In the race to secure superannuation capital which is increasingly flowing to mature overseas markets, the Australian social and affordable housing sector needs more time to prove its worth.
Housing Australia chief executive Nathan Dal Bon says despite being a nascent asset class, there’s no compromise on returns expected for funds if they get behind the Labor government’s flagship housing initiative, suggesting the lower-return narrative is based on a “misunderstanding”.
Earlier this month, the first tender under the $10 billion Housing Australia Future Fund (HAFF) and National Housing Accord Facility (NHAF) backed by investors including Cbus opened for applications from charities, local governments and special investment vehicles participated by eligible applicants.
During an information session for applicants, Housing Australia said the objective is to let people live in new dwellings as soon as possible.
Large-scale metro projects favoured by institutional capital will be a prime initial candidate of the tender, but Dal Bon says regional projects whose planning has the potential to be fast-tracked won’t be overlooked.
“For the first round, it’s probably going to be a lot of those projects that are ready to go and have a DA (development application) in place. There is an expectation that once we settle documents, construction will start within 18 months,” he tells Investment Magazine.
“If you’re starting from scratch for a high-density project, for example, that might be a fairly tight timeframe, so you may see more of those projects come through in round two and three.”
No haircut on returns
The timing, frequency and scope of HAFF and NHAF’s funding rounds over the next five years will be determined following the first tender, and the process will be fine-tuned.
Dal Bon says this is partly to make sure the programs continue to be an attractive proposition for super funds, adding that he’s encouraged by what he’s been hearing so far.
“We think the ingredients are there [to invest at scale] but ultimately, we’ll have to see what individual investors decide to do,” he says.
Dal Bon says he is aware of the public debate around whether social and affordable housing is an appropriate investment for super funds. The asset class’s perceived lack of returns is the key issue, which would breach the sole purpose test and penalise funds under the rigorous performance benchmarks they are subject to.
Dal Bon says it’s not Housing Australia’s job to change those criteria.
“There’s certainly no intention with this scheme for investors to take a haircut and that’s the way that we’ve approached this from day one,” he says.
“We can’t and we’re not trying to influence their rate-of-return hurdles, but things that we can influence, for example, are the degree of risk that are potentially in the transaction.
“I think there’s probably been a bit of a misunderstanding that somehow super funds would have to compromise [if they invest in the scheme] and that is absolutely not the case.”
International lessons
While Australian funds are hesitant towards the local social and affordable housing sector, many are enthusiastic about global opportunities.
Last year, the $150 billion Aware Super injected $900 million into UK built-to-rent (BtR) company Get Living, with a plan to invest more as projects develop.
Dal Bon acknowledges there’s a gap between Australia and more mature markets such as the US, where tax credits can be issued to affordable housing developers and subsequently sold to investors as an incentive. But closing the gap is going to take time.
“The organisation that we were initially based on in the UK, for example, the Housing Finance Corporation, they’ve been operating for 30-plus years, and we’ve been operating for five and a half years,” he says.
“I think investors have seen that track record. There’s been that continuity and certainty, so they understand the system and they know how to engage.”
Dal Bon hopes the fact that HAFF will operate in perpetuity can start building some of that “evidence base” for investors and tapping into the “catalytic” role that all governments in mature markets have in attracting private capital.
“Whoever that government is in the future, they can determine what else they want to do, but they’ve got a platform to build on,” he says.
The long-term game
Dal Bon’s perspective is that social and affordable housing is a form of BtR property, except that the Australian market is largely premium, and investors are typically unwilling to hold for more than 15 years before selling.
Projects under HAFF will receive government subsidies for 25 years, in the form of quarterly availability payments, concessional loans or upfront capital grants in exceptional circumstances.
While these dwellings can be sold at the end of the term, it must come after accommodating the tenants elsewhere and proving that they’ve contributed to the greater social and affordable housing system, such as by letting charitable housing providers retain ownership.
He says the feedback from institutional investors has been that the HAFF and NHAF schemes lend themselves more to infrastructure-styled investments rather than as real estates.
“Our concern… is that if you go too short in terms of the timeframe, obviously tenants would have to move out,” he says.
“When you’re talking about social housing, where a lot of people are on some form of support from government welfare, that can be very disruptive.”
“Making sure tenants are not disrupted is very important because it is seeking to fulfill a government objective and helping those people most in need.”
In the latest investment update from Future Fund, the $10 billion HAFF portfolio has generated a return of 0.7 per cent as of 31 December 2023 and is valued at $10.07 billion.
