Star-crossed lovers: do property investment and social housing mix?

By Lucy Dean

December 18 2017
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With Australia’s most vulnerable in need of affordable housing, social impact investing could be the solution as long as governments mitigate the friction of a potentially lower yield.

Star-crossed lovers: do property investment and social housing mix?

The Australian Housing and Urban Research Institute (AHURI) recently released its study into the role of impact investment in “supporting vulnerable households to achieve their housing goals”.

The study found that while social needs and market expected expectations don’t always align, due to investors' expectations of a return equal to the market average, there are ways around this.

Researchers from the University of Western Australia, the University of New South Wales, Deakin University, Social Traders and Curtin University explained: “There is much promise with various social impact investing (SII) financial instruments and models, but numerous barriers need to be overcome.

“A viable SII market would require assistance by government to help close or minimise return gaps, especially because of a) the low incomes of very vulnerable tenants; b) the finance gaps faced by Community Housing Providers (CHPs); and c) the limited number of impact first investors.”

Registering this, the researchers found that impact investment mutual funds, together with social impact bonds and the Commonwealth’s bond aggregator model could go some way towards addressing the issue. Meanwhile, to make up the return gap, governments could also provide capital gain discounts or tax concessions.

The bond aggregator is a structure which would allow the Government to lend money at a lower long-term rate to community housing associations.

“The intention is that money would be raised efficiently with reduced financing costs rather than in expensive one-off transactions such as when borrowing from a bank,” AHURI explained.

To the University of Western Sydney’s Professor Paul Flatau, impact investing presents an “important opportunity” but Australia needs to improve its understanding of the financial instruments and structures that can facilitate the investing.

Continuing, he said: “Investors will accept a lower than market financial return, higher risk, low liquidity, and limited ability to exit the market in return for the understanding that their investment is doing social good.

“However, we do see a need to mitigate this risk, and this can be done in part by taxation benefits or other direct government subsidies to assist the financial viability of the proposed impact investment.”

The report found that older Australians priced out of their rental accommodation, younger people at risk or victims of domestic violence, those in financial stress, Indigenous people and people with disabilities, mental illness or substance abuse issues are most vulnerable to a housing crisis.

“It is important to acknowledge that this study was undertaken at a time of more than two decades worth of Gross Domestic Product (GDP) growth and sustained growth in property prices in Australia and rising rents,” the researchers added.

“It was also a time of limited wage growth (no real growth for people on social security payments) and increases in social inequality.

“This has created ideal market conditions for investors and increased the housing stress of many and the demand for more affordable housing. This environment also increases future risk in investing in the housing market because the residential property market may not generate the same levels of capital growth in the next decade.”

Noting this, the researchers called for an increase in social impact bonds’ investor bases as well as an increase in the amount of capital “willing to accept a mixture of financial and social return”.

They said: “Housing-based social enterprise models struggle to support people with higher needs. They usually cannot afford even the discounted rents of affordable housing properties; and the costs of tenancy support is high. Separate block grant funding may be required to sustain this support for the tenant and to decrease the risk for landlords.

“The needs of the social enterprise must be married with the needs of impact investors, and this union is time consuming and expensive to orchestrate. There are high transaction costs that organisations will need assistance with either via a pro bono arrangement or direct funding.”

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