Regulation and Growth of the Not-For-Profit Housing Sector: Discussion Paper 

3.1 The need for national regulation

A robust national affordable housing market needs an effective regulatory framework that is flexible enough to accommodate the diverse needs and structures of both existing and emerging housing providers.

Regulation must support growth and maintain high standards of tenancy management and enhance the sector’s capacity to operate across multiple jurisdictions.  Regulatory controls must be proportionate to the level of risk, encourage the adoption of optimal business models, and develop a market that suits large-scale institutional investors.

State-based regulatory systems seek, among other objectives, to protect the funder’s interests in respect of operations in the individual jurisdiction.  The need for not-for-profit housing organisations to be able to operate across State and Territory borders raises the problem of developing effective national regulations that protect the interests of all jurisdictions.

The potential exists for growth providers (both not-for-profit and for-profit) to control a significant share of the affordable housing market, increasing the risk to the sector should these providers become financially unstable.  National regulation has the potential to act more effectively in cases where organisational failure becomes a cross-jurisdictional problem.

Effective regulation will be particularly important as governments’ relationships with not-for-profit housing providers changes over time, particularly where their funding derives from a broader range of government and non-government sources.

3.2 Current Regulatory Systems

Current regulatory systems that operate in States and Territories are fundamentally sound and capable of forming a basis for a national system if linked to a national framework that reflects the interests of all jurisdictions, balances risk with the need for innovation and removes cross-border disincentives.

Regulatory systems now in place cannot on their own support a national, not-for-profit housing system that will contribute significantly to national supply.  Their focus is on individual jurisdictional interests and they lack portability across State borders.

Harmonisation of regulation between jurisdictions has not occurred, even among recently developed systems.  There are marked variations in State/Territory approaches to regulation of the community housing sector as summarised at Appendix C. All jurisdictions but Tasmania and the Northern Territory have legislation regulating the community housing sector, however there are differences in the scope and subject of the legislation.  Differences include the powers and sanctions available to the regulator, including the extent to which it can intervene in the operations of a registered housing provider.

The independence of the Community Housing Registrar from the Housing Authority varies between State systems.  There are differences in the definition of a registered entity from the very broad, for example a body corporate which provides community housing (NSW) to specifications around company type and purpose (Victoria and ACT) and charitable status (ACT).  Most jurisdictions have different tiers with different monitoring requirements and some have special provisions for growth providers and/or those seeking to leverage public assets.  Some establish minimum standards while others seek to promote continuous improvement with assessment tools ranging from external inspections to self assessment.²³  The government’s interest in funded property is provided for in some legislation while other jurisdictions rely on enforcement of funding agreements to protect public assets.

3.3 Regulation to build capacity and manage risk

Not-for-profit housing providers and governments agree that strong regulation is required in order to manage risk, protect against failure, bring down the cost of finance and help create an expanded community housing market.

The role of regulation is to set the benchmarks for governance and viability against financial and commercial performance.  There are inherent risks associated with an expansion of not-for-profit housing organisations' roles, including the housing of many disadvantaged households and billions of dollars in government funded assets.

A national regulatory system will manage risks to governments, taxpayers, private investors and tenants by

• encouraging the sector to deliver high quality and value-for-money services through continuous improvement,
• setting benchmarks for high quality governance, board capability, accountability and financial management skills,
• providing assurance for government that its social and economic objectives are met including standards of tenancy management.

3.4 Good regulation can attract greater investment in the sector

Institutional investors are more likely to contemplate large-scale involvement in the sector if they are convinced of the financial strength and management capabilities of not-for-profit housing providers.²⁴ International experience similarly suggests that private investment is more likely to occur in not-for-profit housing if a regulatory framework is in place.  For example, the UK regulatory regime is directly credited with reducing the cost of funds lent to the social housing sector.²⁵

Strong regulation and prudential supervision practices can help provide a level of confidence and assurance for investors, as well as provide the finance industry with the benchmarks and performance data necessary to determine suitability of financing individual operators. 

3.5 Prudential Supervision

Good prudential practice for not-for-profit housing is crucial to ensure that investment occurs on a manageable and affordable scale, thus protecting the financial continuity, and performance of the entity.

Advice from the Australian Prudential Regulation Authority (APRA) identified key elements of prudential regulation, appropriate for the social housing sector as follows:

1. Setting Minimum Standards
   Financial viability; management (including governance, strategic management and asset management); risk management and operational standards
2. Ongoing Monitoring of Providers
   Periodic reporting (financial and non-financial) and operational reviews (e.g. on‑site reviews or discussions with management)
3. Legal / Statutory Framework
   A legal framework with compliance requirements and effective sanctions.

While prudential regimes exist in some States and Territories under regulatory systems, these approaches are varied and include the use of Performance Standards, Regulatory Codes and Prescribed Requirements.

A review of good prudential practice characteristics across other comparable sectors including the Office of the Registrar of Indigenous Corporations (ORIC), Aged Care Approved Providers (Department of Health and Ageing), and the Early Childhood Education and Care (ECEC) services identified key commonalities:

• One national system with common standards across all providers
• Registration with ASIC as a company limited by guarantee in order to receive government assistance
• Meeting minimum standards to become a registered approved provider with regular reporting and compliance checks
• Suitability of key personnel / criminal history checks
• ASIC registration of all business trading names
• Minimising multiple compliance requirements
• Mutual recognition of standards to reduce barriers to entry.

3.6 How national regulation can attract increased private investment

To achieve a new class of affordable housing providers attractive to new investment, regulation needs to operate at the national level to support a national market, introducing regulation where none exists and removing duplication and differing standards that restrict national operators.

Institutional investors with the capacity to make substantial contributions to affordable housing finance do not want the inefficiencies of multiple regulatory systems.  The lack of an efficient, government-assured national market will hold back this source of capital investment.

Importantly, any new regulatory system should not impose an undue burden on a growing sector, nor discourage investment.  Investors might well regard an over-regulated sector as a virtual arm of government, unable to operate independently, flexibly and entrepreneurially.

Regulation can provide investor confidence in a viable and well-managed sector and is particularly important in attracting new investors to unfamiliar investment spheres, particularly if the benchmarks for prudential supervision, governance, management and financial competence are set against commercial standards.

Importantly, where effective regulation lowers risk to investors, it may also lower the costs of borrowing for the not-for-profit housing sector.

3.7 A proportional approach to risk and regulation that minimises red tape

Diversity across the community housing sector warrants a targeted, risk-based approach.  Many small providers will have no desire to expand or change, and a national regulatory framework will need to minimise regulatory burden on these providers.

Most State and Territory regulatory systems in place now differentiate between small, medium and growth providers, although they differ on definitions.  A national regulatory system should establish consistency in this regard, and ensure appropriate, risk-based regulations.

A national regulatory system needs particular focus on risks associated with organisations who wish to expand beyond the role of contracted tenancy managers to more complex business models that include capital raising, debt financing, property development and large-scale asset management.  Risk indicators change over time as organisations grow, and the regulatory framework needs to be broad enough and seamless enough to reflect a range of operational size and growth trajectories.

Questions:

Should national regulation apply to all not-for-profit housing providers, or only those operating at a large scale, with developer/owner capacity?

Smaller community housing organisations may not wish to merge with others, build houses or manage a larger volume. What then is the role of the federal government with regard to smaller organisations?

Using a risk based approach to regulation, what should be the thresholds for greater levels of regulation?

Is national accreditation, combined with the existing prudential safeguards in corporate regulation, sufficient for prudential supervision?

Could a national accreditation scheme that incorporates State/Territory regulation work effectively as a national scheme?  What are the lessons from cross-referral approaches in other sectors of the economy?

Should the regulator have a role in supporting industry adjustment – for example, resources to grow, restructure, merger or enter the market? Is such support necessary? Are recommendations on this best made by an advisory council at arms-length to government?

Is there one State or Territory, or aspects of laws from different States and Territory, whose current community housing regulation would be ideal for application at a federal level, or substantially fit for purpose?

Should State Housing Authorities be regulated in the new national framework so that public housing does not fall out of step with national standards?

23. V Milligan, N Gurran, J Lawson, P Phibbs & R Phillips, Innovation in affordable housing in Australia: Bringing policy and practice for not-for-profit housing organisations together, Australian Housing and Urban Research Institute, Melbourne, 2009
24. SGS Economics and Planning, A Vision and Plan for Social Housing in Australia, report commissioned by PowerHousing Australia, 2009, p. 25
25. C. Barbato, R. Clough, A. Farrar, P Phibbs 2004, Could regulating community housing make a difference to affordable housing? AHURI Research and Policy Bulletin Issue 34, Sydney Research Centre.