Social and affordable housing has become the darling of institutional investment in a growing number of global markets such as the United States and the United Kingdom.
In these markets investment managers realise that it can deliver sustainable, competitive returns for their investors and give them access to an attractive investment proposition that is underpinned by real assets and an unwavering demand for affordable housing.
In the UK today about 70 per cent of capital for affordable housing is sourced from private financing
This figure of 70 per cent is up from around one third in the 2000s according to the Impact Investing Institute.
With high quality, affordable housing, Sage Housing, for example, is using private capital to deliver housing for those on local authority housing lists. Last year it became the largest provider of new-build affordable housing in the UK and has just set a new target to deliver 30,000 homes by 2030 – an increase of 50 per cent on its previous goal.
It’s not niche players that are funding this growth. This asset class has the support of some of the world’s largest investment managers. Sage Housing is backed by The Blackstone Group who hold almost a billion US dollars in assets under management. Blackstone’s investment philosophy is centred around driving economic growth and making a positive impact by using flexible capital to solve problems, and to engage with local communities. Social and affordable housing investment is one of many investments that is delivering this for Blackstone, at scale, in partnership with Sage Housing.
Investors such as Blackstone have shown how private capital can add to the rental supply in the subsidised housing sector, and how it can stack up as an investment proposition in other markets. AXA is yet another example of a global player making impressive headway as a major investor in social and affordable housing in France and the UK.
The story in Australia
In Australia housing affordability is among the worst in the world, with Sydney ranked number two—behind Hong Kong—as the least affordable housing market internationally according to Demographia’s International Housing Affordability 2022 Edition. Demand outstrips supply in all Australian capital cities, especially at the lower priced end of the market.
Greater supply in the private market is unlikely to solve the problem of affordable rental at the scale required for those on very low incomes, as private market rental regularly exceeds affordable levels. Added to this is the lack of security of tenure it provides for renters. Alternatively, if the supply of social and affordable housing is increased this will at least put more people on this first step of the housing continuum and, in time, move some renters closer to the private market.
A young couple on the average Australian salary saving 20 per cent of their after-tax earnings towards an entry-level house would need to save for more than eight years in Sydney or six and a half years in Melbourne, according to research by Domain. Home ownership may not be the answer for all renters, but for the most fortunate, affordable housing can be a stepping-stone that gives them the best possible chance to save for a deposit. Government efforts such as the NHFIC First Home Loan Deposit Scheme will also support these first homebuyers to move further along the housing continuum.
Whether social and affordable housing is a safety net or a stepping-stone, there is undoubtedly an unwavering demand. The Leptos review predicted that $290 billion of investment would be required over the next 20 years to deliver the 600,000 shortfall of social and affordable housing units in Australia.
If other markets can attract institutional investment at scale, why is Australia lagging?
In its 2021 Report, Frontier Advisors documented four key challenges for institutional investors developing a portfolio in Australia:
- the capital gains tax discount of 50 per cent is available to individuals but not institutional investors
- institutional investors are unable to negatively gear costs against assets
- the treatment of stamp duty and land tax at a state or territory level acts as a disincentive to large scale investors, and
- finally, there are no concessions for GST.
In summary Australia’s affordable and social housing asset class is lacking the necessary government support, in terms of tax treatment, to generate acceptable returns for investors.
In summary Australia’s affordable and social housing asset class is lacking the necessary government support, in terms of tax treatment, to generate acceptable returns for investors.
As a result of these barriers, build to rent (BTR) as an affordable housing class in Australia is in a nascent stage compared to other global markets where these challenges have been, in some way, addressed for those trying to provide housing to society’s most needy.
In the US the federal low-income housing tax credit (LIHTC), inclusionary zoning and opportunity zones (OZ) promote institutional investment into distressed geographical areas in exchange for tax benefits to investors. Meanwhile in the UK the affordable homes program (AHP) is a government grant that encourages development of affordable housing for rent or sale. VAT exemptions, the British equivalent of the GST, are also available.
Super funds face additional challenges
For more than a decade now, many have identified affordable housing in Australia as a potential asset class fit for super funds looking for new investment opportunities with a strong ESG profile. However, until recently there has been insufficient understanding of how to match the complexities of the affordable housing regulatory and risk environment with the return objectives and time horizons of super funds. And this must be achieved with the emergence of APRA benchmarking fund financial performance in the MySuper Product Heatmap. It’s not a simple match, instead it requires an approach to structuring the housing asset and returns in a way that is workable for funds. It requires deeper investment of time and thought by both housing providers and super funds in designing those structures to demonstrate their viability.
But it can be done. When current projects are complete Aware Super will provide affordable homes for 1,800 key workers with an estimated value of more than $1 billion. This is on top of several hundred apartments it already rents to key workers. Aware Super is leading the Australian funds in this asset class, but this is a long way from the 600,000 properties needed over the next 20 years.
Progress has been made but institutional interest, particularly amongst the super funds, will be strengthened by stronger policy signals
The Morrison Government’s NHFIC was a game changer for the community housing sector to help attract investment from the private sector, and the NSW and Victorian Governments have taken some steps in tax policy to assist in the construction of BTR affordable housing developments.
The recent Falinski review put forward a range of policy views that included universal agreement across the political spectrum that housing affordability is an issue, broad recognition that sub-market affordable rental housing is an essential part of the market, as both a safety net or a springboard, and appreciation of the increasing momentum towards social and affordable housing as essential infrastructure to underpin the future success of our economy and communities.
On the other side of the political divide Labor has put forward the Housing Future Fund, which focuses on boosting supply, as an election policy. With the growing need for solutions and weight of evidence of the negative impact of a housing shortage on so many Australians, there will no doubt be a range of efforts to address affordability from any elected Government.
Making progress to attract the super funds will require a coordinated approach from all levels of government to ensure that tax, regulatory policy or financial incentives focus on scalable development opportunities. Without attractive scalable investment conditions, the impact will be limited.
If government gets the settings right, Australian super funds will have more opportunities to invest into these ESG aligned assets that open the door of opportunity for lower income Australians.
