Overview

The project involved analysing the potential options for developing a model of an effective property investment vehicle for affordable housing. This involved consideration of strategic positioning, whether the fund is listed or unlisted, whether the fund portfolio involves a mix of assets, and analysing risk and return. The performance of the proposed vehicle was also estimated using financial modelling.

The study finds that Australian residential property is an effective investment asset class with strong long-run risk-adjusted returns as well as portfolio diversification benefits. Unlisted wholesale residential property funds are the most appropriate model for attracting large-scale investment in residential property in Australia (especially affordable housing investment) since they require a significant minimum investment with low debt levels, tend to be less volatile and more stable in investment returns (similar to appetite of institutional investors in superannuation funds). An unlisted wholesale residential fund is proposed for the Australian context.

Performance and portfolio analysis suggest that the proposed unlisted property fund offers a moderate risk-adjusted return, higher than for stocks and Australian Real Estate Investment Trusts (A-REITs), and also reduced risk effectively demonstrating its value for institutional investors. There is also (weak) evidence to support it being an effective residential investment vehicle in marginally enhancing returns and diversifying risk over the full risk spectrum.

Key enabling strategies to deliver such an investment vehicle and obtain investor acceptance include: providing ongoing support from the sponsor (i.e. housing operators), housing industry and governments; selecting a fund manager with a good track record; effectively promoting to targeted institutional investors and superannuation funds/property fund managers; and introducing a liquidity protocol to enable entry and exit.

This report suggests that there are good opportunities to structure affordable housing into an effective property investment vehicle attractive to superannuation funds in Australia, particularly those with a strong Corporate Social Responsibility mandate. Unlisted wholesale residential property funds were identified as the most suitable investment vehicle. Implementation challenges relate to commitment and buy in from policy makers and other stakeholders including community housing providers. Policy makers could help facilitate their emergence by: reshaping policy settings on taxation to encourage the development of unlisted wholesale affordable housing funds; promoting the idea of the fund and attract long term investors; and support the housing industry in benchmarking the performance of residential property especially affordable housing.