Australia’s $9.6-trillion-plus residential market is finally coming onto the radar of large superannuation funds, as a convergence of key economic and social trends help create a more conducive environment in the housing sector for institutional investors.
In a low or zero interest environment, the 3.5 – 4 per cent return from residential property begins to appeal as a viable option to fixed income assets, such as bonds and cash.
The long-standing pillars of property investment – prime retail and office – are no longer the defensive assets they used to be. Logistics, that other pillar of today’s commercial property market, is highly priced.
Meanwhile, housing affordability and an increasing focus on the “S” (social) in ESG compliance are factors helping change the age-old mindset against residential property among the chief investment officers of superannuation funds.
Super fund investors are deterred by the cyclical nature of the housing market. Residential investment entails time-consuming and resource-intensive, micro asset management.
But the arrival of professional managers – in build-to-rent (BTR) companies – has opened the pathway for super funds to enter the residential market as co-investors, or through special BTR funds.
A coalition of interested parties is seeking changes to a number of existing investment, taxation and planning laws, which currently discriminate against residential investment for institutional investors.
It is a conversation that is continuing at various levels of government.
The NSW government, for example, is to cut land tax for the next 20 years for new BTR housing projects. In an ‘Australia-first’, the state will provide a 50 per cent discount on land tax to developers investing in BTR schemes.
Victoria and Queensland are also offering concessions.
But other issues, such as a bid for exemption from GST, remain unresolved. Offshore investors continue to worry over requirements around managed investment trusts (MITs), which generally allow for a concessional withholding tax rate of 15 per cent.
It is a provision that does not yet apply to residential property, which continues to be taxed at 30 per cent.
Paving the Way
Hurdles notwithstanding, a handful of super funds have moved into affordable housing under either their impact investment or real estate strategies.
Damien Webb, Head of Real Assets and Deputy Chief Investment Officer at Aware Super, told [i3] Insights the fund has committed upwards of $3 billion towards a broader residential strategy in Australia, the US and Europe.
This investment, he says, will continue to grow in line with the growth of the fund, which now manages around $150 billion. Webb says residential is a key part of the fund’s overall property strategy.
“We have been spending a lot of time in Australia and overseas, looking at what we see as the key pillars for our investments,” he says. “These are retirement villages and build-to-rent assets in Australia, and multifamily in the US, and Europe,” he says.
“In Australia, key workers’ affordable housing is our priority. In addition, we are investing in serviced apartments, more like a hotel with some multifamily characteristics.”
In September, Aware Super entered the Melbourne market, embarking on its first major residential hub after acquiring a keenly sought-after site known as Bayview on the Park, for more than $70 million.
In Australia, key workers’ affordable housing is our priority. In addition, we are investing in serviced apartments, more like a hotel with some multifamily characteristics – Damian Webb
Aware Super plans to build more than 300 apartments on the site, most of which will be offered for affordable housing at rents generally below the going market rate. The housing is reserved essential workers.
With this commitment, Aware Super’s total exposure to essential worker affordable housing is inching towards $1 billion.
The fund is now one of Australia’s largest build-to-rent developers, with several other sites at various stages of development in Sydney.
Aware Super has been investing in essential worker affordable housing for more than three years, during which time it has refined its approach, first by purchasing excess stock, then underwriting shovel-ready projects, to now building and developing units.
The fund’s rationale is that it has a social responsibility to create affordable housing in inner city suburbs where the bulk of its members who work in essential services would like to live.
Because of high housing prices, these Australians have been forced to buy in outer suburbs and face a long commute to work.
Affordability
Super funds stepping into the housing sector all share the same concern about affordability for their members.
AustralianSuper reviewed a number of affordable housing models, and last year decided on the model offered by a Melbourne company, Assemble Communities. To make, what it called, ‘an impactful investment’, AustralianSuper took a 25 per cent stake and two seats on the board of Assemble.
Bevan Towning, Head of Property for AustralianSuper, sees Assemble’s business model as sustainable and scalable. It will provide ‘an appropriate return’ on members’ capital, while providing an affordable housing solution for working Australians, he says.
Assemble distinguishes itself from a myriad of property development businesses by partnering with community housing providers to deliver social and affordable housing.
It is pioneering a new model of housing development, involving ‘rent with the option to buy’ apartments for specific income groups, particularly those in low-to-moderate-income households. It focusses on providing a support pathway to affordable home ownership for such workers.
Assemble says returns for its investors will come from two sources: net income out of rents, and the final sale price. Even though it sets its margin at one-third below the traditional build-to-sell model, each sale is expected to yield capital gains for the company and its investors.
Aside from its venture with AustralianSuper, Assemble is talking to multiple other Australia-based super funds, as it seeks to raise additional capital and debt to expand its activities.
Christian Super has also long invested in housing, having narrowed its strategy to build and own, specialist disability accommodation, which delivers annual returns of 7-8 per cent.
Its exposure to housing for disabled people represents about 1.5 per cent of the fund’s total unlisted portfolio of around $1.7 billion.
Impact and Residential
The $52-billion HESTA has been in the affordable housing market under its impact investment strategy since 2014.
It now invests in projects ranging from one that supports the National Rental Affordability Scheme (NRAS) to affordable housing and aged care homes.
Its current venture is Nightingale Village, in the inner Melbourne suburb of Brunswick. HESTA has committed $20 million to the project in partnership with Social Ventures Australia (SVA), a not-for-profit entity.
HESTA hopes the project will provide a possible blueprint to help grow the supply of more affordable housing.
In time, HESTA expects the project can be replicated at scale for first home buyers. The fund has ventured offshore in a joint venture with global asset manager Nuveen Real Estate and Irish developer Eagle Streets Partner to set up a US$500-million built-to-rent partnership in Ireland.
The platform was formed in November and it is planned to develop 702 homes for its first BTR project, expected to be completed in 2024. Commenting on the Irish investment, HESTA’s CIO Sonya Sawtell-Rickson said housing is a ‘key theme’ for HESTA.
Other funds are generally shy of getting involved with development risks, but they are indirectly supporting affordable and social housing by investing in housing bonds, which support community-housing providers (CHPs).
Cbus Super has subscribed to residential affordable housing bonds through the federal government agency, the National Housing Finance and Investment Corporation (NHFIC), to date investing close to $140 million.
Cbus Super is stepping up its involvement with both NHFIC and the NSW Land and Housing Commission to explore the establishment of a pilot program for social and affordable housing. The trio is trying to create future scalable investment opportunities for large capital investors.
Many super funds recognise the entrenched and worsening problem of housing affordability. The conundrum remains how to deliver returns yet perform a ‘social service’ by providing affordable housing to some members.
With a handful of funds taking the lead, a model could evolve to attract some of trillions of dollars in super savings to invest in the residential market.
__________
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.