As he awaits the passage of the enabling legislation in the Senate, he has become the marriage broker, talking to super funds to see just how he can bring their money to the table and looking for ways to structure investments to meet their return criteria.
“We’ve got the objectives from government, and the objectives of institutional investors like the super funds, and we are trying to marry them up,” he says.
After extensive consultations with funds as well as industry organisations, the agency has appointed Macquarie Bank as an adviser to turn the concerns and investment parameters of super funds as potential investors, into financial models which could make the deals potentially viable.
It has also set up an advisory panel to liaise with the super fund sector on potential ways to structure the financing.
Over the past few years, NHFIC has raised $2.2 billion in six bonds with maturities of up to 15 years.
The money has been used to finance $3.4 billion in long term loans to 38 community housing providers around the country, which have helped develop more than 17,500 new and existing homes.
As Dal Bon points out, all of NHFIC’s bonds are socially responsible bonds.
For those super funds which have invested in them, they are effectively government-backed senior debt which pay a slight premium of 20 to 60 basis points above Commonwealth Government securities.
Emerging asset class
Dal Bon sees part of his role as getting super funds comfortable with what is effectively a new class of assets in Australia – an education process for super funds which have been wary of investing in the sector.
Affordable housing is a well-established asset class in Europe and the US, thanks to long standing tax breaks, but has yet to really get off the ground in the much smaller Australian market.
For many Australian super funds, it can be easier and more profitable to invest billions into infrastructure and property deals offshore than to take the riskier step of looking at small deals in the low cost end of the housing sector in Australia, which traditionally has not been attractive for institutional investors looking for big ticket deals with predictable returns.
“To get them comfortable with social and affordable housing in Australia there needs to be a combination of education as well as market development,” he says.
What has been missing in the past, he says, is a steady pipeline of developments in the sector to create the scale needed for it to be taken seriously by super funds.
But if the government can get its legislation through parliament, there is the potential to create a sizable pipeline needed to develop the asset class in Australia through the combination of the new $10 billion Housing Australia Future Fund and the Housing Accord between the Federal and state governments. These two new initiatives are targeting to deliver a total of 40,000 new social and affordable houses, going some way to alleviate the housing crisis.
“A lot of super funds are looking for scale in projects,” he says. “The community housing provider sector is still relatively nascent in Australia and hasn’t got that sort of scale. We have got to look at ways we can get that scale and aggregation.”
There are two sub-sectors within the affordable housing industry – the more financially attractive sector of affordable housing which is often used for key worker housing, where rents are around 75 percent of market levels and the less financially attractive social housing with lower rents for those on welfare.
Dal Bon knows looking for ways to make social housing attractive to super funds will take a lot more work and financial structuring with the complexity of having equity investments in social housing as well as debt.
He says the projects will also have to work as long term investments, not dependent on being sold after a few years to generate profits.
“At the moment, if people buy our bonds, they are guaranteed, and they don’t need to do any due diligence.”
“But if you are looking at equity-like investments, that’s when the super funds tend to get a bit nervous.
“When you are getting direct exposure to the projects, it is a different dynamic and there is more hesitation. It’s a problem for the banks as well as the super funds.”
But Dal Bon sees potentially structuring some of the projects to be undertaken as infrastructure projects is one way to appeal to super funds.
“We have done a lot of the preparation work and consultation and we are now taking it to the final stage.”
“What we have got to prove up is the pricing of different options – from the debt to equity-like pieces, and if they can be made attractive from an infrastructure point of view or a real estate point of view.”
“The other thing we need to firm up is volume and how much each super fund is likely to allocate.”
His challenge is much broader than that including talking to state governments about providing access to low cost land needed to make the economics of the projects work, as well as the construction sector.
Dal Bon says the new federal government backed housing could prove attractive to the construction sector at a time when higher interest rates will slow down future private sector projects.
But bringing the super fund sector to the financing party is a key part of the challenge.
He is confident of getting offshore pension funds, which have had a lot more exposure to the sector, to put money in and potentially some offshore sovereign wealth funds.
But Dal Bon is asking for “a degree of openness and flexibility” from super funds in Australia to work with him along the journey.
“It is getting people familiar with an asset class that they haven’t been able to make work in the past,” he says. “There’s a bit of exploration we need to do, to find the solutions which satisfy their requirements and our requirements.”
“We are literally building a new asset class in Australia. We don’t need all the money up front. The plan is for it to happen over five years.”
“But let’s build up confidence in the first round which can pave the way for them to come in at scale.”