Local council as an investor - what are the options?

If a Council were to be interested in Tier 3 programs, it will want assets and investment channelled into procuring social housing in the most efficient way possible. There is a multiplicity of joint venture, risk sharing and innovative financing models evident in the affordable housing literature and a growing record of practice in Australia.

Procurement models can be thought of as sitting on spectrum from traditional procurement (simple cash purchase or development of social housing through a Housing Association) through to public-private joint ventures where private capital is mobilised to provide the social housing by a public sector agency ‘topping up’ returns for investors, making up the difference between the yield that can be generated from the targeted lower-income tenants and a ‘commercial yield’. The latter approach is exemplified by the oft-quoted Low Income Housing Tax Credit (LIHTC) Scheme in the US and the former NRAS scheme in Australia.

It is important that a council interested in direct investment has a clear framework for evaluating these alternative models and ensure that any models or levers adopted remain aligned to the city’s underlying goals and objectives as discussed above.

Tortoise or hare?

Innovative models which induce private capital into delivering social housing have the great benefit of generating relatively large volumes of affordable housing relatively quickly. However, if the public sector ‘top up’ ceases, the housing is likely to cease to be rented at affordable rents and the stock may be lost to this sector, as is now happening with a significant proportion of NRAS stock.

Traditional procurement is characterised by a slow build up of affordable housing stock but can ultimately ‘overtake’ private leveraging schemes. It also has the merit of being more committed to social housing supply over the long term.

The following chart illustrates this dynamic. The two lines represent a notional annual outlay of $5 million on the part of a Council. It assumes the tenant group targeted pay rents that meet all operating expenses in the case of traditional procurement, and a similar group is supported with the ‘innovative’ private leveraging model.

Under traditional procurement, a $5 million outlay buys 10 social housing units per year which accumulate over time. The private financing model involves providing an annual top up subsidy of $30,000 per year to investors to induce each social housing unit. Thus the $5 million annual outlay secures an on-going stock of 167 social housing units.

After 17 years, the traditional procurement model delivers more – and more secure – affordable housing units, but in the run up to this change over point, the innovative finance strategy offers more affordable housing volume. These kinds of trade-offs need to be resolved by council when considering the alternative pathways to achievement of its social housing objectives under its Tier 3 program.

Different needs, different costs

The volume of housing generated by any given investment and procurement model, regardless of where it sits on the spectrum noted above, will be contingent on the income profile of the tenants housed. If these households are on modest incomes – around the 40th percentile – the top up to mobilise private capital to deliver a marginal social housing unit will be smaller than if households are in the very low-income 10th percentile.

Likewise, for traditional procurement, higher income households can pay rents which produce a modest surplus that can enable the social housing provider to reinvest in additional social housing assets. Alternatively, if housing predominantly very low income households, there may be a net operating loss that requires ongoing injections of funds to sustain operations.

Bringing together the parameters of ‘tenant income profile’ and ‘type of procurement strategy’ a broad menu of options for local social housing production can be identified, as illustrated in Figure 3.