1. Financing social and affordable housing
Peta Winzar
CEO
Community Housing Industry Association (CHIA)
September 2017

2. The impossible dream - Institutional investment at scale?
Affordable Housing Working Group
Bond Aggregator
National Housing Finance and Investment Corporation
Tweaking the tax system – MIT and CGT
In the last week the Federal government has released 2 reports, some draft legislation and a consultation paper which collectively signal a step-change in the way government is thinking about financing social and affordable housing.
Together with some complementary measures in (some) state Budgets this year, these four measures have the potential to significantly alter the financing landscape.

3. Affordable Housing Working Group
Community housing: 0.9% of all dwellings in Australia
Social and affordable housing sector: 4.3%
47% of private renters qualify for social housing on income grounds
Cost of maintaining sector at 4.3% as population grows:
6,300 SAH dwellings a year … $1.9 billion pa
Plus cost of renewal/replacement of existing stock
Just to stand still [AHWG prescription]
CHIA’s view – 100,000 SH dwellings by 2027, AND 100,000 AH dwellings by 2027
Cost: $60 billion
The Affordable Housing Working Group was set up by state and Federal treasurers in 2016 to look at innovative ways to finance affordable housing.
It is made up of DSS, Treasury and officials from NSW, WA and Victorian governments.
Its first report in December 2016 suggested that the Commonwealth government should explore raising money through the bond market to finance affordable housing. It also noted that more work was need to fill the funding gap between the rental income and operating costs.
While the Commonwealth Treasury took up the work on a bond aggregator, the working group was asked to do some more thinking on how to fill the funding gap between rental income and operating costs.
The Working Group’s final report was released on 22 September 2017.
Unfortunately, it approached the problem with an “as is’ mental model – ie, it found that the cost of increasing social housing in line with population growth would be around $1.9 billion pa.
However, this is just a recipe to stand still. It completely ignores the shortage of social and affordable housing which already exists.
CHIA’s view is that we need 100,000 social housing dwellings and 100,000 affordable housing dwellings over the next decade to make good the housing shortfall, and then 10,000 a year to keep pace with population growth
The cost will be around $60 billion over a decade – clearly too large a problem for government to sort on its own.

4. Affordable Housing Working Group
Nine months, three recommendations:
Progress initiatives aimed at closing the funding gap, eg
examine the levels of direct subsidy needed for affordable low-income rental housing,
affordable housing targets,
planning mechanisms,
tax settings,
value-adding contributions from affordable housing providers, and
innovative developments to create and retain stock.
Develop and implement a uniform, nationally applied regulatory framework.
Update the National Industry Development Framework for Community Housing
The Working group made three recommendations.
Its prescription for closing the funding gap between rents and operating costs contain no surprises – targets, planning mechanisms, tax reform, contributions from affordable housing providers, and so on. This is a list which could have been written a decade ago.
While it acknowledges the need to increase direct subsidies for affordable housing, the working group’s report stops short of suggesting how this might be done.
The report does contain some good examples of how to increase housing supply at no cost or low cost to government, for example
redevelopment of public housing properties, with the government getting a return either in cash or in replacement dwellings, or
government taking a share of the profit from development of government land, in partnership with a developer or a CHO, or
-cross-subsidisation through a mix of market sale, affordable sale, affordable and social rent in a development
The report does make some valuable recommendations to strengthen the regulatory framework for community housing, and to overhaul the national industry development framework for community housing.

5. Bond aggregator – towards a new asset class
Objective: raise institutional finance at scale
Recommended structure – sits under NHFIC
CHPs apply for loans (fee~0.2%)
These aggregated and put to market in blocks
Longer tenor than bank finance – 10 years
Pricing benefit – up to 1.4% below bank finance
Government guaranteed?
Borrowing secured against title
T1 and T2 to begin with (first couple of years)
Aiming for steady flow of debt, year after year – “make the market”
Needs stronger regulation
NEED to fill funding gap - $3,100 pa AH, $8850 SH
The aim of the bond aggregator is to raise institutional finance at scale from the wholesale bond market and then lending the money to CHPs at a cheaper rate than they can get from banks, and for longer terms. The CHPs would apply for loans, pay a small fee towards the administrative costs of the BA and their borrowings would then be aggregated.
It is proposed that the Bond Aggregator sit under the new National Housing Finance and Investment Corporation, but there are still some design issues to be sorted out, for example:
Exactly how long the term of the bond would be – probably up to 10 years. This would give CHPs certainty about financing costs and remove the need for them to renegotiate with their bank every 3-5 years
How much cheaper the BA would be depends on the credit-worthiness of the CH sector and whether the government guarantees the bond
It is proposed that the borrowing be secured against the title of properties held by the CHO, which raises interesting questions about whether states would consider allowing properties under long-term management by CHPs to be used as security for borrowing.
So will the bond aggregator make a difference?
It depends which state you’re in.
It also depends of the organisational capability, mission and strategy of the CHO.

6. Policy settings vary across states
Less diversification of income sources in QLD
These next two charts come from a survey by EY of 68 providers (22 were Tier 1 providers). In Queensland a higher proportion of T3 providers responded, reflecting the profile of the sector in this state.
Three things to note from this chart:
The two left hand bars compare T1 and t2 income sources – T1s have more diverse income sources, from development activity and other activity
Across states, providers in NSW and Victoria have more diverse income sources and the highest levels of government support, and
Government funding is almost non-existent in Queensland and the ACT – at least among those which responded to the survey
We do need to be cautious here about cross-state comparisons, since NSW and Victoria have higher numbers of T1 organisations

7. Less debt in QLD – policy or practice?
This next slide is quite clear, however.
Responding CHOs in Queensland are smaller (the yellow bars) and have less debt – not surprising because small numbers of dwellings means income streams are too low to service much debt.
We need to know more about the reasons behind this before we get to the policy prescription:
How does the department or the CHOs’ rent setting policy impact?
What about contractual requirements on not accumulating surpluses?
Or using properties as security for borrowing?
Or preventing redevelopment of state-funded properties even if held under very long-term leases?
Alternatively, is there room for mergers or consortia to gain enough scale to do property development, for example?
Are there any other ways to diversify income sources?

8. What difference will a bond aggregator make?
Sector debt $1.05b
Refinance 0.5b existing debt – maybe $250m in bonds pa – create certainty, cut cost
Marginal impact on supply - Could increase leverage by 25-35% - ie, another 1,000 dwellings across sector with current policy settings
Constraints are lender security requirements, govt rent setting policies, CHO ambition & capacity, the funding gap, regulation, competition in resi sector from build to rent, student accommodation, SDA etc for development sites, finance, staff
Whether the bond aggregator succeeds depends on how much CHPs are prepared to borrow. It will need a steady stream of borrowing year after year to encourage institutional investors to come to the party.
The sector holds around $30b of property, but has title to at most $10b, against which it has debt of around $1 billion
The EY report on the bond aggregator suggests that around $0.5b could be refinanced pretty fast, which could save up to $7m pa in interest payments.
It is not going to be able to borrow more than about 30% without alarming the regulator about debt levels - the EY report suggested debt could increase by another 25-35%, ie about another $350m
Further, the cheaper finance alone will not fill the funding gap between rents and costs 0 $3,100 for affordable housing and $8,850 for social housing
Will it make a difference?
On current policy settings, the difference is marginal, but nonetheless important in establishing affordable rental as a new asset class for investors.
Perhaps the biggest innovation which could be made in social and affordable housing would be for government to loosen its grip on title transfers. There is a balance to be struck with protecting taxpayer-funded assets, but what if the government held an amortising interest in a property over 40 years instead of forever? This arrangement would gradually unwind the government’s interest over the life of the dwelling at the same time as the CHO equity stake accumulated.
Effectively government would be buying a housing outcome for the 40 years. The CHO would have a strong incentive to maintain the asset to which it would gain title at the end of the period. Ideally, it could borrow against its accumulating interest in the property over time – eg at year 10, it could borrow against its 25% equity stake. A CHO which wanted to buy out the residual value of the asset before the end of the term could do so. The government could put in place ‘retrieval provisions’ which enabled it to resume the property or transfer it to another organisation if it all goes to hell in a handbasket and the CHO fails.

9. National Housing Finance and Investment Corporation
Two functions:
National Housing Infrastructure Facility
$1b in loans, grants, equity to accelerate housing supply
Partnering with local government, development partners (but not developers)
Possible CHP funding in consortium/joint ventures
Development headworks, transport & water infrastructure, site remediation, etc
Priority to developments with certain level of affordable housing
Innovative finance – equity, blended finance – to stimulate projects
Finance from January 2019 (applications July 2018)
Bond Aggregator
Originating bonds and transacting loans/payments to investors
Investment and credit risk assessments
The third element of the federal government’s strategy is the National Housing Finance and Investment Corporation.
It will have two functions: The National housing infrastructure facility and the Bond aggregator.
What’s innovative about this in a housing context is that it is a legislated vehicle at the Commonwealth level.
The NHIF will be able to join City Deals
It will also be able to invest in projects at the government’s direction.
And it aims to be self-sustaining over the medium term, from its investment returns from its equity stake
Note that it is intended to give priority to development projects with affordable housing components
The consultation paper on the NHFIC and the NHIF is on the treasury website, consultation closes on 20 October 2017

10. Managed investment trusts and Capital Gains Tax concessions
Legislation released last week to enable MITs to invest in residential real estate
Target is overseas investors – more generous withholding tax offered
Extra 10% CGT discount (ie 60%) for sub-market rentals let through CHP to eligible tenants and held for 10 years (cumulative)
For individual investors, extra 10% CGT discount if sub-market rental through CHP to eligible tenants for 3 years or more (cumulative).
Tenant eligibility and level of rental discount required will be set by state govt
Good in rising markets obviously. Some estimates: need 4% capital growth
Compliance costs for CHPs
Finally, draft legislation was released last week to enable managed investment trusts to invest in residential real estate and to provide a capital gains tax discount to long-term investors in affordable housing.
This measure is about bringing EQUITY into affordable housing at scale. It is also encouraging overseas investors into affordable rental housing as opposed to investing in Australia’s boarder housing market.
The innovative aspect to it is that the benefits are delivered in the near term through rental discounts, but the CGT cost to government is not incurred for at last 3 years (individual investors) or 10 years (through MIT)
Overseas investors in countries which have ‘exchange agreements’ with Australia will be subject to a 15% withholding tax instead of 30%
CHPs are to be the gatekeepers. The properties must be let to eligible tenants at sub-market rent and managed by CHOs.
Rules on tenant eligibility, rental discount, what counts as income, etc will be set by state governments. This raises some issues potentially about equity across jurisdictions and it could be quite complex for a CHO which operates ins several states, keeping up with different rules.
The compliance requirements have yet to be worked out – CHOs will give investors a certificate confirming the rules have been met, and provide a schedule to the ATO as well. We are promised the compliance will be a much lighter touch than NRAS but the detail is still unfolding.

11. Amcor redevelopment and CHL
Former Amcor site at Alphington, 6.5km from city
First large-scale inclusionary zoning in Victoria - 2,500 dwellings, 5% affordable
Private-Social Partnership between Community Housing Limited, Alpha Partners and Glenvill homes
CHL is one of largest community housing providers in Australia, 6,300 dwellings (30% in Victoria)
CHL lease & 2 BR apartments at fixed rent, for 10 years
At end of term, CHL keeps 10 units
C/W Budget gives developer extra 10% capital gains discount on other 140 units in long-term rental
Finally, it is worth thinking about what strategies we might pursue if there turns out to be no extra subsidy to fill that funding gap.
This is a current example of deal-making without capital injection from government.
Good deal?
150 tenant households win – average annual saving $3,600 each
CHL wins - $5.9m in assets at the end of 10 years and a secure lease on 150 properties hedged against rent increases (presuming CHL can peg rents to market)
The developer wins – an (unexpected) extra 10% CGT discount will be worth around $4.1m in 10 years time. Developer taxed on just $16m of its $40m capital gain on 140 units at year 10.
(assumes $300k properties x 140, house prices increase at roughly 7% pa (long-run), so the developer $42m stake turns into $82.6m at year 10,
And the developer can cover the cost of CHL’s 10 dwellings by a $1,270 increase in price on all other dwellings. Which it could probably cover by being less wasteful in construction .
This is only 150 dwellings – would need a lot of deals like this to meet the 200,000 shortfall in social and affordable housing – but it shows what can be done.
Examples like this challenge the way we have been framing our policy and advocacy.
Is it possible that CH could deliver at least 10% of all residential construction in 10 years – ie around 25,000 units pa? [as in the UK last year]
Yes community housing can deliver this scale, but it will need to do so in partnership with developers as well as doing its own developments
Is it possible to do this with only 40% of funding coming from government? [as in the UK last year]
Probably – let’s turn our minds to the question of where we would find the balance of the funds.
How much could we deliver with no funding from government at all? [as with CHL and Glenvill at the Amcor site]
Perhaps the questions are:
“how much HAS the CH sector already delivered with no funding from government?”
What policy settings (eg planning) would facilitate more delivery with no/low government funding?
What is the quid pro quo – ie what does CH industry offer in return for this facilitation: housing outcomes for whom, with what product and for what period?