Social housing in Australia has been in neglect for more than two decades. With a growing shortfall, ballooning waitlists and exploding queueing times across the country from minimal investment, the sector desperately needs a way to fund the construction of new below-market rent dwellings – and quickly.
With the support of the Greens, Labor’s $10 billion Housing Australia Future Fund (HAFF) has finally passed the Senate. This will usher in a new funding mechanism enabling publicly subsidised, privately financed, social and affordable housing development.
“Superfunds and other institutional players are looking for new investment opportunities, and governments are looking to boost social housing construction while minimising new debt on the public balance sheet,” says Professor Hal Pawson, Associate Director at UNSW’s City Futures Research Centre. “With the HAFF framework, Australia has a new national match-funding mechanism to enable institutional investment, which will help expand much-needed social housing production.”
How will the HAFF enable social housing investment?
Under the HAFF, the Australian Government plans to borrow A$10 billion to invest in equity markets, generating an estimated $500M annual return to subsidise housing development that, backed by investment income, would be accounted as ‘off balance sheet’ expenditure. That is, formally sitting outside of the annual budget.
Emulating similar but much smaller frameworks established by several states, including NSW, it is understood community housing organisations will then secure private (debt) finance from institutional investors like superannuation funds to develop 30,000 units in the program’s first five years, underpinned by government contracts for annual subsidy payments for 25 years.
“Crudely ignoring inflation, the maths of this will see subsidy paid out at $500 million a year for 25 years, summing to $12.5 billion over the period, and therefore implying a per dwelling subsidy totalling $417,000 across the 30,000 unit program,” Prof. Pawson says.
Along with tenants’ rents, these subsidy payments will enable the housing providers to meet finance costs – interest and repayment on institutional debt – as well as ongoing housing management and maintenance. In other words, institutional investors will be financing a program largely funded by government subsidy.
“The upside of this mechanism is that, for a given annual amount of public subsidy, it effectively enables the government to bring forward social housing investment,” Prof. Pawson says.
Expended more conventionally through capital grants, a given annual subsidy spend (e.g. $500 million per year) would generate far fewer dwellings over the first few years of a program, Prof. Pawson says.
“If the subsidy needed to build each new social housing unit is $417,000, a $500 million capital grant program would give you only about 6000 in the first five years, not 30,000,” Prof. Pawson says.
But Prof Pawson says there is also a downside to the HAFF.
“Once the 30,000 homes have been contracted near the start of the program, the income stream generated by the $10 billion HAFF investment is fully committed for the next 25 years,“ Prof. Pawson says. “In isolation, 30,000 new units will make only a very modest start towards redressing Australia’s far greater social and affordable housing shortage.
“But if governments insist on this form of procurement, extending and expanding the program beyond this tranche will be possible only by boosting the value of the HAFF itself – for example, by pledging another $10 billion equity investment stake.“
Leveraging institutional investment
Institutional investors, like Australia’s superannuation funds, regularly invest in infrastructure assets, like roads, ports and tunnels, but few have a direct stake in social housing – or, indeed, in any form of rental housing.
“There’s potential for social housing to attract institutional investors like superannuation funds, but up until now, Australia has generally lacked the right government policy settings to ensure the returns are comparable with competing risk-adjusted investment options,” Prof. Pawson says.
Importantly, the returns on social housing as an asset class are predicated not on capital gains via property sales but a steady cash flow from rent revenue ensured via long-term government contracts, such as those expected to be struck under the HAFF. From the investor perspective, it’s a low-yield, low-risk stake that can form part of a diverse, balanced fund portfolio.
“In this model, the institutional investor is providing debt, not equity. Their financial input doesn’t buy them an equity stake in the building,” Prof. Pawson says. “Instead, with debt repaid after, say, 25 years, the properties are eventually outright owned by the community housing organisation for retention as low-rent homes in perpetuity.”
Large corporations having a stake in social housing might prompt anxieties. But Prof Pawson argues the arrangement could bring added benefits.
“For the ‘big end of town’, it would give them some skin in the game, in a part of the housing market they haven’t had much interaction with before,” Prof. Pawson says.
“From a strategic point of view, it means those companies will have a vested interest in the vitality and sustainability of social housing and will be motivated to protect and defend it into the future.”