Scheme Needed to Encourage Super Funds into Long Term Rental Housing

Australia needs a new rental affordability scheme, specifically targeting its institutional funds, that closes the current viability gap, and creates a new residential rental investment class, writes philanthropist and former general manager for Fraser’s Property Australia, Robert Pradolin.

Rental housing is the only option for millions of people around the world. Every government wants to attract foreign capital to its shores enabling investment and building infrastructure; rental housing included. No one should therefore be surprised that our super funds are being attracted into investing billions of dollars in providing rental housing for Americans (ABC 7.30 Report Monday July 30).

However, given significant rise of homelessness and the increasing level of housing stress facing several hundred thousand Australians, it seems rather ironic and in fact wrong that our financial system does not encourage our super funds to invest in building and owning a significant amount of rental housing in Australia.

But l want to be very clear. The issue is not with our superfunds. They are obliged to maximize the return on members’ funds. The issue is that over decades, our governments (Labor and Liberal) have created and then perpetuated, a financial system that does not allow institutional funds to achieve a reasonable financial return, after tax, to build and own 1000’s of rental housing. This is market failure and the responsibility to fix it rests with government.

The purpose of every government is to create an environment that will allow its citizens the opportunity to live a healthy and happy life. Fundamental to a healthy and happy life is the basic human need for food and shelter. Without these two fundamental needs satisfied, a person or family will struggle.

And when they struggle, they will not be able to contribute productively to society. Most likely, they will require long term support in the form of social security benefits. Further still, people that are in desperate circumstances do desperate things. This may lead to demands on our police, our courts, our hospital system and eventually they might end up in jail. All these are unproductive demands and they come with an exorbitant cost.

If you look forward from an intergenerational perspective, this will add significant pressure to future federal, state and local government budgets and the cost will run into the billions if not trillions of additional dollars.

Call me simplistic, but as a capitalistic and intelligent society, it is in our long term economic interest to provide shelter for all; rich or poor.

Now don’t get me wrong. I like many other Australians, feel for the people that are currently under housing stress (paying more than 30 per cent of their income on rental) or for those that are homeless. To make my point, however, I am purely looking at this through a long term economic lens not the humanistic one. If we do not invest in this type of rental housing now (including social and affordable housing), it will limit the economic prosperity of our country.

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 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? Where they can sleep safely tonight; next week; or next month?

Analysis by SGS Economics indicates a cost benefit ratio of 7:1 in respect to the economic benefit to the community of providing public, social and affordable housing in the right locations.

Well placed affordable housing for key workers (such as firefighters, nurses, teachers and police officers) needs to be located in areas where society needs their services. And social housing? It should be located where there is ready access to existing infrastructure, services and jobs as it lowers government costs. It makes good and rational business sense.

It’s encouraging to see our Federal Government taking steps towards providing a framework which could unlock significant institutional investment. 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. However, because it currently only relates only to debt funding (rather than equity) a co-financed bond aggregator model can only yield a limited amount of additional supply.

Major property companies like Stockland, Mirvac and Lend Lease are 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.

And 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. The social and affordable housing stock has been allowed to dwindle from 15 per cent to 3.5 per cent of our national housing stock.

Budget moves indicate that for the first time in almost a decade, our federal government has an appetite for real leadership in the social and affordable housing space. But it needs to keep up the momentum. The NHFIC needs to expand its brief to include establishing a financial instrument to encourage our super funds into long term ownership of rental housing, which must include social and affordable housing within its mix.

In New York, for example, a person earning less than $22,000 US per year pays only $125 per week rent while for the same apartment in the same building, the market rent is $750 per week. We need to create a similar system in Australia.

We cannot afford to wait any longer to start fixing this problem because we have already wasted several decades in doing nothing.

About the author: Robert Pradolin is the former general manager for Frasers Property Australia (formally Australand) and is currently engaging with the not-for-profit sector to establish pop-up homeless shelters within empty CBD buildings.