While the housing crisis is hitting the headlines, and some super funds are keen to play a role alleviating it, they are closely watching the emergence of the Housing Australia Future Fund (HAFF), which is set to create a new asset class in Australia for institutional investors.
Unlike traditional housing or even low-cost or affordable housing developments, the HAFF is a very specific housing investment vehicle whose terms and conditions will create both opportunities and challenges for funds.
At the moment it is only construction industry super fund Cbus which has said publicly it is prepared to put money in projects backed by the HAFF, declaring it will put in some $500 million.
Some funds are just keeping it on a radar but standing back, wondering if it will be actually worth their while in terms of time and effort, while others are more actively doing the sums to see if the potential HAFF-backed investments can stack up for them.
After some ups and downs in the Senate with the Greens, the legislation for the fund has been passed and the government has issued a draft investment mandate for the market to debate.
Put simply, the government is giving $10 billion to the Housing Australia Future Fund, which will provide money to deliver 20,000 new social and 10,000 affordable homes over 5 years and address acute housing needs. The $10 billion is being managed by the Future Fund.
Some $500 million a year will be put into Housing Australia Future Fund Facility (HAFFF), which will in turn hand out money in various forms to back approved housing projects.
The HAFF is being administered by the organisation now known as Housing Australia which was formerly known as the National Housing Finance and Investment Corporation (NHIFIC), run by the energetic Nathan Dal Bon.
Well respected in the super fund sector, Dal Bon has been raring to go for some time and will be keen to get projects off the ground. He outlined his vision to create a new housing-backed asset class in an interview with Investment Magazine earlier this year.
Fine print still to come
The HAFF has very laudable aims, but the question now being debated by the investment brains in the sector is how it will work in practice and what the terms and conditions will be around any investments they might make.
The fund is set to provide seed capital for housing which will not be sold, allowing lower income renters to stay in their property indefinitely.
The main form of return for investors will be in the income stream from the housing which will be enhanced by money from the HAFF- and not in the development profit or capital gain from selling it down the track.
This makes it a very different form of investment for fund investment teams, who are now grappling with how it will work within their fundamental constraints of having to invest in the best financial interests of members.
While the details of how this will all work are being finalised, the draft investment mandate for the HAFF gives it some flexibility in how it operates, allowing it to hand out money in the form of loans, grants, or a combination of both depending on the specifics of each project.
These can include “availability payments” where Housing Australia makes regular, ongoing payments to eligible funding recipients for a period of up to 25 years if housing is made available on agreed terms.
These payments are aimed at closing (or helping to close) the gap between the cost of the projects and the rent received from tenants. (One observer describes these payments as “war bonds”.)
There is also the option of concessional loans which can be used to provide financing to eligible project proponents. These may be offered on a highly-concessional basis, including interest-free, for terms of up to 25 years.
Then there is the option of upfront capital grants which may be available to support some social housing projects- funding which is mainly intended to support smaller, regional, or remote projects.
Some super funds, particularly Cbus, have invested in bonds issued by the former NHFIC in the past, but investing in funds backed by the HAFF will be a different and more complex proposition.
In a statement issued last November, Cbus supported the idea of the HAF and the Federal Government’s Housing Accord saying it was prepared to put up $500 million to support it.
Cbus’ then deputy chief investment officer, Brett Chatfield (now its CIO) said the fund would work with the government and NHFIC to ensure the success of HAF.
“The introduction of the NHFIC bond aggregator four years ago was a significant innovation in affordable housing finance in Australia,” he said.
“This new fund, if we can get the settings right, will be an even greater leap forward for the provision of social and affordable housing.
“The early work of NHFIC has shown that we can align financial returns for our members with an affordable financing stream for CHPs (community housing providers).”
More recently, NSW Liberal Senator Andrew Bragg drew attention to some concerns about the constraints around HAF funding in parliament recently, pointing to a submission made in January by Cbus to the government.
The submission, which is available on the Cbus website, outlines some specific concerns in how the fund will operate.
These include the HAF having to get formal government approval for the disbursement of funds- potentially as part of the annual budget process- which it warned could deter investors from putting in upfront capital.
It also argues that the potential $500 million cap on disbursements from the fund will limit the amount of capital which will be able to be raised.
Its submission also raises other issues including the cap on loans which the then NHFIC could provide of up to $5.5 billion.
Times have moved on from then and many funds are not wanting to make public comment on how the HAFF will work in practice, waiting for more details and in principle supporting the idea of more being done to ease the housing crisis.
For some of the very big funds, like the $300 billion AustralianSuper, which largely looks at investments of $300 million and above, the issue may be one of scale.
Is it worth spending the time and effort on one off housing projects which are smaller in size and involve complex financing options?
Other funds are making their own direct investments in housing projects in more market linked investments.
Welcoming the passage of the legislation, Industry Super Australia’s deputy chief executive, Matt Linden, said it meant that super funds could now “proceed with confidence to assess project pipelines and assess how to deliver good risk-adjusted returns to members, while investing in critically needed new housing supply.”
He noted that the Fund could be good for super funds looking for “asset classes which deliver stable, cash based returns.”
“The affordable housing sector- backed by recurrent annual funding supported by the HAFF- is well placed to meet that need.”
Performance test woes
One source told Investment magazine that funds are grappling with several issues including exactly how to classify their investments in HAFF-backed projects which can be an issue when it comes to the APRA performance tests which are done by asset classes.
A careful comment made by Alek Misev, the head of property at Aware Super, which manages some $160 billion in assets, reflects the balancing act now being undertaken by some funds.
“Aware Super is already a major investor in Australian residential property, with $1.5 billion committed to build a 1600-strong apartment portfolio by 2025,” he says.
“There are already more than 450 apartments in the portfolio, many of them leased to essential workers such as police officers, nurses, and teachers under our Essential Worker Housing program.
“This program was established in 2018 to provide our build-to-rent assets in Australia with stable cash flows backed by high-quality tenants.
“We’ve been able to deliver stable risk-adjusted returns from our residential portfolio because we’ve done a great deal of work to ensure they’re high-quality investments in prime locations close to infrastructure and amenities such as hospitals, schools and public transport.
“While we haven’t made a financial commitment to the Housing Australia Future Fund, we’re certainly open to working with the HAFF if it enables investments in projects that can deliver the necessary returns on behalf of our 1.1 million members.
“We look forward to receiving more detail about the HAFF and the proposed funding model for projects.”
Correction: A previous version of this article mistakenly inferred Matt Linden was deputy CEO of IFM.