion superannuation industry.

Its other recommendations include a revamp of planning and tax laws to boost housing supply, a long-term national housing policy, and permanent representation of industry super funds on the board of peak agency Housing Australia.

The review, commissioned by one of the country’s largest industry funds REST, backs the use of the national savings pool to solve the housing crisis, but says the plan faces many obstacles in practice.

“Some are regulatory, others relate to how institutional investors can best invest in housing that generates the most effective social impact while also delivering good financial returns.”

Worsening crisis

The research comes amid growing debate about the worsening housing shortages in Australia’s capital cities that are inflating property prices and driving up rents.

The national rental vacancy rate stood at a record low 1 per cent in March, as returning international students and workers boosted demand for accommodation. Meanwhile, the federal budget this month has forecast a widening gap between home construction and population growth over five years.

The Albanese government has sought to tackle the issue through last year’s Housing Accord between federal and state governments, which aims to construct one million new homes over five years from 2024 with the aid of private capital, including from super funds.

It has also targeted building 30,000 new social and affordable rental homes over five years by establishing a $10 billion Housing Australia Future Fund, legislation for which has been delayed in the Senate.

Nathan Dal Bon, CEO of the National Housing Finance and Investment Corporation (NHFIC) last month told Investment Magazine that attracting super fund capital is critical in delivering the government’s ambitious plans to build more social and affordable houses in Australia, estimated to cost $20 billion-$25 billion.

Emerging asset class

Funds such as UniSuper and HESTA already invest in NHFIC’s Triple A-rated bonds, while others such as Cbus and Aware Super have committed investment in affordable housing. However, most super funds remain wary of making big spending commitments for low-cost domestic housing, where returns and ticket size lag deals in infrastructure or offshore property.

The $70 billion Rest has itself stayed away from investing in local affordable housing, despite admitting such a move would improve the financial well-being and security for many of its own members. Nearly 20 per cent of Rest members are currently experiencing housing stress.

“Rest has been an investor in institutional residential developments overseas since 2014. These assets have been valuable in enhancing the financial interests of our members,” CEO Vicki Doyle said in comments accompanying the report.

“However despite looking for opportunities to invest in Australian housing, we have not been able to find domestic opportunities which would provide equivalent investment returns to those overseas.”

The build-to-rent segment in Australia is valued at a mere $10 billion, a fraction of the estimated $250 billion US market, where it has been an established institutional asset class for decades.

Super sops

The ‘Super Solutions’ report makes several recommendations, chief among which is the need for the government to bridge the gap in returns for super funds.

This could either take the form of a guaranteed annual rate of return over the life of the asset or providing UK-style capital grants to developers to cover a portion of construction costs where projects include an affordable housing component.

It also wants the government to adopt a housing tax credits system similar to the US − whereby developers are able to monetise tax subsidies by selling them to investors − in order to meet yield returns for institutional investors.

It is also urging an overhaul of the tax regime in order to refocus property investment on reliable rental returns rather than speculative capital gains. This could be achieved by reforming land tax, removing negative gearing and stopping GST leakage on build-to-rent projects, it said.

Other recommendations include supply-side regulatory and zoning reform, defining essential workers who would be eligible for affordable housing, establishing guidelines for a national charter of renter’s rights, and creating a housing-specific national Environmental Social Governance framework.

“It is in the best interests of Australia’s economic future that the debate around housing affordability and supply, puts the needs of low-income essential workers, such as retail and like-workers, front and centre,” the report said.

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