Do your super and affordable housing mix?

Article published 18 November 2022

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SHOULD your super fund invest your contributions in social and affordable housing?

On face value, putting some of the $3.3 trillion of savings held in these funds towards improving housing outcomes seems obvious.

Super funds already invest in residential housing but increasing their portfolio would have lots of benefits. Besides increasing housing supply, which should ease demand and lower costs, super funds don’t have to borrow and are therefore less vulnerable to risk.

They also hold on to build-to-rent properties longer than mum-and-dad landlords do to their much smaller property portfolios.

This is good news for renters who get more secure, long-term tenure in a highly unstable market.

But what’s really going to help make housing available to everyone is investing in new social and affordable housing. How realistic is it to expect super funds to get on board with this?

There are a few schools of thought.

On the one hand, many companies including super funds are starting to look at their investment opportunities through an ESG (Environmental, Social and Governance) lens. In other words, while financial return is always the key component of investing, they are also looking to invest in opportunities that will provide the best possible social outcomes.

Purely through an ESG lens, social and affordable housing seems like a no-brainer.

However, superannuation funds also need to think about superannuation’s sole purpose test: all investment must be in their members’ best financial interests.

So, while investing in social and affordable housing will offer positive long term social outcomes, they don’t exactly provide the best financial returns which is what’s in the best interest of super fund members.

Super fund bosses have said that to invest in residential housing they would normally require returns of 6 – 11 per cent. Social and affordable housing is no different.

Part of the National Housing Accord announced in the October Budget is the $350 million set aside to incentivise institutional investors to invest in 10,000 social and affordable housing properties by covering the gap between subsidised and market rents.

It’s unclear how this money will be provided, but let’s assume it’s an average one-off $35,000 payment per dwelling.

The initial cost of building a social housing property was estimated by the Australian Housing and Urban Research Institute to be $270,000 in 2018. This is estimated to come to around $300,000 today but with the $35,000 from the government that’s down to $265,000.

Since the majority of social housing occupants are single adults and the average income limit for this group between states is about $700 a week, that would be the maximum income for a single person household in social housing. Actual incomes of course would vary as income will be higher for households of more people and lower for those reliant solely on social security payments.

With social housing rent set at 25 per cent of income, super funds would get an annual return on investment in social housing of just under 3.5 per cent. Not even close to 6 per cent, let alone 11 per cent. And remember, these are your superannuation contributions towards your retirement!

In affordable housing, where rents are capped at 75 per cent of the average $510 a week market rent, the return goes up to 7.5 per cent.

So, while social housing still isn’t a viable investment, with the government subsidy affordable housing could potentially be.

But these estimates are of gross rental income. They don’t take into account the cost of property management, maintenance and other outgoings such as council rates. Net returns would therefore be quite a bit lower than this and may not be sufficient for investors in affordable housing.

To get super funds involved in building 10,000 affordable homes, the Government will need to make either a larger contribution or scale down the number of homes it wants to support.

However, it may just make more sense to cut out the middleman and commit government funding to actually building 10,000 homes, especially since every dollar invested in social housing equals two dollars saved on future costs, such as homelessness and health services.

That’s a net return of 100 per cent on your tax dollar as opposed to 6 to 11 per cent on your superannuation dollar, and a dollar is a dollar.


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