With a membership of mostly women working in health and community services, it is hardly surprising that HESTA invests in affordable housing to meet member needs. But only on the premise that the investment must earn an appropriate return for members.
Barring the overriding criteria of returns, HESTA looks to housing for what it sees as secondary benefits for members and the wider community.
That’s because a housing crisis impacts not just on those who need a roof over their heads – it can have economy-wide implications which ultimately impact on the rest of the fund’s portfolio.
Total Portfolio Approach to Housing
HESTA believes housing is a major social and economic issue, which requires a total-portfolio approach solution, not just one that addresses member needs.
Over the past three years, the $83 billion industry fund and its partner, Super Housing Partnerships (SHP), have been working on a framework to expand the build-to-rent (BTR) model. The aim is to offer a range of accommodations, matching the affordability of the target market.
Today, HESTA could be on the cusp of solving what has proved to be a complex problem – an ability to offer rental accommodation to a widely-diverse market, ranging from the disadvantaged to low-income earners, the disabled and those who choose renting under a BTR platform as an option of buying.
We know that if we can’t solve the challenge of providing housing to workers who can’t do their jobs remotely, then the value of all other assets in our portfolio will be impacted
Essentially, the HESTA initiative involves the use of a not-for-profit specialist community housing provider (CHP) for social housing, land lease to cut capital outlay, and incentives spread around all parties involved to ensure that projects are completed on time.
HESTA has committed $240 million to develop up to half-a-dozen projects under the SHP partnership, to be rolled out progressively over the next few years. Their first project is under way in Kensington, an inner-city suburb of Melbourne.
If Kensington lives up to its feasibility promise, HESTA could have cracked a solution for a very complex area of the property market.
“We know that if we can’t solve the challenge of providing housing to workers who can’t do their jobs remotely, then the value of all other assets in our portfolio will be impacted,” says Jeff Brunton, Head of Portfolio Management at HESTA.
HESTA has one million members, 80 per cent of them are women who work in aged care, early childhood education and healthcare. “These are jobs that cannot be done remotely,” Brunton, who joined HESTA in 2021 from AMP Life (where he was deputy Chief Investment Officer) told [i3] Insights.
“We hear from our members that housing and affordable housing is a big issue for them. We have some members in a position of housing stress where a significant portion of their wage goes on market rent.”
Brunton explains: “HESTA is a fund where we tend to join the dots, not just (look for) the best property investment in isolation. We look at other factors, including those that could at times lead to unacceptable risks across other areas in our portfolio.
“Our approach is holistic. We think about investment excellence with impact, because we believe this will lead to great long-term investment returns.”
Social & Affordable Housing
An earlier iteration of HESTA’s investment in social and affordable housing dedicated to the health and community services sector is Nightingale Village, also in Melbourne. HESTA invested $70 million in the project through its Social Impact Investment Trust, managed on its behalf by Social Ventures Australia.
The Kensington project with SHP allocates apartments to affordable housing where the rent will be tied more to the wages of workers in key industries – not just the industries that HESTA represents but others as well. Disability, social housing, and market-rate BTR will take up the balance of the 362 apartments.
In the longer term, Brunton expects the proportion of affordable, social and disability housing to represent around 50 per cent of the fund’s residential investment. “We like social and affordable and disability apartments to make up a meaningful mix in our blocks,” he says.
This strategy sits within our property asset allocation, which falls within our mid-risk strategy. The mid-risk portion is looking for some capital growth as well as an inflation-hedging ability.
On returns, he explains that these are long-term investments, and that the internal rate of return (IRR) becomes a multi-decade IRR.
“That IRR is sensitive to rental assumption, and it is also sensitive to the turnover cost of having tenants come and go,” he says. “If we can offer a safe and secure place where people want to live for as long as possible, we will have less vacancies and therefore less change-over costs.
“There are multiple levers with which to move the IRR around. This strategy sits within our property asset allocation, which falls within our mid-risk strategy. The mid-risk portion is looking for some capital growth as well as an inflation-hedging ability. And that is currently made up of infrastructure, property, mezzanine credit exposure and private credit exposure.
“This makes sense in HESTA’s property portfolio. It allows us to diversify away from traditional sectors like office and retail, where we can see how IRRs move with different economic cycles. We think BTR and affordable housing move differently to office, so we will get a better mid-risk outcome by having that new subset class of assets in our property holding.”
Impact of Rising Costs & Persistent Inflation
Rising costs are impacting all developers and builders, and HESTA and SHP have not been spared.
“We have a higher-for-longer inflation view, and that means we have to be very careful around calibrating the construction costs of these projects with our developer and construction partner,” says Brunton.
“We try to work through issues with our partners (including the owner of the leased land) so that there is alignment as well as good incentives to be efficient, and to look for savings to make sure there is resilience in the face of unforeseen circumstances.”
While the first fund uses long-term ground leases to bring costs down, in future, land will be purchased, says Brunton. The sources could include state-owned land sold by governments, leased government-owned land, as well as private sector land.
“We know that investment returns and members’ best interests are also pre-eminent decisions for super funds like ours. We believe that if we go after those areas where the solution is not yet visible (like housing), and we can crack the solution for a problem that is this large, there will be great investment performance in future.”
Creating the BTR Platform
HESTA’s original idea was to have a BTR platform to deliver security of tenure through longer rental leases. The concept has now been broadened to include social and disability.
“That is the goal,” says Brunton, admitting, however, that it is an incredibly complex task to get the balance right. “We need the appropriate legal structure and governance in place before putting capital into this space. This involved establishing an entity that could enter into an investment management agreement (IMA) with our fund.”
Now that such a platform has been created, it could work for other super funds and institutional investors – both in Australia and globally – seeking to enter Australia’s complex residential market.
HESTA's original idea was to have a BTR platform to deliver security of tenure through longer rental leases. The concept has now been broadened to include social and disability.
Brunton says Australian funds seeking residential exposure are currently looking overseas for opportunities. HESTA itself has invested in multifamily in the US for some years, and plans to continue with those investments as a diversification of its portfolio, even as it says its exposure to domestic residential could eventually run into many billions as HESTA grows its funds under management.
HESTA’s property allocation is between 6 – 7 per cent of funds under management. Brunton says it could put up to “around a quarter” of its property allocation into affordable housing.
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[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.