Australia: The national housing finance and investment corporation: solid foundations or a house of cards?

Housing affordability is an issue faced by Australians across the Eastern Seaboard, from residents of public and community housing to private renters and first-home buyers.

And what happens in one sector of the market can have a domino effect across others. With house prices at record highs in urban areas of Sydney and Melbourne, many first-home buyers are delaying purchasing their own property and remaining in the rental market longer.1 This means an increase in both demand and price in the private rental market, which in turn increases demand for community housing – affordable rental housing owned and managed by non-profit organisations. Access to finance for the construction of this type of housing is challenging, not least because of the low rate of return on properties where below-market rents are charged.2 Government assistance, whether federal, State or local, only goes some of the way to addressing the problem.

As part of a suite of initiatives announced in the 2017 Federal Budget designed to increase the supply of affordable housing in Australia, the Government announced the creation of the National Housing Finance and Investment Corporation (NHFIC). To be established by 1 July 2018, the NHFIC will operate an affordable housing bond aggregator with the aim of encouraging greater private and institutional investment in affordable housing.

HOW WILL IT WORK?

The NHFIC's housing bond aggregator will act as an intermediary between community housing providers (CHPs) and institutional debt capital markets. It will pool the debt requirements of CHPs and issue fixed-interest, long-term bonds on the wholesale markets. The increase in scale from pooling the debts (and selective government support) means that funds raised from bonds issuances can be loaned to CHPs at lower interest rates and with longer tenor than they could access individually through traditional bank finance.3 The NHFIC is also likely to be responsible for undertaking credit assessment of CHPs and proposed housing projects, managing security over assets and monitoring compliance of CHPs. 4 The use of the capital markets to finance social housing is increasing around the world, led by the UK where The Housing Finance Corporation (THFC) has been operating since 1987.

IS THERE AN OPTIMAL STRUCTURE?

An Affordable Housing Implementation Taskforce, set up in March this year, will advise the Government on the structure of the NHFIC and its bond aggregator. We would advocate for the NHFIC to take the form of a not-for-profit company limited by guarantee, established under the Corporations Act 2001 (Cth). We do not see the need for the NHFIC to be a statutory corporation or equivalent. As an independent financial institution with no express funding from Federal or State governments, the NHFIC would mitigate the compliance burden of the regulatory regime which applies to statutory corporations. It would not be dissimilar to any other entity established as a financial institution for the purpose of raising funds and lending to third parties. This would require criteria as to the qualification of the entity's directors, as well as limitations on the NHFIC's ability to engage in activities beyond those contemplated for not-for-profit companies providing funding to community and social housing providers in Australia.

GOVERNMENTAL SUPPORT AND CREDIT RATINGS

While the intent is for the NHFIC to operate without express government funding, some indirect support is desirable to enhance the credit rating of its capital market issuances. This could take the form of interest subsidies or taxation credits from the Federal Government, or access to standby credit facilities or subordinate debt from State governments.

Additional support could come in the form of step-in deeds between the NHFIC, the relevant CHP and governments. Pursuant to such deeds, on default by a CHP, governments agree to intervene and transfer housing stock to another CHP or to an active, national housing sector regulator with the ability to intervene in the event of defaults, for example by appointing a statutory manager or compelling a CHP in financial distress to restructure or merge with another CHP.

Another potential credit enhancement mechanism would be for government to guarantee the obligations of the borrowing CHPs. This was the model for the THFC in the UK during the global financial crisis. However, any such guarantee under the NHFIC should not be viewed in isolation from strong regulatory oversight of the social and affordable housing funding sector. In the UK, the regulatory framework is acknowledged by credit ratings agencies as a critical component of any ratings analysis of a housing association.5

A ROLE FOR AUSTRALIA'S BANKS

The longer tenor of financing under the bond aggregator model means that the NHFIC will be best suited to facilitating refinancing of existing bank finance by lending against the ongoing operating cash flow of community housing, rather than providing the kind of short-term funding required in the initial (construction) phases of housing projects.6 However, greater funding of community housing by the capital markets means more opportunities for commercial banks to increase their already strong presence in financing these initial project stages,7 as arrangers and managers, and distribution agents. There will also likely be a role for banks to play in providing warehousing and interim facilities to cover the period between project approval and bond issuance.8

If the right mix of corporate structure, community housing sector regulation and government support can be achieved, the NHFIC has the potential to transform the affordable housing landscape in Australia while creating a new asset class in the capital markets and expanding the existing role of banks in supporting affordable housing construction on a national scale.

Footnotes

1 Australian Government, Budget overview: reducing pressure on housing affordability http://www.budget.gov.au/2017-18/content/glossies/overview/html/overview-15.htm>.

2 Australian Government, Affordable Housing Working Group, Innovative Financing Models to Improve the Supply of Affordable Housing, report to Heads of Treasuries, October 2016, p 14

3 Ibid p 24

4 NSW Federation of Housing Associations, The Affordable Housing Intermediary, Proposition Paper, July 2016, p 4

5 Moody's Investor Service Rating Methodology – English Housing Associations, p 4

6 Australian Government, Affordable Housing Working Group, Innovative Financing Models to Improve the Supply of Affordable Housing, report to Heads of Treasuries, October 2016, p 36

7 NSW Federation of Housing Associations, The Affordable Housing Intermediary, Proposition Paper, July 2016, p 7

8 Ibid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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