Can NSW be the trail blazer for institutional investment in rental housing? - Vivienne Milligan NSW Community Housing Conference May 6 2015

City Futures Research Centre

Can NSW be the trail blazer for institutional
investment in rental housing?
Vivienne Milligan

NSW Community Housing Conference
May 6 2015

What is institutional
      investment?
Any large scale (‘pooled’) investment from
corporates, pension/super funds, unit trusts etc
A shorthand for ‘large scale’ ‘professional’
landlordism – antithesis of ‘amateur’
landlordism
Can be structured as either equity (e.g. direct
investment) or debt (e.g. loans or bonds) or
both (asset-backed securities)
Can be styled as an infrastructure-style product
(i.e. return is cash flow based) rather than a
property investment (capital gains based)

Why do we want
institutional investment?
Scale
 Only by accessing institutional funds can provision expand sufficiently
  to meet levels of future rental housing need
Individual investor activity a ‘volatile’ source of funds, too
reliant on capital gain
Steady rental revenue a match for
institutions’ yield requirements
Efficiency/Cost
 Fewer transactions & building at scale can
  produce efficiencies in procuring & managing housing
 Potentially lower cost finance than bank debt
Long-term players needed to reform nature of rental product
 Professionally managed, stable tenure option

Who would invest?
                                                      “We are looking for long
Super funds operating in the pension phase            term secure income cash
 Rental returns well matched to fund liabilities     flow investments that
                                                      leave the Registered
Self-managed super funds requiring steady             Provider in direct control
& predictable returns                                 of the assets. ”
 Task of aggregator to attract                       CANADA LIFE Michael
                                                      White
Super funds looking to diversify                      Source: JLL (2014) Brave New World: Examining the
                                                      Case for Institutional Investment in Affordable

 Residential property typically 0-5% of portfolios
                                                      Housing. jll.co.uk/residential

Overseas financial institutions attracted to
stability of the Australian economy
Social investment funds

Latest industry views
"It's a nice asset class, it's domestic property, has a social good, which is very
important for many funds, and you've got that potential for a steady return as
well as a capital gain…" (Pauline Vamos, CE, Association of Superannuation
Funds of Australia)
“This [interest in residential assets] really started about a year ago …some of
our funds are very close to their members who are now telling them that
housing has become a big problem” (Industry peak body).
“We’ve spent time getting to know who the affordable housing businesses are
and how the regulation works around these entities …With NRAS gone, we’re
still talking to people about how we might [make an investment in rental
housing] but are we working on any [possible models]? No… It’s been a bit of a
frustrating ride really because we’ve spent quite a bit of time on this
(Superfund investment manager).
“The government change regarding NRAS has severely impaired some of the
strategies we were looking at …There has to be an incentive, whether it’s along
the lines of NRAS or otherwise, there has to be some incentive and there has
to be a market” [for tradeable debt](Superfund investment manager)

Removing the main domestic
barriers
Barriers                        Strategies
Lower yields than for        Govt. interventions to adjust
competing investment options risk return equation
A lack of industry knowledge   Urgently collect & publish
of rental housing products and information on CHP financial
performance                    deal terms, asset portfolios &
                               tenancy performance
The small scale and              Scale up investment program
fragmented nature of deals on & pool CHP opportunities
offer, coupled with insufficient
liquidity                        Encourage a secondary market

Changeable and uncertain or,    Long term govt. pledge /
in some instances, unsuitable   strategy / targets
government policy settings

UK recent developments

Context: Severe housing shortage & government austerity
Housing associations (HA) leveraging extensive asset base
Grant (albeit lower) still available for social housing developments
Major shift towards capital markets (2014: 25%: £18.6bn) away from mortgage debt
Credit agency-rated HAs issue bonds, negotiate private placements
 The Housing Finance Corporation (THFC) assists smaller HAs
 Total bonds issued to HAs: >£10 bn 2007-2013
Government guarantee schemes support capital market financing of both market &
affordable rental products
 Aggregators (e.g. THFC) raise & distribute funds
Some well-endowed HAs cross-subsidising from market rental schemes
 e.g. Fizzy Living
Aggressively competitive market with < 4% pricing being achieved by HAs for long
term deals – 85 to 150 basis points margin over LIBOR
Wealth of financial performance information available to investors

Stop press

Guaranteed debt breaks 3% interest rate barrier
11 March 2015 | By Pete Apps

Twelve housing associations have secured the cheapest long-
term bond in the sector’s history, smashing the 3% barrier for
the first time.

Affordable Housing Finance (AHF), a subsidiary of The Housing
Finance Corporation, has announced the latest tranche of its
record-breaking guaranteed bond – securing £194m of
investment at an interest rate of just 2.92%.

Next moves?
"This is clearly a type of asset class where there will be very close relationships between the
government and the departments involved and the investor“ [Pauline Vamos]

     Government commitment & leadership
     Appointment of a champion & cross-sectoral working group
     CHP collaboration & advocacy
      Industry information
      Industry positioning around models, strategy, investment opportunities
     State investment package to kick start
      Package of Govt. sites for CHP/joint venture development with streamlined planning
       approvals
      Mixed market & affordable rental product requirement
      Revolving loan fund to assist CHPs to develop – optimal application for NSW Govt $1B
       pledge?
      Test ‘sale & lease back’ (equity) & ‘long term finance lease’(debt) models
      Land tax offset for affordable housing component – to address yield gap
      Limited rental income guarantee for fixed period? – to address novelty barrier

References

Milligan, V. Pawson, H. Williams, P. & Yates, J.
(2015) 'Next moves? Expanding affordable
rental housing in Australia through institutional
investment'
http://www.be.unsw.edu.au/sites/default/file
s/upload/research/centres/cf/publications/cfp
rojectreports/Next%20moves_report_0.pdf

Milligan, V., Yates, J., Wiesel, I. & Pawson, H.
2013 Financing rental housing through
institutional investment
Volume 1: outcomes of an investigative panel
Volume 2: supplementary papers
AHURI Final Report no. 202
http://www.ahuri.edu.au/publications/downl
oad/ahuri_71016