Large investors see an opportunity in the $4 billion in housing supplements paid out annually, and the government sees a win
The first community housing development funded by ACC opened in West Auckland with advocates saying the case for further institutional investment in the space is strong.
The 15 units in West Harbour were developed through a $61 million joint venture with Cort Community Housing which aims to develop a further 91 across West and South Auckland.
ACC isn’t the first institutional investor to take an interest in community housing, but how does someone like New Zealand’s largest fund manager, with a $50b portfolio under management and an imperative to turn a profit, balance social outcomes?
According to the Ministry for Housing and Urban Development, $4 billion is spent on government housing supplements annually. 346,000 receive the government accommodation supplement, with 87,000 people receiving additional support.
A further 5000 people get emergency housing grants and 70,000 people are on the public housing register.
With just above 600,000 rental properties in New Zealand, the stats mean government supplements make up a substantial part of the rental market.
All that money
Economist Shamubeel Eaqub said the enormous expenditure hadn’t led to better outcomes.
“That's where that institutional investment opportunity is getting quite big in both that community housing space where there is this massive waitlist of about 26,000. That’s just mind-blowing right?
“It doesn't count all these other people who are also being priced out of the rental market, living in crowded homes or living in very low disposable incomes because so much of the income is going towards housing and/or transport.”
Working on the funding side, Community Finance sells bonds to large investors to secure development funding for community housing projects by accredited providers as well as providing an equity investment option.
Past investors in the space include Sir Stephen Tindall and Brendan Lyndsay’s foundations, investment banker Alvarium, and KiwiSaver providers Generate, Simplicity and Pathfinder.
Chief executive James Palmer acknowledged there was a well-earned stigma around profiting from lower socio-economic conditions, “Normally poverty and generation of profit are either on opposite ends of the spectrum or it's that nasty side of town where it's usury.”
Equab, who is on the board of Community finance, also weighed in on challenges around the perceptions of private investment in public housing, “The profit is deemed to be, I think, dirty, and yet if you don't have the return on capital, the supply wouldn't be there.
“It's really the question of what is the alternative if we don't build these houses”
Coming back to that massive subsidy spend, Palmer believes institutional money can be put to work in a win-win for investors (returns) and tenants (quality affordable housing).
“From an investment point of view, there are two parts to it. Even though the household isn't one that has a high income, it's the government funding that creates the return profile, so that generates a return that actually is marked appropriate. We're not asking investors to take a discount.
“Secondly, you get to look to the strength of government. People have high confidence that government will be around to pay that funding. So again, that goes to risk-return profile, and the long-term 25-year contracts between the community housing provider and the government.”
Tenants in community housing pay 25% of their income towards rent, with the remainder paid for by the government. Internationally a third or less of income is considered affordable.
“We can provide a similar, sometimes better return and we're getting people out of motels into a home that's affordable, that's warm and dry. To me it's a no-brainer,” Palmer said.
ACCort’s development
Cort chief executive Stephen Hart housing by its nature was expensive, and he viewed ACC’s investment in its development, which then meets the needs of both the Ministry of Social Development and the Ministry of Housing and Urban Development, as a good use of public funds.
“From an ACC perspective, their first thing is to be a responsible investor of government funding and they know that with Cort as a very experienced developer. The way this is structured, that there's a good financial return for them.
“From their perspective, they're working over a longer horizon and I think an investor like ACC has the opportunity to do that. I suppose sometimes private investors are looking for shorter returns or shorter horizons, which can be challenging for to match that up with the way that government contracts [public housing].”
With such a large waitlist and with public housing rates in New Zealand one of the lost per capita across the OECD, CORT is in support of the unitary plan and general intensification with a mind to ease pressure on the wider rental market.
ACC property and infrastructure portfolio manager Ian Purdy said the partnership was an example of its $50b fund while achieving social impact while also delivering a sound financial return for the scheme.
Under the terms of the ACCort joint venture, Cort will deliver public housing to tenants under a 25-year contract with the Ministry of Housing and Urban Development, as well as providing tenancy and property management services.
Cort’s share of any surplus will be used for its charitable purposes, and ACC’s share will be used to help meet the costs of the ACC scheme.
“While we would be confident of the demand for social housing, this contractual commitment from the Ministry of Housing and Urban Development reduces the risk profile for the investment and enables ACC to accept a lower return than we would normally require from a residential housing investment,” Purdy said.
He said ACC would be “delighted” to finance additional social housing transactions that met its required returns, but rising interest rates and construction costs were making it more difficult to find suitable projects.
Housing and Urban Development Minister Megan Woods, present at the opening of the Cort development, said the increase in interest rates, with the official cash rate sitting at 3.5 percent as of this week, had shifted the returns on housing.
“Counterbalancing that is actually low return on shares at the moment, so that when you're looking at institutional investors, they do need to weigh all of those up. What they also tell me is the thing that will unlock it is these long-term funding agreements.”
She said during the Labour government’s tenure the number of homes developed by the 70-odd company housing providers had risen from around 5000 to around 11,000.
“We have quadrupled the funding going into those developments. In order to build public housing, you need two things, you need capital to build the house, but critically, what is also needed is operating funding in the form of income-related rent subsidy and operating supplement that comes through the Ministry of Housing and Urban Development.”
When asked about concerns around community housing tenants falling second to profit, Woods rolled her eyes and came back to the opportunity provided to impact investors by the 25-year Ministry of Housing and Urban Development contracts.
“This is a win-win for the government, we're saying we want you to be in this for the long haul, this isn't a four-day wonder, we want a 25-year contract with you, this is going to be provided as public housing, we're going to be paying that money anyway put that up to give the certainty to unlock the investment.”
