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Three ways to match housing affordability with good returns

If there is one positive to take away from the past year, it is the importance of what we do together. The adverse impacts of a pandemic fall disproportionately on the most vulnerable: people living in poverty, the working poor, women and children, persons with disabilities, and other marginalised groups around the world. Loneliness and mental health issues spiked amongst our most vulnerable, millions of children experienced a new mode of education and, of course, we were reminded that like a pandemic, climate change can have far reaching consequences for our global economy if left unchecked.

Our Impact Fund focuses on each of these areas through its four key investment sectors including specialist disability accommodation, social housing, community solar and social impact bonds.

Social housing is the focus of this article where we look at the sector and how to address the challenges of social housing investment in Australia.

Why is housing such a challenge?

Few would dispute that housing is a fundamental human need, yet even in a developed economy like Australia the provision of stable housing is not guaranteed.

Housing is also an asset class and sits at the intersection of human needs and financial markets. It is an area where impact investment is uniquely suited to address the challenges society faces in providing shelter to those in need.

Housing affordability is a challenge globally, and is particularly acute in Australia, where demand and supply side factors have combined to increasingly push housing beyond the reach of many families.

In the short term, house prices increase because of demand side factors, including government policies encouraging home ownership designed to create financial security for voters, falling interest rates, and wealth inequality that drives demand for certain types of housing.

Over the longer term, house prices stay high because of supply side factors, including lack of appropriate supply to address demand, NIMBYism stalling development of new housing stock at scale, and in some cases, policies designed to support housing (such as rent controls) that also deter new developments.

How big is the challenge?

On a given night in Australia, one in 20 households need to rent social housing, but that statistic does not account for the large waiting lists of people vying for shelter.

Digging into the state level provides a better understanding of some of the challenges, as all states in Australia are governed by different regimes and dynamics for social housing.

Victoria, where Conscious Investment Management is based, has the lowest level of public and community housing stock in Australia (3.2% of all housing stock). The national average sits at 4.5% of all housing stock as social housing. To simply maintain its social housing stock at 3.2%, Victoria will require 3,500 new social housing beds to be built every year for the next 10 years. Similar calculations can be made for other states.

In NSW, in 2018 there were around 53,000 applicants on the social housing wait list. Of these applicants, 23,000 were households with children. Wait times were beyond 10 years for social housing in many areas.

What are some solutions?

Governments and various community organisations have tried different policies and approaches over the past few decades, with varying degrees of success.

Incentives and concessions for developers, planning restrictions, direct financial support of community housing charities (say through cheap debt), or cash payments directly to social housing tenants all have a role to play. A major boon for the sector was the launch of the Commonwealth’s National Housing Finance and Investment Corporation (NHFIC) in 2018 to provide an increase in low-cost financing for social and affordable housing providers.

Financial markets and institutional investors have also begun focusing on the sector over recent years, attracted by perceived scalability and stability of returns.

A challenge for these investors, however, is that investors typically require ‘market’ rate financial returns. By definition, social housing tenants cannot pay market rent. That disconnect is difficult to solve and remains a key reason why financial investors have not entered the asset class at scale.

Three investment angles address the challenges

We have focused on the sector from a few angles:

1. Build-to-rent investments

  • After a positive experience investing in the US ‘multifamily’, or ‘build-to-rent’ sector, which has been responsible for significantly increasing affordable housing supply in the US, we’ve sought analogous investment opportunities in Australia.
  • Build-to-rent in Australia is a new industry, and many build-to-rent developments underway are not necessarily ‘affordable’ (even if marketed as such). We expect to continue assessing the sector.

2. Working with Community Housing Providers, often charities, to understand novel ways that our funding can play a role to support their mission.

  • For example, we have explored pairing social housing with specialist disability accommodation or other commercial real estate to obtain a ‘blended’ market rate return.

3. Direct engagement with governments to seek a concession.

  • Analogous to our investment in specialist disability accommodation, Government support can assist in addressing the gap between what a tenant can afford and market returns.
  • By plugging the gap between market returns and social housing rents, Government can drive increased private sector engagement and investment in a sector as it matures towards institutional scale investment.
  • This is the most attractive way to structure social housing investments, but also the most challenging.

As impact investors, we are dually focused on long-term investments that drive positive change, as well as the generation of stable and strong returns for our investors.

We spend months and even years understanding an area of need and the sector that seeks to address it, to make investments that can combine both impact and financial returns.

 

Matthew Tominc is Chief Investment Officer at Conscious Investment Management (ACN 630 131 476 AR No. 1275316), a Channel Capital partner. Channel Capital is a sponsor of Firstlinks. This information is not advice or a recommendation in relation to purchasing or selling particular assets. It does not take into account particular investment objectives or needs.

For more articles and papers from Channel Capital and partners, click here.

 

2 Comments
Mic Smith
January 31, 2021

I have worked for the NSW Department of Housing for 16 years and the wait list during this time has always been in excess of 50,000. The wait list is a very poor measure of housing stress. Those around 50,000 on the wait list currently live somewhere (aside from around the 2,000 odd living on the streets) private rental market, relitives, friends etc, however they want to improve their circumstances by getting on government housing. Why wouldn't you. You have tenure for life with a maximum rental of 30% of your gross (declared) income paid in rent in housing which in 90% of cases if absolutely first class.
Beats the hell out of sacrificing and working your backside off to earn a deposit and then paying off for the next 30 years.
It is not surprising that it is almost impossible to get anyone off public housing once they are in it. One of policy issues is when a family occupies a large house and the children grow up and you have the parent or parents occupying a 3 or 4 bedroom house. It is hellishly difficult to get the parents to "give up" the large house and move to smaller public housing. such action would free up 3 and 4 b/r housing for families on the wait list. To encourage this "downsizing" in 2018 the NSW government brought in a policy that all unoccupied bedrooms would be charged at an additional $20/week. Fair enough. However what happened was a backlash of tenants to their local members protesting both the additional charge and the accompanying encouragement to move. It is now almost a given the tenant who does not want to move protests they need the additional bedroom/s for an overnight stay of a Carer, or grandchild or some other medical/social need and so exempt themselves from the additional charge. In my area I know of no tenants who pay the additional charge. This is behavior is actively encouraged by the local State member whose political base is substantially public housing tenants. This just one example of one of the many rorts that public housing tenants get up to. Another one is the cash economy. I never cease to be amazed by the expensive cars, and "toys" (boats, motorbikes etc) that the public housing tenants enjoy. I could go on, however having worked in the NSW Department of Housing for many years I have little sympathy for the constant bleating about "the public housing crisis". The whole debate has been highjacked by rent seekers in the literal sense of the word.

John McLennan
January 28, 2021

The increasing cost of housing in recent years is caused by the population increase which has reduced supply and increased housing costs - plus low interest rates. I came from a low, very low socio-economic large family. It took me ten years to save up enough money to put a realistic deposit on a house. This meant depriving myself of other things like an expensive motor vehicle. Today's generation do not seem to have any 'saving plans' and often rely on their parents to support the purchase of a property
But the big issue is migration. Melbourne now has 5million people and its liveability has decreased accordingly and has resulted in less young people being able to afford minimal housing.

 

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