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Super funds look abroad for social housing opportunities

Super funds in Australia and New Zealand are eyeing international social housing investments, but associated risks mean that most investors in the nascent sector still favour opportunities in the domestic market.
Super funds look abroad for social housing opportunities

Two leading super funds have signalled their willingness to extend recent affordable housing investments beyond Australia and New Zealand, despite the associated risks as well as the risks presented by the asset class more widely.

Following its first investment in March in a sector beyond Australia, Bevan Towning, head of property at AustralianSuper, the country’s largest super fund, told AsianInvestor the fund was interested in adding to its international affordable housing investments.

In March, the fund paid £290 million ($365.2 million) to buy half of British Land’s shares in London’s Canada Water Masterplan, one of London’s largest-ever regeneration projects in which 20 percent of the 2,600 homes built will be affordable.

“Certainly, we would consider the east and west coast of the US. But independently of [our social] requirements, there has to be demand for it,” Towning said.

“Beyond New Zealand, we would consider [affordable housing investing] in Europe or the US, but we would have to have the right partner,” Toby Selman, who is in charge of property investment strategy at the New Zealand Superannuation Fund (NZ Super), told AsianInvestor.

HOME BIAS

Despite his willingness to invest in the sector beyond New Zealand, Selman pointed to the risks. “At home you have the government links you need to make investments work and there is alignment, including with financial incentives. Everyone is wanting the same outcome,” he said. He added that activity by foreign investors in social or affordable housing abroad has in the past seen local residents questioning investors’ motivation.

Until March, AustralianSuper had concentrated its efforts at home. In June 2020, AustralianSuper bought a 25% stake in Australian affordable housing developer Assemble Communities, in a deal which gave it two of five board seats, for an undisclosed sum. At the time, Towning said it anticipated investing “a couple of hundred million” dollars per year in the company’s new pipeline of new homes, which tenants rent for five years before having the option to buy. However, Towning declined to say how much the fund had invested since June 2020.  

Peter Hobbs, managing director of private markets at consultancy bfinance in London, told AsianInvestor that such risks meant a domestic market bias was still common for investors in the sector, which remains in its infancy.

“Most investors who want to do [residential] investments with a social impact end up doing it domestically. Why would a Dutch or French pension fund do it in the US when the perception is they should be worrying about supplying it at home?”

He contrasted this with investing to combat climate change. “It doesn’t matter [where you invest],” he said, pointing to the wide geographical range of investments by Danish and Nordic pension funds. “They are keen to invest in low-carbon strategies wherever they can,” he said.  

CHALLENGES AHEAD

The sector contains other investment challenges, too. Assemble Communities says it sets its margins a third lower than typical build-to-sell developments that do not feature affordable housing. In addition, build-to-rent developments typically charge a rental premium on comparable surrounding homes of between 20% and 30%, whereas affordable housing is offered below the average rental price. Despite these two apparent challenges, Towning said his return expectations for the affordable housing sector were not lower than for other residential property investments.

“We don’t look at it like that. At the end of the fifth year there is a further return [created by the sale of the home]. So, the internal rate of return is made up of some income and some capital gain,” he said, although he declined to say what the target IRR was on these investments.

Towning also noted that the sector featured the general risks associated with multi-family investing. “Building [blocks] from scratch, typically comprising 200 apartments in each building, means planning approval, construction risk and rental risk,” he said. In addition, there are specific credit risks associated with those who qualify for this type of housing. Towning said the fund spent a longer period of time screening eligible tenants to ensure both their financial circumstances and their attitude were right.

The Assemble Communities acquisition represented a departure from AustralianSuper’s preferred model of owning buildings outright or alongside other investors. But Towning said the ownership model was the best way to pursue its strategy of extending affordable home ownership for those on moderate incomes, rather than social housing, where the majority of peer investment and fund offerings – both in Australia and abroad – had traditionally focused.

Towning highlighted the benefits of providing long-term home ownership in Australia, where residential prices had grown significantly in recent years, far outstripping wage growth.

Despite the appeal of the affordable housing sector in ESG terms, Hobbs said that many investors were still waiting on the sidelines, uncertain about which of the affordable housing options best suited them. “There is a huge range of activities: is it social housing, is it housing for key workers, is it shared ownership, is it asylum-seekers’ [housing], is it women’s refuges? A lot of investors want to do something but they’re not sure what.”

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