Australia’s asset owners agree that there is enormous potential for large-scale investment in affordable housing if the federal and state governments remove the hurdles that prevent the economics from making sense. Barriers include land unavailability, high costs and onerous GST charges on construction costs.
During the ASI conference on Wednesday, Damien Webb, head of income and real assets at Aware Super conceded that the state and federal governments are focused on support jobs in construction, an economic recovery and supplying affordable housing.
In addition to the obvious hurdles to institutional investors, he noted the tax breaks afforded the not-for-profit community housing providers (CHPs).
“More programs with CHPs is a great way to increase supply,” said Webb, noting that these tax breaks are not available to private investors who want to invest in affordable housing. “It would be great if we could get additional incentives,” he told delegates.
Webb explained to the delegates GST on construction costs is a massive 120 basis points of total return.
“The trick in the system is if you build-to-sell, you can claim back input credits but not if you build-to-own,” he said.
Webb told delegates he has raised this with Canberra but there was little appetite for what would be a very significant reduction for superfunds.
Web conceded that there was some positive movement at the state level.
Linda Cunningham, Cbus’ head of debt and alternatives wants to see continued government support for the National Housing Finance and Investment Corporation (NHFIC) up and running for just over a year.
Some think that the government is borrowing to fund CHPs but it’s really issuing a guarantee. It’s a contingent liability on that balance sheet – the capital markets are actually funding NHFIC. “If any CHP defaulted on the loan, it calls on the federal government but it’s a very low risk since the NHFIC structure includes building up a loss reserve,” she explained
“NHFIC was a gamechanger for CHPs It provides a way of getting debt – since they don’t have access to equity – enabling them to do the development and access cash flows.”
“So let’s push for NHFIC to generate even more loans to CFP.”
Cbus invested in NHFIC’s first bond issuance, with the proceeds going towards increasing supply and reducing the overall cost of affordable community housing.
Cunningham said this underscores the demand for this type of investment which improves supply and provides a low risk, sustainable return for our superannuation members.
All panellists agreed that the concession model makes sense citing PPPs as an example.
“We would be open to the PPP model as long as we get the right rate of return for the associated risk of using that land to develop affordable housing and operating it with the CHPs,” Webb said.
Josephine Toral, an analyst with HESTA’s unlisted assets team also argued that the leasehold model mirrors a PPP in that you hand it back after 40 years or so.
“It’s about getting the getting the economics right,” she argued. “If you believe in the stability of affordable rent, it can create a return outcome which is appropriate relative to other opportunities that we see in the PPP market.”
Webb closed the session by saying tenancy rental is robust and stable just when office and retail property are facing severe headwinds.
“While funds have shied away from too much exposure to residential property, it is entirely plausible multi-family asset that can be a very stable part of funds’ return stream. This is how we are thinking about it as we put together portfolios for the future.”