The opportunity of residential property investment vehicles in enhancing affordable rental housing supply. Graeme Newell Western Sydney University

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1 The opportunity of residential property investment vehicles in enhancing affordable rental housing supply Graeme Newell Western Sydney University

2 AHURI research grant Professor Graeme Newell: WSU Associate Professor Chyi Lin Lee: WSU Dr Valerie Kupke: Uni SA Positioning paper Final report

3 Context A lack of institutional investor involvement in residential sector Institutional investors play a critical role in the Australian capital markets Allocation: Property: typically 5%-10%

4 Selected Australian superannuation funds: property Superannuation fund Level of property in balanced option AustralianSuper 8.5% UniSuper 9.0% REST 7.0% HESTA 10.0% SunSuper 8.9% Cbus 14.0% Hostplus 15.0% Telstra Super 14.0% QSuper 9.0% State Super 6.0%

5 Selected international pension funds: property Pension fund Level of property CalPERS 8.5% CalSTRS 11.7% CPPIB 11.6% Universities Superannuation 6.5% APG 7.8% PGGM 11.0% AMF 12.5% BVK 12.6% Ilmarinen 11.3%

6 Australian property funds management profile Sector AUM # funds # properties Diversified $90.0B Retail $102.2B Office $29.4B Industrial $31.2B Hotel $0.4B 3 38 Residential $1.0B Leisure $1.4B Healthcare $1.1B Total $285B 356 5,269

7 Main residential REITs: global US Canada Japan Singapore France

8 US residential players: unlisted Lone Star Fund VIII Real Estate Opportunity Capital Fund II GTIS US Residential Strategies Encore Housing Opportunity Fund II IMT Capital Fund III

9 UK residential players: unlisted Wellcome Trust Grosvenor M&G Aviva Legal & General LaSalle UK: overseas investors

10 Key issue REIT versus unlisted property fund? Superannuation fund investment requirements

11 Objectives Australian institutional investors attitudes regarding property investment vehicle Develop structure for effective residential property investment vehicle - Residential - Affordable housing Enabling strategies

12 Key issues in private rental sector investment Lack of well-structured residential investment vehicles Low returns Lack of management expertise

13 Desirable features for an effective residential investment vehicle Managed by an experienced manager Diversified portfolio by location Focused on delivering a stable income stream

14 Potential problems of investing in residential investment vehicles Low returns Poor market information Low quality portfolios

15 Key messages Residential property does not figure at significant levels in Australian property fund portfolios Current lack of well-structured residential investment vehicles Desirable features Potential problems

16 Effective vehicle: characteristics The residential investment vehicle is managed by an experienced fund manager The residential investment vehicle contains a diversified portfolio by location It should deliver stable income returns Low debt level Liquidity by listing on a stock exchange is not a critical success factor Large scale of investment Low level of volatility Reputable property managers

17 Key desirable features of REITs, UWFs and URFs Key Features REITs UWFs URFs Experienced fund managers A diversified portfolio by location Large scale of investment Stable income Low debt level Liquidity (limited) (limited) Low level of volatility Experienced property managers Market sentiment of investors

18 Major unlisted wholesale property fund managers AMP ISPT Goodman QIC Eureka Lend Lease GPT Charter Hall Dexus

19 Leading international unlisted residential property fund managers Pramerica REI TIAA Henderson Heitman Starwood Vestade Bouwinvest Syntrus Achmea CBRE Global Investors JP Morgan Invesco Clarion Colony AXA BNP Paribas Credit Suisse LaSalle

20 The structure of an unlisted wholesale residential property fund Sponsor, with holdings in the Fund Unit Holders Fund Manager Sale and Leaseback; property or tenancy management Distributions Fund management fee Management services Purchase assets Investment in the Fund Unlisted Wholesale Residential Property Fund Housing Portfolio Net property income Distributions Acts on behalf of unit holders Trustee s fees Responsible Entity or Trustee Management fee

21 Key features of unlisted wholesale residential property fund Key Features Experienced fund managers A diversified portfolio by location Large scale of investment Stable income Low debt level Liquidity Low level of volatility Experienced property managers Enhancing affordable housing supply Individual investors Transaction costs Assessment (limited)

22 The structure of an unlisted wholesale affordable housing fund Sponsor, with holdings in the Fund Unit Holders Fund Manager Sale and Leaseback; property/tenancy management Distributions Fund management fee Management services Purchase assets Investment in the Fund Unlisted Wholesale Affordable Housing Fund Net property income Affordable Housing Portfolio Distributions Acts on behalf of unit holders Trustee s fees Responsible Entity or Trustee Management fee

23 Key features of unlisted wholesale affordable housing fund Key Features Experienced fund managers A diversified portfolio by location Large scale of investment Stable income Low debt level Liquidity Low level of volatility Experienced property managers Enhancing affordable housing supply Individual investors Transaction costs Assessment (limited)

24 Enabling strategies Sponsorship Experienced fund managers CSR mandates Ongoing support from government Market information Active promotion of affordable housing funds to superannuation funds Active promotion of affordable housing to major property fund managers Liquidity protocol

25 Key challenges Is CSR mandate enough? Efficiency of CHPs Is liquidity protocol enough? Sponsors and housing supply Sponsor linked affordable housing fund and government commitment

26 Policy implications Reshaping the policy setting on taxation to encourage the development of the unlisted wholesale affordable housing fund Strategies to promote the unlisted wholesale affordable housing fund Ongoing support from the housing industry in benchmarking the performance for affordable housing Long-term institutional investment is required across the full spectrum of residential property including affordable housing

27 Acknowledgement AHURI Survey respondents Stakeholders