‘Only if the return stacks up’: Super funds will demand sweeteners to back Labor housing plan

Key points

• A key plank of the federal government’s budget announced last week was the National Housing Accord, which will explore ways to facilitate superannuation and institutional capital investment in social and affordable housing. 
• Experts say there will be complications in structuring the proposals in a way that is attractive for superannuation funds, which haven’t historically invested in housing. 
• The super industry has broadly welcomed the accord, but funds are expected to be cautious about any proposals given they are bound by law to ensure any investment decisions put their members’ financial interests first.

The federal government will have to put “something in the tin” to make social and affordable housing an attractive investment for superannuation funds, with experts warning of a raft of complications in making its new housing accord a success.

Last month the federal government released the National Housing Accord, a key plank of this year’s budget, which will explore ways to facilitate superannuation and institutional capital investment in social and affordable housing. It aims to build 1 million new homes over five years from 2024.

The super industry broadly welcomed the accord, but funds are expected to be cautious given laws require that members’ financial interests come first in investment decisions. Super funds have historically shied away from residential housing due to low returns.

Grattan Institute economic policy program director Brendan Coates said super funds could be attracted to the idea of acquiring another asset class to which they can allocate some of the more than $3 trillion of superannuation savings they manage, but “they’re only going to do it if the return stacks up, and that means government would have to subsidise it”.

The Commonwealth wants superannuation trustees to invest in social and affordable housing.Credit:Rhett Wyman

Some also believe state land tax and planning laws may need to change to make it economically viable for trustees to invest in residential housing.

“The actual structure of the investment proposal will be where this proposal stands or falls,” said industry analyst Alex Dunnin.

Treasurer Jim Chalmers committed an initial $350 million in additional funding for 10,000 new affordable homes, which will be delivered through an ongoing funding stream to “help cover the gap between market rents and subsidised rents – making more projects commercially viable”.

Super funds – Australian industry funds and overseas pension funds – have a long history of investing in major government sales, such as ports, airports, roads and rail projects, with varying success. Property is a common investment class, and large super trustees have about 10 per cent of their portfolio invested in various types of property, including some exposure to social and affordable residential property.

AustralianSuper purchased a 25 per cent stake in affordable housing developer Assemble Communities in 2020, and several large super funds including CBus have also invested in bonds through the National Housing Finance and Investment Corporation, which is leveraging private capital into community housing providers.

However, super funds may also be wary of government-sponsored programs given the well documented issues with the National Rental Affordability Scheme that was a flagship housing policy of the Rudd government.

‘Someone’s got to pay to bridge the gap between what it costs to build and maintain that home and what it’s rented to a low-income earner.’

Coates said he strongly supported trying to remove the barriers to get super funds to invest in residential housing, but current state land tax regulations made it uneconomic for large institutional investors. There were also other specific challenges with investing in social and affordable housing, he said.

“Someone’s got to pay to bridge the gap between what it costs to build and maintain that home and what it’s rented to a low-income earner,” said Coates.

“The super funds are not going to pay to do that. So ultimately, the government will have to pay if you expect to see super funds investing in social affordable housing. It’s not clear how getting the super funds involved, what problem they solve.”

Australian National University associate professor Geoff Warren also said for super funds to invest in social housing, the government would need to contribute money.

“If the government is putting something in the tin to give a sweetener to the returns, it starts to make sense. But they’ve got to raise it to the point where returns are attractive enough so that the funds aren’t working against their members’ returns,” he said.

“It’s about how much they’ve got to actually put in the tin to make it work is the question … It has to be done in a way that’s not going to compromise their returns. And there’s a lot of complications around that and making that work.”

Industry analyst Alex Dunnin said the accord was a smart development but its success would come down to the structure of the investment proposal.

“It makes huge sense for governments to finally see super funds as actively interested constructive economic players. But if governments think these super funds are going to make naive quick investments before they’ve really analysed what’s being proposed, they are kidding themselves.”

The federal government has said it will incentivise funds to invest in social and affordable housing by covering the gap between market and subsidised rents through availability payments.

Treasurer Jim Chalmers said they had been encouraged by the interest of super funds and other institutional investors to invest more in affordable housing, and they were committed to working with super, state and local governments, and the construction sector to try and shift the needle to build the affordable homes in areas where the jobs and opportunities are.

Housing is set to be the focus of the Treasurer’s Investor Roundtable in late November

Industry super funds have come out in strong support of the housing accord, however the response from retail funds has been more muted. A number of both retail and industry funds have signed up to the accord.

Blake Briggs, the chief executive of the Financial Services Council, which represents the retail super industry, said he looked forward to addressing the historical challenges that have prevented institutional capital from investing in affordable housing. Proposals must be consistent with the legal obligation on super trustees to promote the best financial interests of members, he said.

Spokespeople from Insignia Financial Group (which provides super products through IOOF and MLC), Colonial First State and AMP said they would be part of the discussions as the details are worked through but all stressed their focus on producing strong returns for members.

David Bryant, the Australian chief executive of Mercer, said they were keen to understand what the accord specifically entailed to ensure investments stack up against other local and global opportunities.

“A sector like social infrastructure has the potential to present attractive opportunities for the capital markets. That said, it’s small and needs aggregating if it’s to attract big players. To ensure domestic funds can invest here, the landscape needs to change,” he said.

Industry Super Australia deputy chief executive Matt Linden said as the size of super funds had increased, their appetite for and capacity to invest in different assets such as housing had improved.

He said governments would need to address issues around land release and planning, as well ensuring the projects were of a large enough scale to justify investment in housing from super funds.

“If governments and everyone working together can get those policy settings right, then our assessment is that it would certainly be a very workable investment for the funds, provide attractive risk-adjusted returns to members and that’s the primary consideration of the funds,” Linden said.

The chief executive of $200 billion fund Australian Retirement Trust said they supported the need for institutional investors and the private sector to carefully examine the role they can play in investments and the barriers they can clear, but members’ financial interests always came first.

Chief executive Bernard Reilly said the government had signalled its intention to make these types of investments more attractive to institutional investors by covering the gap between market rents and subsidised rents, which will be a key consideration for the fund when assessing the risk-adjusted returns.

Brett Chatfield, chief investment officer at $70 billion trustee Cbus, said a breakthrough for super funds investing in housing was made under the previous government through the National Housing Finance and Investment Corporation’s bond aggregator. It had met Cbus’ risk and return profiles for investments while financing social and affordable housing, and it showed there was significant demand for these types of products in the investor market, he said.

Industry funds Aware Super and HESTA have also been vocal in their support of the accord.

The announcement of the housing accord came after the Victorian government also signalled a desire to encourage the trustees of major super funds to invest the trillions in retirement savings in government projects that can produce returns to trustees. It has promised to revive the State Electricity Commission, with plans for the state to have a 51 per cent stake in the revived commission, and Premier Daniel Andrews has said the superannuation industry was the preferred investor in the remaining share.

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