Analysis: Australian super funds embrace A$10bn housing scheme

Australian superannuation funds have embraced the announcement of a A$10bn (€6.48bn) Housing Australia Future Fund, a centrepiece of the Labor government’s 2022 election manifesto.

Although details of how the fund will function are yet to be set out, the government says returns from the fund will be used to build 30,000 new social and affordable dwellings over five years.

Together, with a string of other funding initiatives, the first Labor government in 12 years is making a bold and ambitious bid to tackling the nation’s housing crisis head on – while roping the nation’s cashed-up superannuation funds into the mix.

The government is also expanding the remit of the National Housing Infrastructure Facility (NHIF) to allow it to more flexibly use A$575m in existing funds.

Under what will be known as the National Housing Accord, the government will provide an initial A$350m over five years, with ongoing availability payments over the longer term, to deliver additional homes. It sets “an aspirational target of one million” new homes over five years from 2024, but realistically is looking at some 20,000 per year.

Affordable housing is dear to the heart of this Labor government. Aside from ideological leanings, there is a personal perspective for Prime Minister Anthony Albanese and his housing minister Julie Collins. Both spent part of their early lives in public housing estates. They say they totally understand the imperative of having a roof over one’s head.

So it was not surprising when Australia’s new Treasurer, Jim Chalmers, put housing and affordability front and centre of his first budget in late October. The initial response was one of overwhelming support.

Deanne Stewart, CEO of Aware Super, says: “We have heard the clarion call – that to redress the current housing emergency, Australia needs to supply one million urgently-needed homes. That is why it is vital the government continue to foster the right policy settings to make it acceptable for institutional investors to play in this space.

“Institutional investors can play a critical role in partnership with the construction industry, community housing providers and all levels of government in addressing the nation’s need for significantly more housing supply. Current projections have almost one household in 10 needing a new home.

“We are clear that our primary obligation as a super fund is to act in the best financial interests of our members, and to help them achieve their best possible retirements. Diversifying our portfolio and investing in new areas such as build-to-rent helps us achieve this.”

AustralianSuper CEO Paul Shroder says his fund has joined governments, institutional investors and other key industry players in signing the National Housing Accord. He says a real benefit of the accord is the flexibility it provides for various parties to collaborate and to learn from each other. While finding opportunities to invest in affordable housing at scale has been a challenge for super funds like AustralianSuper in the past, he says, this should not be a barrier to considering potential investments in the future.

Brett Chatfield, deputy CIO of Cbus Super, says the accord is an opportunity to build on proven affordable-housing finance models. “The key has been matching the risk-adjusted return profile of social and affordable housing investments to similar investments we would otherwise make,” he says.

Chatfield says construction by bonds issued by the National Housing Finance and Investment Corporation (NHFIC) “shows the funding model works”. Cbus Super has invested in some A$150bn of NHFIC bonds over the past four years. “It is this alignment that creates the win-win situation of strong investment returns for our members and more secure and affordable housing for vulnerable Australians,” Chatfield says.

Debbie Blakey, HESTA chief executive, says: “Australia’s superannuation system has incredible investment expertise to bring to the table, and we’re already seeing the industry develop a range of models that, if backed by strong partnership with government, can attract patient, long-term capital.”

Matt Linden, deputy chief executive at Industry Super Australia (ISA), which represents 11 large industry super funds, says association members welcome further opportunity to be involved in the housing sector. “The nature of investments can vary, and there are a number of ways to invest in affordable housing,” he says.

“One approach is to have equity exposure through built-to-rent-type schemes. Another is to participate in joint ventures doing precinct developments which include a housing component.”

Linden believes the government is exploring whether social and affordable housing can be classified as a form of infrastructure. “The treasurer and the government have been talking about potentially having availability payments to top up returns to an acceptable level for institutional investors,” he says.

“A [super] fund’s investment is not treated necessarily as an equity investment. It can be done through debt investment or enhanced debt instruments. No one model fits all here.”

One hurdle to institutional investment is the below-market-rate rents that providers of affordable and social housing charge. This raises the question as to whether adequate returns can be achieved to attract the capital needed for projects.

Linden says the role for government is to provide grants to close the financial gap. Using the government commitment, rent revenues could effectively be amortised to provide long-term returns that will help attract institutional capital. “An approach like that, subject to the term and risk-return profile of the investment vehicle, could be something that would be attractive to institutional investors and able to bring private sector capital into the sector,” he says.

Compared with infrastructure, where the financial models are already in place, housing has a long way to go in establishing workable models, Linden says.

And because of a recent increase in the superannuation guarantee, funds are under pressure to find ways to invest the higher contributions. According to the Australian Prudential Regulation Authority (APRA), which has oversight of the super industry, superannuation contributions totalled A$147bn in the 2021/22 financial year – a 15.2% increase on 2020-21. After benefit payments, the net contribution flow was A$63.6bn, compared with A$33.8bn the previous year.

This gap between payments and inflows is set to widen as the compulsory employer-sponsored superannuation levy, now at 10.5% of gross earnings, rises to 12% by 2025.

“Believe me, the funds are very exercised in investing money and getting good returns for their members,” Linden says. “They certainly will welcome an opportunity for further diversification around their investments.”