Key issues:
- Sustained and cost effective private finance at scale is critical to building affordable housing in the longer term.
- The challenge is creating a long-term affordable housing investment class.
- Leverage for growth is a function of tenant profile, cost of finance, organisational sophistication and quality of housing stock.
- The challenge for not-for-profit housing providers is balancing their role of providing housing to low income, special needs tenants with the need to optimise rental income.
- The government is concerned to protect existing assets as supporting stock growth.
6.1 Raising and Allocating Funding
Social housing in Australia has traditionally been built through capital programs fully funded by Government.
Access to capital funding is a key consideration, but not all funding needs to come from government. Social and affordable housing growth can, and is increasingly funded by a mix of public and private investment. NRAS has shown that investors can be attracted to housing developments through participating as partners with developers, builders or not-for-profit organisations.
Following the introduction of a robust regulatory system, the United Kingdom has seen a remarkable growth of private investment in social and affordable housing (AUD$93 billion equivalent in 2003). In 2006 there were around 150 lenders engaged with not-for-profit housing associations. The establishment of the Homes and Communities Agency in 2008 centralised the management of capital and investment programs, including the development of national tools such as joint ventures to access private finance and promote development.
A robust, well regulated not-for-profit sector will of itself be more attractive to greater investment. Regulation and prudential supervision will increase confidence in the sector and may also help lower loan-to-value ratios for the sector as a whole.
6.2 The role of cost-effective private financing at scale
Institutional activity in residential property has been limited in part by the disincentives of high-cost property and tenancy management compared with commercial and industrial portfolios. A 2009 study29 found that limited institutional activity is also caused by the absence of an efficient entry point into this market, combined with a lack of understanding of the advantages and disadvantages of investing in residential property. Institutional investors also require large scale investment opportunities that would be difficult to deliver with the current operating scale of not-for-profit housing organisations.
Financial institutions are receptive to new debt finance for new property and have shown a commitment to owner-occupier housing loans. To encourage lending to not-for-profit housing organisations, it may require these organisations to work with the finance sector to reassess risk in the context of a national regulatory system. It may also require that financial institutions adopt a preferential risk-weighting to these organisations, as they currently do for individual home buyers.
In Australia, despite an average return on residential property of 13 per cent over the 10 years from 1998 to 2008, institutional investment in residential property remains tentative. This suggests a need for greater engagement with the sector, to better understand the incentives and assurances required to encourage private investment.
While the Australian experience in raising private finance for social housing is limited, there are some emerging examples. In NSW, through the Affordable Housing Innovations Fund, registered community housing providers will deliver 356 new dwellings. This is 214 dwellings more than the NSW Government could deliver alone. Registered not-for-profit providers will contribute equity and debt of $55.5 million to these projects. In Queensland, the Brisbane Housing Company has received a total of $128 million from the Queensland Government and the Brisbane City Council. It now has 707 dwellings in inner-Brisbane with an estimated asset value of $167 million and access to $30 million in bank debt and has $8.2 million in liability.30
Some Australian not-for-profit organisations now achieve leverage rates of between 15 and 40 per cent.31 Not-for-profits also have competitive advantages in the development industry, benefitting from GST exemptions on the supply of housing and land tax and payroll exemption in most jurisdictions.
6.3 Rental income
Private investors want a return based on good rental income and capital appreciation.32 While capital growth alone may be sufficient for some individual investors, it is not sufficient for many institutional investors.
Improved rental returns for not-for-profit housing providers could be achieved through a tenant mix that optimises rental income while maintaining provision for disadvantaged households. It may mean moving to some degree from income-linked rents to rents based on the quality and location of dwellings (while maintaining affordability benchmarks). While improving overall rental returns, this would also have the advantage of sending market signals to existing and prospective tenants about the value of the housing, and help to remove workforce disincentives. Community housing tenants are already prepared to pay rents that are higher than for public housing and demand for this type of housing has remained high, indicating some scope for improved returns for providers.
Affordable housing operators may need to offset their provision for very low income tenants with a proportion of tenancies that can deliver an overall operating surplus.
6.4 Protecting government investment in social housing assets
It is important that policies not work against each other. The prospect of raising debt against social housing assets must be considered along side the strong desire to protect government investment.
The transfer of public housing stock to the not-for-profit sector is currently controlled by State and Territory Governments. State and Territory Governments who attach conditions to protect the right of social housing tenants and the value of public assets. The conditions used vary in each jurisdiction.
Across jurisdictions there are a variety of protective mechanisms for government investment including caveats, director’s interest and mortgages (see Appendix C). It is unclear what impact these approaches have on raising private investment.
In establishing a national regulatory system, the Australian Government seeks to identify a common approach that would provide for leverage within an acceptable risk management framework.
6.5 Competitive allocation of funding
Competitive allocation of funding can drive improvement in the performance of not-for-profit housing organisations. Some options for future consideration that could help deliver more efficient allocation of available funding include:
- Providing public housing and not-for-profit housing organisations with access to capital funding on the same conditions
- Mandatory regulatory requirements as a pre-condition to accessing capital funding from government
- Funds allocated on a regional or sub-regional basis in response to housing market pressures.
Questions:
What would help to attract greater private investment in the Australian affordable housing market?
What financial vehicles for investment would be appropriate in the Australian context?
What partnerships need to be developed to attract private investment? How and by whom could major joint ventures be brokered in Australia?
Is there a role for a national broker for large scale affordable housing investments?
What level of mortgage is acceptable on social housing assets? Who will carry the risk and how can we protect stock levels as well as achieving growth?
By how much is it possible to leverage? What barriers are there to leveraging? What is a reasonable debt to value ratio to enable leveraging? Is asset transfer required or does tenancy management provide sufficient income to leverage?
What interest should States and Territories retain in transferred properties?
Are pre-existing State Government asset protection measures a significant barrier to leveraging?
What would be the outcomes of competitive allocation of funding?