The opportunity of unlisted wholesale residential property funds in enhancing affordable housing supply

Aim of the study The demand for private rental properties has increased significantly in recent years. In 2014, it was estimated that the Australian private rental market included 2.4 million rental dwellings with 5 million renters across Australia, reflecting the role of the private rental residential sector in Australia in meeting housing demand. Nevertheless, the lack of institutional investment in residential property reflects concerns over the general lack of both listed and unlisted property investment vehicles available and suited to Australian superannuation funds in the residential investment area. This AHURI Final Report examines the opportunity of residential investment vehicles in enhancing the supply of private rental dwellings, particularly the supply of affordable rental dwellings in Australia. Research design and method This research consists of three key components. The first component was to provide a strategic positioning of the development of an effective investment vehicle. Importantly, the most suitable model to encourage institutional investment in residential property, particularly affordable housing, was identified by comparing the characteristics of listed and unlisted residential investment vehicles. The second stage of the analysis examined the role of residential property in a mixed-asset portfolio. The risk and return levels of Australian residential property were estimated and compared with the other major assets. The role of Australian residential property was also assessed by using Modern Portfolio Theory. Finally, the third component of the analysis developed the model of an effective property investment vehicle for affordable housing. The structure of the fund was critically discussed. The performance of the proposed model was also estimated by using a financial modelling analysis. Key findings There are several key findings from this AHURI Final Report: 1. Australian residential property is an effective investment asset class. Australian residential property presents a strong picture regarding the strategic contribution of residential property to investment portfolios in Australia. Specifically, Australian residential property delivers strong long-run risk-adjusted returns, as well as portfolio diversification benefits, indicating the strategic role and potential added-value of residential property in these portfolios. 2. Unlisted wholesale residential property fund as the most appropriate model. Unlisted wholesale residential property funds are the most appropriate model for attracting large-scale investment in residential property in Australia, and particularly for affordable housing investment. Unlisted wholesale residential property funds require a significant minimum investment, with low debt levels, and tend to be much less volatile and far more stable in their investment returns. These features are very consistent with the appetite of institutional investors such as superannuation funds. 3. The proposed unlisted wholesale residential property fund is an effective residential investment vehicle. The performance analysis and portfolio analysis suggested that the proposed unlisted wholesale residential property fund offers a moderate risk-adjusted return, which is higher than for stocks and Australian Real Estate Investment Trusts (A-REITs). The analysis also demonstrated the unlisted wholesale residential property funds return-enhancing ability and its risk-reducing facility, reflecting that the unlisted wholesale residential property fund should be considered as a strategic asset in institutional investors mixed-asset portfolios. 4. Weak evidence is available to support the view that the proposed unlisted wholesale affordable housing fund is an effective residential investment vehicle. Mixed results were evident for the unlisted wholesale affordable housing fund. In case 1 with the adjustment rate of 0.42, the inclusion of the unlisted wholesale affordable housing fund showed a marginal return enhancement and some risk diversification benefits over the full risk spectrum. However, no comparable evidence was observed for the case when the adjustment rate of 0.60 was employed. The unlisted wholesale affordable housing fund with the adjustment rate of 0.60 (case 2) only features at low-risk levels in Australian superannuation fund portfolios. The lesser role of affordable housing with the adjustment rate of 0.6 in a mixed-asset portfolio clearly highlights the importance of reliable information regarding affordable housing to further examine its role in an Australian context. 5. Key enabling strategies for future delivery are identified. Several key enabling strategies for the future delivery and investor acceptance/support for the unlisted wholesale residential property fund and the unlisted wholesale affordable housing fund are identified. These strategies include: 1. The ongoing support and commitment from the sponsor (i.e. housing operators) is required. 2. Selecting a fund manager with an outstanding track record is essential for industry confidence in residential property investment. 3. Targeted and effective promotion of the unlisted wholesale affordable housing fund to institutional investors with a strong corporate social responsibility (CSR) mandate. 4. Ongoing support from government is required. 5. Ongoing support from the housing industry in benchmarking the performance for residential property is paramount. 6. Active promotion of affordable housing funds to superannuation funds and major property fund managers. 7. Introduce a liquidity protocol. Conclusion and policy implications Overall, the establishment of the unlisted wholesale residential property fund and the unlisted wholesale affordable housing fund are critical for industry confidence in residential property, particularly affordable housing, as a viable option in institutional investor portfolios. This AHURI Final Report has clearly highlighted the challenges and opportunities for housing and affordable housing to be structured into an effective property investment vehicle that would be attractive to superannuation funds in Australia; particularly those with a strong Corporate Social Responsibility (CSR) mandate. An unlisted wholesale residential property fund was identified as the most suitable investment vehicle; able to be extended to an unlisted wholesale affordable housing fund to accommodate affordable housing in their portfolios. While a number of key challenges remain and need to be addressed in the policy implementation area, commitment and buy-in at all level of stakeholders including government, investors, Community Housing Providers (CHPs) and superannuation funds should see the effective delivery of a high quality and effective property investment vehicle to address the style of investment needed for housing and affordable housing in institutional portfolios in Australia. Addressing these key challenges and opportunities should see the effective delivery of an enhanced affordable housing supply via a high quality property investment vehicle, that is currently not available in Australia, to the significant benefit of the affordable housing sector in Australia. The report also identifies four key areas for policy development: 1. Reshaping the policy setting on taxation to encourage the development of the unlisted wholesale affordable housing fund. 2. Strategies to promote the unlisted wholesale affordable housing fund. 3. Ongoing support from the housing industry in benchmarking the performance for residential property, particularly affordable housing. 4. Long-term institutional investment is required across the full spectrum of residential property including affordable housing, with affordable housing seen as a key focus; particularly with the increasing CSR mandates of superannuation funds.