On Monday, news broke that Australian super funds had invested more than $1 billion into the United States’ rental housing system. The reaction was swift and understandably negative: Why are Australians helping create affordable homes in the United States when we are ourselves in the midst of a housing affordability crisis?
Robert Pradolin, former general manager of Frasers Property Australia and board member of the Property Council of Victoria has written extensively on the issue of affordable housing in Australia.
Here, Pradolin explores why it is not economically viable for Australian super funds to invest in the Australian build-to-rent market and how our governments can take steps in providing critical economic infrastructure to combat the public housing shortage.
Funds are very mobile. Today, money can be invested anywhere in the world wherever it achieves an acceptable return relative to the risk. Every government wants to attract foreign capital to enable it to invest in building infrastructure and commercialise its natural resources. Australia is exactly the same. That’s the way the world financial system works.
But it seems quite unbelievable that our federal, state and local governments did not recognise what the property industry has always known. That it was not currently economically viable for our super funds to invest in Australia to create thousands of build-to-rent housing for Australians.
Instead, they are attracted to America’s well established rental housing system where to-date they have invested over $1 billion in helping to make America great again.
But let’s be very clear. The issue is not with our super funds. They are obliged to maximise the return on members’ funds. The issue is that over decades, our governments have created and then perpetuated a financial system that does not allow institutional funds to achieve a reasonable after tax return, to attract them to build rental housing in Australia. The National Rental Affordability Scheme tried, but it too failed. This is market failure and the responsibility to fix it rests with government.
Housing for all, rich or poor, is fundamental to Australia’s long-term economic prosperity; and rental housing is becoming the only option for a number of Australians.
We are now seeing major property companies like Stockland, Mirvac and LendLease making public statements about how they are looking into build-to-rent. The reality is that build-to-rent does not financially work in Australia for the large institutions and public companies.
We need a new rental affordability scheme, specifically targeting our institutional funds, which closes the current viability gap and creates a new residential rental investment class.
When we do this, it needs to include rental stock to suit the diverse range of incomes that exist within our society. Being specific, the build-to-rent housing sector needs to be “salt and peppered” with social and affordable housing.
We have allowed our social and affordable housing stock to dwindle from 15% to 3.5% of our national housing stock and governments must mobilise private capital to help replenish this stock.
Along with food, having a stable form of shelter is a fundamental human need. How can anyone be productive if they do not have a place to reside and sleep in safety? How can society function efficiently if the people we need to provide essential services, must travel hours to their workplace? How can parents bring up a family if there is no stability in where they sleep because they are always under threat of a forced move? How can anyone manage the emotional, physiological or traumatic events that happen in life if their primal need of stable shelter is not met?Analysis by SGS Economics indicates a benefit-cost ratio of 7:1 in respect to the economic benefit to the community of providing public, social and affordable housing in the right locations. Governments typically look for benefit-cost ratios of 5:1 and above when endorsing regulatory or project initiatives for further deliberation and implementationWell-placed affordable housing for key workers (such as firefighters, nurses, teachers and police officers), located in areas where society needs their services, and social housing, where tenants have ready access to existing infrastructure, services and jobs also makes good and rational business sense.
It is estimated that the current affordable/social housing shortfall nationally is around 200,000 new dwellings. At an average total cost (including land) of $500,000 per dwelling, the potential size of this segment alone (excluding private rental housing) is in the order of $100 billion.
Given the quantum of the money involved, our government, just like America, needs to attract private capital into any solution, and to do that, it must accept that private capital will need to achieve market returns (relative to the risks).
Now don’t get me wrong. While I, like many other Australians, feel for the people that are currently under housing stress (paying more than 30% of their income on rental) or for those that are homeless, I am looking at this through a long term economic lens not the humanistic one. If we do not invest in this type of housing now, it will cost future generations billions of dollars in additional social service support costs.
It’s great to see the current Federal Government taking steps towards providing a framework which could unlock significant investment in this critical economic infrastructure. The establishment of the National Housing Finance and Investment Corporation (NHFIC) to provide long-term, low cost finance to support more affordable rental housing is a positive step to attract institutional investment. However, because it relates only to debt funding (rather than equity) a co-financed bond aggregator model can only yield a limited amount of additional supply.
Budget moves indicate that for the first time in almost a decade, our Federal Government is up for real leadership in the social and affordable housing space. But they need to keep up the momentum. The NHFIC needs to expand its brief to encourage equity investment by institutions in owning and renting a range of housing types that include social and affordable housing. This can only be done by a paradigm shift in thinking to find new solutions for funding this critical economic infrastructure.
In New York, a person earning less than $22,000 US per year pays only $125 per week rental while for the same apartment in the same building, the market rent is $750 per week. We need a similar system developed in Australia.
We cannot afford to wait any longer to start fixing this problem because we have already wasted several decades in doing nothing.