Associate at the Housing Action Network, Carrie Hamilton, facilitated the session, Flying the National Housing Finance and Investment Corporation, on day two of the National Housing Conference 2017, Thursday 30th November. Following is a response from her broaching issues that were brought to the table by the panel of Piers Williamson (UK), Stephen Knight, Michael Swan, David Cant and Jon Ross.
Housing conferences have increasingly featured a stream on affordable housing finance. Some conference attendees instinctively avoid this niche topic due to alienating jargon, while others gravitate toward these sessions’ inspirational presentations on cutting edge, sophisticated mechanisms.
But beware: If a presenter ever tells you they can create affordable rental housing through innovative financing without any government contribution, it is indeed too good to be true. Our sector loses credibility with every one of those claims. Subsidised housing requires subsidy, and there is rarely anything actually ‘innovative’ in finance. Project funding needs to be soundly balanced with fair assessments of risks, costs and cashflow but finance is the tail that shouldn’t ever wag the dog – it just needs to work in the background.
Finance is the tail that shouldn’t ever wag the dog – it just needs to work in the background.
This year, we welcomed the Australian Government’s attention to affordable housing market failure and its initial proposals to address this shortfall. Finance moved from specialist streams in our National Housing Conference to the main plenary session – no one could escape. Refreshingly, we heard about a proven mechanism that needs little jargon to explain, and that demonstrates that finance doesn’t actually need to be innovative or complicated to have impact.
The new National Housing Finance and Investment Corporation announced by the Commonwealth in this year’s May budget is actually quite vanilla and intuitive. Indeed, the most innovative thing about the NHFIC is central agencies – the Commonwealth Treasury – deciding to take housing out of the too-hard basket for the first time.
The NHFIC (our newest acronym rhyming, naturally, with ‘terrific’) is a bridge or intermediary between community housing providers (CHPs) and institutional investors – super funds – who require a large-scale, standardised format to be able to invest in affordable rental housing. So first: think of the NHFIC as a bridge.
The NHFIC is proposed to have two components – a Housing Infrastructure Facility, offering loans and modest grants to local governments or CHPs, and a bond aggregator. The bond aggregator is the NHFIC’s main function, and that term is often used interchangeably to refer to this new entity.
These mortgage loans to the community housing sector exist now.
A ‘bond aggregator’ basically aggregates – or pools – mortgage loans made to CHPs into standardised bonds that super funds can invest in. Supers need these large, rated bonds because it’s too expensive to negotiate individually with each CHP for relatively small investments. They need extremely large-scale, watertight instruments, like bonds, where the risks are clear and the repayment stream is steady and long-term.
These mortgage loans to the community housing sector exist now. CHPs have been borrowing from banks for about 10 years, using the operating income from CRA rents as the repayments for borrowings, which they use to build new rental dwellings. However, the banks are restricted from lending for more than the short-term and these loans are tricky to negotiate. Each one is essentially a one-off and the CHPs are living with significant refinancing risk.
The NHFIC, or bond aggregator, will standardise this process to bring regular infusions of super fund money to housing. So, perhaps, think of the NHFIC as a sausage-making machine as much as a bridge.
Mixed metaphors aside, this aggregation of loans to CHPs into bonds by a specialist finance intermediary is a proven mechanism. Over the past five years, housing academics have completed several research projects – funded first by the West Australian Government, then subsequently twice by AHURI, and most recently by the NSW Government – that collected tremendous evidence on examples of debt aggregation into housing bonds overseas.
After surveying many international housing finance mechanisms, researchers led by Dr Julie Lawson chose this mechanism – and, specifically, The Housing Finance Corporation (THFC) in the UK – as the most applicable to Australian settings. Its CEO Piers Williamson has now travelled to Australia three times in service of these research projects and Treasury investigations. His non-profit The Housing Finance Corporation (THFC) was set up in 1987, and has since provided over £5 billion in loans to British Housing Associations without suffering a single default.
Why are we seeking super fund money in the first place? Why go to all this trouble establishing a new entity to grind individual CHP loans into bonds?
Because Australia’s well-documented shortfall in affordable rental housing is sadly too big for any level of government to fund at this point. Government stopped investing in steady annual production of affordable housing starting in 1996, with only brief respites for the GFC stimulus and NRAS. This has now reached a tipping point into the housing crisis that we see now. We have no choice but to raise private finance at an institutional scale to supplement the re-introduced underpinning of government co-investment to produce housing. We need the bond aggregator because we left it too long for more straightforward solutions to succeed.
We need the bond aggregator because we left it too long for more straightforward solutions to succeed.
Ambitiously, the NFIC will be up and running by next July. But will it fly?
That could mean two things – will this new entity solve our shortfalls of affordable housing? No – the NHFIC is not the comprehensive national housing policy we’ve sought, like Canada’s recent shining light, but it’s an important piece of the puzzle.
‘Will it fly’ could also mean: will the NHFIC work the way it is intended and actually attract recurrent super fund investment? What needs to be in place for that to happen?
One component of the ‘if we build it, will they come’ issue was addressed by the Assistant Minister to the Treasurer Michael Sukkar at the 2017 National Housing Conference (see article page?). Gratifyingly, he announced to the plenary audience that the bonds issued by the NHFIC will carry a full government guarantee to underpin investor acceptance of these new housing bonds. This is extremely significant as ‘guarantee’ was very recently such a third-rail issue for the government that researchers even had difficulty including the word in their research proposal titles. Now, with this commitment the Australian government is saying that it’s backing the sector, it’s backing itself (meaning uninterrupted CRA) and it will hopefully be backing the necessary improvements to National Regulatory System that are key to avoiding this guarantee from ever being called.
While this is big, even the guarantee isn’t going to make the NHFIC fly.
As always, in discussing affordable housing finance, we must remember to avoid what I call the ‘silver bullet fallacy’ – the belief we can solve everything with a bright shiny new finance mechanism.
Make no mistake, the only ‘silver bullet’ will be re-introducing a stable and robust government investment program to fund the feasibility gap between the cost of building rental housing and the debt that can be supported by the CRA rents. Depending on affordability level targeted, this equals between a third and two-thirds of project cost (the larger gap reflecting social housing rent levels). Note this is different to a ‘yield gap’, which is a furphy because it represents investors claiming what they need to bring affordable rental returns up to comparable yields but, until now, there hasn’t been any comparable asset class in aggregated rental property so there is no such comparable.
A bond aggregator like the NHFIC needs something to aggregate every year in order to have credibility with investors.
The Commonwealth has been silent on what credible, robust funding program it will expect to drive a pipeline of new affordable housing development that will populate this financing entity. Remember, a bond aggregator like the NHFIC needs something to aggregate every year in order to have credibility with investors. Super funds eschew ‘orphaned assets’, which are inefficient one-offs that aren’t part of a recurrent asset class. Refinancing the CHPs’ existing short-term bank loans will only fill one, maybe two bond issues. Without a program of new government co-investment in new affordable housing, investors won’t buy these bonds because they don’t think the bonds will be recurrent and, ultimately, even tradeable.
A guarantee gives comfort to smooth the introduction of a new asset class; it doesn’t create the assets.
This is what will make the NHFIC fly.
Carrie Hamilton is a finance expert who acted as industry partner to the first AHURI investigation into Housing Supply Bonds and co-authored subsequent AHURI research into the use of guarantees for a financial intermediary, and NSW-sponsored business case into the bond aggregator. She advised Treasury’s Affordable Housing Working Group through 2016 and continues to support the expansion of the Australian affordable housing industry.