The numbers for affordable housing projects don’t always stack up, but a few super funds have found an innovative way to make these projects work, Florence Chong writes
Housing was a key election platform for the Australian Labour Party in the 2022 general election and, on winning, quickly garnered the support of industry super funds in rallying behind the government’s call for action.
Superannuation funds embrace the ideal of affordable housing, and with much fanfare, they have pledged hundreds of millions of dollars to help provide it.
With the first term of government reaching its penultimate months, few dollars have actually been put to work to create many thousands of affordable homes needed to ease what is a national housing crisis.
The idealistic plan continues to languish in the too-hard basket for a simple reason: whichever way super funds play it, the numbers apparently still do not stack up.
That said, some super funds have found a way to invest in the sector that meets their returns criteria.
The Emergence of Build-to-rent-to-own
One approach is build-to-rent-to-own, which gives the investor cash flow from rental income and a guaranteed return on the investment when an apartment is sold.
It is behind this novel business model that AustralianSuper and HESTA have stepped in to back Assemble, an unusual developer that pioneered this approach. Together, they plan to build 17,000 homes initially in Melbourne, eventually expanding to other key cities on the eastern seaboard.
The two super funds took a majority ownership stake in Assemble in July.
AustralianSuper had been an early backer of Assemble. It made its first commitment to the company in 2020 when it invested in the company’s 199-unit in Kensington quickly followed by another project in Brunswick, also in inner Melbourne.
Australia’s largest super fund took a 25 per cent stake in Assemble and by 2023, was comfortable enough to fund a $920 million development of 1097 units. It put in more than $364 million or 90 per cent of the required equity $405.3 million in equity to acquire and develop three sites in the inner ring Melbourne suburbs of Brunswick, Coburg and Footscray.
HESTA has also worked with Assemble through Super Housing Partnerships (SHP), in which the super fund is a cornerstone investor. SHP, HESTA and Housing Choices Australia have partnered with Assemble to develop and manage social, affordable and disability accommodation. HESTA has pledged $240 million to develop affordable housing.
With the backing of the two super funds, Assemble has merged with SHP. Both AustralianSuper and HESTA have indicated that they are happy for other institutional investors to join them to grow and expand Assemble.
Combined, the financial depth of the two super funds will give Assemble the firepower to plough ahead with its plan to develop 17,000 units, worth around $15 billion, over coming years.
The developer hopes to expand beyond Melbourne and potentially to build affordable housing to other capital cities.
A Difference Business Model
One critical difference between the strategy of Assemble and others seeking to operate and manage social and affordable housing in an institutionalised rental market is that the business model is not based strictly on rental. It has combined a rent and buy approach to differentiate its business from those offering pure rental as in build-to-rent (BTR), or affordable housing for essential service workers.
Assemble calls its model Build-to-rent-to-own. It is a concept that is sometimes used in other niche sectors of the property market.
Renters living in an Assemble apartment have an option to buy the apartment. It applies to people from specific income groups. Its tenants are families with an annual household income of up to A$130,000.
Assemble and its renters agree on a purchase price – valid for up to five years – with the option to buy the home at any stage at an agreed value. Throughout what it quaintly terms “the pathway” to home ownership, the renters are offered optional money coaching support to help them achieve their downpayment for a mortgage.
Other super funds are pursuing different strategies to enter residential market. Through Altis, its investment partner Aware Super has built out a portfolio of affordable and rental housing. Its seed portfolio came from acquiring apartments in one line from distressed developers in the late 2010s when it bought blocks in Sydney’s northern suburbs.
But in recent times, Aware Super through its real estate arm has been developing its own apartments in Sydney and Melbourne. The fund aims to own 1,250 affordable housing apartments by 2025 as part of its $1.5 billion commitment to expand its existing real estate portfolio in Australia.
For other large funds, owning rental residential assets remains a bridge too far.
Real Estate Debt vs Equity
They all believe in the need for more housing, and that housing is crucial to the economic stability of the country, but they struggle to find a model that will work for them. For them, investing in rental residential property is not a matter of chasing altruistic considerations. Rather, the bottom line is getting a fair return for members.
For this reason, some larger funds choose debt instead of equity.
Recently, Australian Retirement Trust (ART) invested $150 million in debt issued by Housing Australia to fund development of community housing. ART is investing alongside Housing Australia and the Queensland Government’s Housing Investment Fund. Their first projects, planned for regional Queensland, will offer more than 600 homes.
While it has pledged $500 million for affordable housing, the construction industry super, Cbus Super, is another fund that is yet to find the right formula to invest directly in housing.
But like others, including UniSuper, Cbus has invested in bonds issued by the National Housing Finance and Investment Corporation, since renamed Housing Australia, which are used to finance community housing providers.
Cbus has been active in discussions around affordable housing for many years and was a strong advocate for the establishment of NFHIC and the bond aggregator concept, Justin Arter, former Chief Executive Officer (CEO) of Cbus Super said in a letter to the Federal Treasury last year.
He said that since the inception of the bond aggregator in 2019, Cbus has invested approximately $150million in NHIFC issued bonds.
It has since subscribed to more bonds issued by the entity.
While major commercial hurdles remain, super funds will continue to take baby steps in their role as providers of capital to boost the country’s housing stock.
Regulatory Hurdles in BTR
Canberra has been seeking industry views to formulate what is known as the Treasury Laws Amendment Bill 2024: Build to rent developments to remove some of the roadblocks to BTR development.
In its submission, in April this year, the Association of Superannuation Funds of Australia (ASFA) made six key recommendations to facilitate the flow of super capital into the nascent BTR sector.
Mary Delahunty, CEO of ASFA, said the managed investment trust withholding rate should also apply to the distribution of capital gains. ASFA urged the federal government to consult with the states and local governments on a nationally consistent definition for the term “affordable”.
ASFA also seeks clarity on the baseline of “market” rents. It recommends basing the rent on that charged for equivalent housing units in the development that are subject to non-concessional rents.
The amendment should retain the originally announced hold period of 10 years and consider GST treatment of construction costs, says ASFA. The industry is seeking GST exemptions for BTR projects.
Finally, it recommends that the government make provision for regulations that would allow key workers to be included as part of the target market for affordable housing.
Delahunty says that compared to other countries, investment in Australian BTR comprises less than 1 per cent of institutional real estate portfolios, compared to more than 20 per cent in the US. To close the gap, the government needs to create a level playing field for super funds and other institutional investors considering entering the emerging BTR market.
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