It is time to think differently about creating an investible asset class that can bridge the housing divide.
You could say Ina Ahmed won housing’s version of TattsLotto.
One of roughly 400,000 Australians on a housing waiting list across the country, Ahmed has been living in transitional housing in the inner Melbourne suburb of Kensington since 2019.
Her prize arrived last year: a brand new, two-bedroom apartment with space to house her young nephew and make a home. But she also gained access to an employment agency that helped her quickly secure a job at a nearby hospital and a plan to study for a graduate diploma in nursing.
Conscious Investment Management has created a social housing model that could be scaled to help solve the challenge.
Ahmed is part of a new approach to tackling Australia’s homelessness, where investment in social housing is about more than just providing homes. It’s also aimed at moving vulnerable people along what those in the industry term the “housing continuum”.
That means the apartments, in this case built and managed by impact fund manager Conscious Investment Management and housing agency HousingFirst, also come with access to critical services, spanning everything from employment to mental health.
They’re also generating stable returns for investors in Conscious Investment Management, which include the Paul Ramsay Foundation and Future Super.
The $150 million investment that housed Ahmed was made possible through Homes Victoria, part of a $5 billion state government program. But the industry says achieving the scale required to fix the problem nationwide will require the federal government to step up.
Social housing has been thrust into the spotlight as the federal government grapples with how best to spend $10 billion of its own money on what Andrew Cairns – chief executive of housing association Haven; Home Safe and former Bendigo and Adelaide Bank executive – calculates is a $200 billion problem.
Getting those most vulnerable Australians – of which there are 60,000 in each of Victoria and NSW alike – into homes is the focus amid talk of “encouraging” our $3.1 trillion superannuation industry to invest in new social housing supply to plug the gaping hole in funding.
Cairns reckons the government would be better off focusing on the entire housing system, rather than homing in on any single component – social, affordable, or build-to-rent – to create an investible market.
Making the economics stack up means understanding the “continuum” that Cairns and others working in the 500 housing associations and community housing providers across Australia say can shape the lives of people such as Ahmed.
Haven’s Andrew Cairns says super funds need to ask themselves what their role is in redeploying capital back into its points of origin.
Moving from homelessness to transitional housing to social housing with access to health, employment or study opportunities means people can then progress toward less capital-intensive housing such as affordable rentals, build-to-rent or even into homeownership through shared equity schemes.
At each step along the way, the risks and returns for investors – and the need for government subsidies, tax exemptions or other incentives – change, says Cairns.
“What they do in the United States is understand the flow of money. They understand who plays what role in the integrated capital stack – the role of traditional debt providers in a highly regulated market, the role of pension funds, the role of the philanthropic market, the role of mezzanine debt providers, the role of the community development financial intermediary market and then the role of the actual asset manager or asset owner.
“They have different tenures, different risk profiles, different rewards and different liquidity event triggers. But it’s underwritten by long-term support at either, in our terms, local, state or the federal government level.”
This comes in the form of long-term tax credits or long-term funding arrangements that underpin certainty for investors in US housing markets “because they understand housing as an asset class”, says Cairns. “They’re able to package their asset class into REITs or into bonds or into financial instruments to attract forms of capital because they understand either the tax credits or other incentives that underwrite it.
“If you take the low-income housing tax credit – a 30-year tax credit – people either bank that and use that as the means to be able to offset the investment or give them some of their yield gain.
“We’re not looking for a guarantee, but we’re looking for higher levels of certainty around the risk profile.”
Unlike affordable housing, which targets lower-income workers such as nurses and hospitality staff who keep cities going, and has become a relatively easier sell for developers and investors (usually as part of a mix within a regular development), social housing can require the delivery of complex (and costly) essential support services through housing associations and community housing providers.
HousingFirst chief executive Haleh Homaei says it is important to recognise that a proportion of tenants will always rely on social housing and have long-term support requirements. Social housing rents are capped at 30 per cent of household income, which is usually either a government payment or a low-income wage, compared with 75 per cent to 80 per cent of the market rent for “affordable housing”.
This means social housing is typically only part of the mix when it’s mandated by local government. In return for prized land near the cities, developers are required to include some affordable and some social housing, or cough up funds to be used to develop it elsewhere. In the US, for example, this is usually 30 per cent of all homes built and there are now calls for state and local governments to embed quotas into planning rules.
But Homaei and Cairns argue that the services that make social housing comparatively expensive and are seen to stymie investor returns also need to be viewed in the context of generating economic contributions over time. Once tenants have a roof over their heads and access to services, 30 per cent of their household income potentially becomes nominally larger over time.
Social housing tenants also have the potential to progress into other categories of housing, and even homeownership, a fact some observers point out is missed by the developers who shun the sector believing it detracts from upfront property sales.
“Viewing housing as a form of infrastructure, there is also a need to measure value creation from the social aspect as well as from a financial aspect,” says Cairns. “For 400 years we’ve understood financial capital measurement through the return on invested capital. But we don’t yet have a harmonised measurement for social capital and that’s something which we need to truly bed down.”
Cairns says governments need to play the role of market-maker in reframing the discussion away from purely subsidised housing into thinking about the contribution housing makes to businesses, particularly in the regions where attracting workers is becoming harder.
“The commentary is very much focusing on social and what I consider to be submarket affordable housing. But we also have the rise of the mid-market and the key worker. Business cannot attract key workers to their regions and markets. Then is it a community problem or a business problem rather than a housing affordability problem?” he asks.
“There are elements of the housing continuum, which are in mid-market that don’t need a subsidy and actually need a different participation in the capital stack.”
That’s where super fund Aware Super has been the most active, building affordable housing for the types of essential workers that make up its membership. Michelle McNally, chief executive of Aware Super Real Estate, says part of their ability to generate returns lies in the recognition that people won’t need affordable rent forever.
Michelle McNally: “Affordability is one thing. It’s availability as well that’s the other issue.” Renee Nowytarger
“We don’t provide rental accommodation so people will stay there for eternity; we look at it as a way in which they can pass through to get to their next housing proposition,” she says. “It delights us when people have saved enough money for their own deposit or for a house and if our program helps them do that in a small way.”
McNally echoes Cairns in saying affordability is not the only barrier to access housing, but the need to scale developments is also an issue.
“Affordability is one thing. It’s availability as well that’s the other issue. So from that perspective, I think you could bring great improvements in both supply as well as the government position on tax and a few other issues as well,” she says.
The success of US models is also a result of policy settings that are not yet found in Australia – covering construction costs, planning and tax incentives.
“There’s no doubt that it will increase but it’s been a long way to go. The portion of the total market is small compared to the total investible universe of residential,” she says.
Banks are also getting more active as they look to fulfil the “S” in their ESG-funding targets. ANZ Banking Group has quietly put aside $10 billion to finance affordable, secure and sustainable homes to buy and rent by 2030.
One banker familiar with the sector says the returns are attractive and working with housing associations and community housing providers that know and understand their tenants, as well as the certainty of knowing there is demand, should encourage more investment, particularly as real estate markets soften.
Although bankers view the incorporation of social and affordable housing as de-risking new developments because demand is certain, particularly as the property market slows, there are still developers who fear that low-income tenants will detract from overall sales.
Homaei says that “at the moment, the incentives still are not at the table” in a long-term and sustainable way.
“If you look at other markets in different parts of the world, there are exemptions available or incentives such as inclusionary zoning that means it has to be part of the planning process and it incentivises the developers and builders to actually include social housing and affordable housing into their development plans.
Halei Homaei of HousingFirst says social housing incentives are not yet on the table.
“It can’t be an afterthought, it has to be in from the beginning, which is when we’re talking about planning cities, when approving planning applications for a development.”
Cairns says super funds also need to look at where they are generating their funds and not simply reinvest people’s contributions through fund managers in Melbourne and Sydney into the cities.
He says the super funds need to ask themselves: “What’s your role in redeploying capital back into points of origin? How are you actually challenging yourselves to understand that you have not only a commercial contract, but a moral contract with regards to the communities in which you’re obtaining capital from?”
If the government sees itself as a market maker, it also needs to look at ways to create a scale that makes it easier for more super funds to invest.
As Cairns explains, the 500 community housing providers and housing associations have more than $200 billion worth of housing assets combined, but it’s a fragmented industry. Haven Home Safe has about $460 million of assets “but we’re invisible to the property sector, because people invest in a port or an airport for $5 billion rather than even look at a $200 billion market,” says Cairns.
CIM’s chief investment officer, Matthew Tominc, hopes the impact manager can expand the model to benefit more vulnerable Australians.
“It’s been well discussed that social and affordable housing is a challenging area for investors to receive their target risk-adjusted returns,” he says.
“Through this innovative investment structure and with HomesVictoria playing an enabling role, we hope we’ve proved up a new model that provides government with long-term savings, social housing tenants with access to secure housing and private investors with market-rate returns. We’ve learnt a lot and we’re hopeful of extending the model.”
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