New Zealand: More light shed on social housing transfers

Brief Counsel

Treasury notes from a public engagement round led by Finance Minister Bill English and Social Housing Minister Paula Bennett over February and March provide more detail on the likely shape of the proposed state house transfers and the issues troubling some potential Community Housing Providers (CHPs) – and, no doubt, their financial backers.

We draw out, and comment on, some of the main themes and policy pointers.

Process

The first tranche of transfers – between 1000 and 2000 houses this year – will be in areas where demand is relatively stable. It has not yet been decided whether this will include Auckland. The Auckland market is acknowledged as "very important" but complex. Other places are seen as "more straightforward".

Transactions may range in size from five properties to many hundreds of properties.

The sales process will be run by the Treasury and will take six to nine months. The Government will be "neutral among bidders" and will not engage in "side line or backroom deals".

Rights of First Refusal (RoFR) to iwi will be negotiated area by area and transaction by transaction. Each RoFR will be different. Some iwi businesses may buy houses and have their social services arm manage the tenants.

The Government is not planning to offer price discounts but accepts that the issue of what constitutes "market value" will be asset specific and a matter for negotiation. It has also acknowledged that the true impact of deferred maintenance may not have been as clear as it is now.

Registered CHPs will be eligible for Income Related Rent Subsidies (IRRS). Any sale must involve a CHP but they can form consortia with developers, financial backers, construction companies or community organisations. Any post-sale redevelopment plans must not reduce the social housing supply.

Local authorities will not be able to access IRRS except in partnership with a CHP on stock in which the local authority has no more than a 49% stake. "We don't want our policies to be an incentive for councils to grow their social housing portfolios when they may not be able to do so sustainably."

The Tamaki transfer

The Government today announced the transfer of around 2800 HNZ houses in Tamaki to the Tamaki Redevelopment Trust (a partnership between the Government and Auckland Council), together with a $200 million loan facility to allow the Trust to accelerate the regeneration work. Ultimately the plan is to build around 7,500 new houses where now there are 2,500 and to sell more than half of these on the open market to help offset the construction costs.

But this deal is entirely underwritten by the Government and allows for costs to be recouped through the sale of properties. The broader transfers programme by contrast relies on private finance but restricts re-sale rights and requires that the property continue to be used for social housing.

Most of the policy dilemmas the Government and potential CHPs and investors are now wrestling with arise out of these restrictions.

Possible road bumps

The feedback Ministers received at the public meetings (in Christchurch, Dunedin, Wellington, central Auckland, South Auckland and Rotorua) shows that there is continuing unease over the proposed sales and that important policy details are still being worked through.

The unease is scarcely surprising given that the two largest suppliers of social housing currently, Housing New Zealand and local government, have struggled to get enough income off rents (including existing subsidies) to keep up with basic maintenance costs - and they have access to cheaper finance and economies of scale which will not be accessible to the average CHP.

Many potential financial investors are also sceptical about the viability of the Government's social housing model, and will be reluctant to trust the available information about HNZ's housing stock. The Ministers accepted that the due diligence process before sale would "put pressure on the Government as to whether the income stream is big enough".

Specific issues include:

Security of IRRS as a funding source

The Ministers acknowledged that some CHPs had been asking for 10 or 20 year guarantees of IRRS funding to provide them with a stable revenue base that they could borrow against. The Government has made no commitments on this score but is planning to legislate to allow for more flexibility over how the IRRS is calculated (the current formula being "very rigid"). These changes will also allow the Ministry of Social Development (MSD), which administers IRRS, to continue payments even when a property is vacant.

The fact is, however, that one Parliament can't bind future Parliaments so clever purchasers will insist on protection clauses in their contracts to protect them against any changes to the IRRS regime.

As yet, there is no indication how lenders to consortia bidding for social housing assets will be able to take effective security over the assets (which will be a fundamental issue for financiers). The type of security those lenders will want is likely to be incompatible with some of the Government's bottom lines.

Tax status of CHPs

Under current charities law (enforced by the Department of Internal Affairs), the provision of housing is not, on its own, a charitable activity. Any costs met by a tax exempt charity in connection with housing or subsidies to a tenant, must be linked to a charitable need, for example a health benefit, relief of poverty or the relief of the aged.

A number of existing CHPs are tax exempt charities. Most iwi organisations are also either entirely tax exempt or have a tax exempt charitable social services arm. They are now waiting on a proposed tax legislation reform which will create a new income tax exemption for CHPs.

Bill English has confirmed that a solution "may be at hand" but has yet to be approved by Cabinet. Until the law is changed, it will create a barrier to participation for many groups as they will be limited to providing housing to people who also have a charitable need.

Tenant placement

The MSD will be responsible for assessing tenant needs and allocating tenants to available social housing. The information available to CHPs about tenants may be limited for reasons of privacy. Yet tenant selection and allocation will be a major potential source of risk for CHPs – for example, 80% of HNZ's maintenance costs are generated by 20% of its tenant population.

Also, many CHPs may be attracted to social housing as a means of augmenting or supporting (in an integrated fashion) other social service programmes they run. Iwi are likely to be interested only in providing housing to their own iwi members. Where this housing comes at a cost that is not covered by the IRRS or other third party funding, then iwi groups are limited by their governing documents to only cover such costs with respect to their iwi membership base (since it is effectively a distribution from group funds).

To work, MSD's approach would need to be aligned to, or at least sympathetic to that context. Whether MSD's mandate would allow this is another matter.

Out of contention

The Government will not provide low interest loans to help CHPs with the purchase price. Neither will it chip in equity. It did this through the Social Housing Unit but "is not going to spend money this way in the future". Whether this rules out deferred purchase price payment arrangements or other forms of vendor finance is yet to be seen.

Flexibility

The message from the Ministers is that the Government is open to ideas. It expects to receive "a whole spectrum" of proposals and is prepared to be flexible about the solutions which will emerge.

Some CHPs have suggested a long-term lease arrangement where the Government retains ownership of the land and the CHP redevelops the houses. The Ministers did not rule this out, saying it would be a "learning-as-we-go" experience.

CHPs do not need to buy HNZC properties to access IRRS. MSD's current Registration of Interest process for new IRRS places in Auckland includes some proposed apartment conversions.

The extent of the acceptability parameters the Government imposes on itself will only be fully revealed as the sales process progresses, depending on how transparent that process is.

Next steps

The timeline for the first tranche of sales is:

  • July - Market sounding, testing of regional interest
  • September - Expressions of Interest
  • Late 2015, mid 2016 - Requests for Proposal, identification of preferred bidders
  • November 2015 - Cabinet to review progress, announce next steps.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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