The Federal Government is determined to develop the fledging affordable housing sector into an investible asset class, tapping the $3.5 trillion of superannuation savings to address Australia’s acute housing shortage.
While there is investor demand from both on- and offshore capital, the challenge is to develop an asset class with acceptable returns, scale and liquidity according to market players.
“Traditional funding and solutions to provide social and affordable housing has only delivered so much,” Ryan Murphy, director of strategy at QIC Real Estate tells Investment Magazine.
“There is a real opportunity through new initiatives being pursued by government for more to be achieved. All the state governments are mindful they need to address the housing crisis and provide solutions.”
At the state level, Queensland for example set up a $2 billion Housing Investment Fund and Victoria has its Social Housing Growing Fund since 2018.
At the Federal level, the Albanese Government plans to build 40,000 social and affordable houses estimated to cost between $20 billion and $25 billion. This ambitious development program is underpinned by the $10 billion Housing Australia Future Fund (HAFF), which Murphy describes as “an opportunity for a step change in the sector”. The passage of legislation to enable HAFF is currently held up in the Senate by Greens party senators pushing for further concessions.
The importance of getting HAFF through the Senate cannot be underestimated, according to St George Community Housing CEO Scott Langford.
“Whilst build to rent is an important structural component of a better housing system, this must be accompanied by other significant levers, such as the Housing Australia Future Fund, to ensure social and affordable housing does not fall through the cracks,” Langford says. “Build to rent alone will not solve the housing crisis.”
Super fund response
The National Housing Finance and Investment Corporation (NHFIC) is leading the charge to working with super funds and other pockets of capital to develop affordable housing as an investible asset class.
In a recent interview with Investment Magazine, NHFIC’s chief executive Nathan Dal Bon urged the industry to work with his agency to see how they can structure investments to meet their return criteria.
A number of the large super funds including AustralianSuper and HESTA already have standalone strategies in the affordable build-to-rent segment of the market. HESTA’s commitment to the sector is through Super Housing Partnership, an investment fund owned by a number of super funds and targeting to increase the supply of build-to-rent affordable housing projects in Australia,
Meanwhile QIC tied up last year with Australian Retirement Trust and community housing provide Brisbane Housing Company to develop up to 1200 new social and affordable homes in Queensland. The consortium will tap the state government’s Housing Investment Fund as part of the financing structure with ART providing mezzanine debt.
Aware Super is one of Australia’s largest build-to-rent developers, with $1.5 billion already committed to further build the fund’s residential property portfolio by 2025.
Central to Aware Super’s residential strategy is its Essential Worker Housing Program, which began in 2018. The program offers eligible residents rent at 80 per cent of the market rate for quality apartments close to important urban infrastructure such as hospitals, schools and transport.
Scale and liquidity
Developing a sufficient pipeline of projects is another challenge to mobilising investor capital into affordable housing.
“Achieving sufficient scale is a challenge, particularly if you’re a large superannuation fund with over $200 billion in assets,” QIC’s Murphy says.
“The complexity which typically is associated with these deals is one which can be quite time consuming. It is a real consideration to ensure that you’re going to get adequate scale from the effort required, so that is a challenge.”
Ryan believes the market needs to start somewhere and “without taking those initial steps and then starting to build momentum, you’re never going to achieve that,” he says.
“Over time, I am comfortable there’s the opportunity to achieve sufficient scale.”
The ability to scale up these assets will lead to liquidity and secondary trading which “would be important for the market to be sustainable going forward,” says Murphy.
“We would have market pricing evidence and also the ability for super funds to achieve liquidity if they need to reconfigure their portfolio; that would be a great outcome.”
Another key consideration for the super funds is how to report and benchmark this asset class against the Your Future, Your Super performance test.
“Superannuation funds have these considerations under the Your Future, Your Super reforms and so there needs to be some sort of market maturity and consistency in affordable and social housing investment reporting,” Murphy says.
Financier appetite
There is likely to be strong appetite from banks and other credit providers to finance build to rent affordable housing projects given the appropriate risk and financing structures, according to property bankers.
“[Lenders] are not looking to take additional risk but to take appropriate risk, recognising that housing is a pretty stable asset class from a revenue and occupancy perspective,” says one banker who declined to be named.
Builders also have to contend with rising construction costs but this can be offset up increased rental. Land costs, particularly in Sydney, are expensive as well as the scarcity of suitable sites.
“There is quite a lot of capital willing to be in the space, but it takes a lot to activate these property sites,” the banker says.
Global shortage
Australia’s housing woes are not unique as spiraling prices and growing inequality have pushed out many from home ownership in major cities around the world.
In the US, the Low Income Housing Tax Credit structure established in 1986 has been the only way traditional affordable housing has developed according to Pamela West, senior portfolio manager at Nuveen. The fund manager has US$3 billion ($4.4 billion) assets under management in affordable housing across 24 states in the US.
Despite this tax incentive, West says the shortage is still acute as the US still has a seven million unit deficit despite the development of three and a half million units since the start of the program.
“There is a huge imbalance of supply and demand in the US market,” she says. “With wage stagnation and rate inflation, it has created a growing national housing crisis in the US and we’re also seeing that happen globally.”
Additional reporting by Glenda Korporaal.
