PARTNERSHIPS PATHWAYS POLICY PLACE Affordable Housing as an Infrastructure asset class: A Public-Private Partnerships Investment Pathway Presented by Lee-Yun Chiang Supervised by Professor Eduardo Roca, A/Prof Richard Yiu-Ming Chung, Dr. Benjamin Liu and Professor George Earl 31 January 2020
PARTNERSHIPS PATHWAYS POLICY PLACE Outline • Background to the Study • Motivations for the Research • Research Objectives • Theoretical Framework • Study 1: Government’s Perspective • Study 2: Housing provider’s perspective • Study 3: Institutional Investor’s perspective • Conclusion 1
PARTNERSHIPS PATHWAYS POLICY PLACE Background to the study • Definition of Affordable Housing • Housing provided subject to access and affordability requirements set by government (Milligan et al., 2016) • Rental housing priced at below-market rents and earmarked for eligible low to moderate- income households, i.e NRAS • Owner-occupied housing for eligible households that are provided under a subsidised loan or shared-equity arrangement and/or is legally encumbered with covenants that impose an affordability requirement • Current Australia’s Housing Affordability Challenge • Attract private institutional investment in affordable housing • Barriers: (ISA, 2016) 2
PARTNERSHIPS PATHWAYS POLICY PLACE Options for unlocking institutional investment in affordable housing Debt Model Bond aggregator model: • Lower the cost of finance through a government’s guarantee scheme (Lawson et al., 2014) • Overcome the problem of scale, monitoring of investment and information asymmetry • Uplift the risk/return profile of the investment through a government credit guarantee on bond • Achieve a platform for institutional investment in affordable housing sector Impact investing model: • HESTA’s responsible investment policy (HESTA, 2018) • 70 million social impact investment trust • Purchase management rights for the NRAS properties (ISA, 2016) • Acquire a compliance function of further NRAS properties (ISA, 2016) • Provide a relatively lower risk with returns consistent with other commercial entities (ISA, 2016) 3
PARTNERSHIPS PATHWAYS POLICY PLACE Options for unlocking institutional investment in affordable housing Equity Model DHA model (Phibbs and Hanna, 2010) • Sale and leaseback program Densification and recycling model (ISA, 2016) • Invest in an existing housing development via a property trust. Shared equity model (NAHC, 2016) • Provide financial support for eligible Australians to purchase and fully owned newly built approved properties. Public-Private Partnerships model (IPA,2019a;IPA, 2019b) NSW: $1.1 billion Social and Affordable Housing Fund Victoria: $1 billion Social Housing Growth Fund 4
PARTNERSHIPS PATHWAYS POLICY PLACE Public-Private Partnerships model • What is PPPs? (DITCRD, 2018; DIRD, 2015) • What is Build & Operate Program? ( IPA, 2019b) Development stage Operating Stage (30 years) Source of Fund Private sector Government rent subsidy Private sector Ownership Private sector: Private sector: Development SPV Housing Provider SPV • • Responsibility Developers build the Housing providers receive property government subsidy • • Financiers provide Housing providers manage, construction loan operate and maintain the property • Financiers provide the investment loan 5
PARTNERSHIPS PATHWAYS POLICY PLACE My Research: PPP model Housing provider’s perspective RQ2 Institutional Investor’s Government’s perspective perspective 6
PARTNERSHIPS PATHWAYS POLICY PLACE Motivations for the Research 1. There is a need to enhance the understanding of a project-based risk profile of affordable housing faced by the government under a PPPs arrangement • DIRD (2008a; 2008b) 2. The government needs to achieve value-for-money for affordable housing • NAO (1999); NSWT (2017); DTF (2016); Milligan et al. (2013) 3. There is a need to enhance the understanding of a project-based risk profile of affordable housing faced by the institutional investors under a PPPs arrangement • ISA (2016); IPA (2017) 7
PARTNERSHIPS PATHWAYS POLICY PLACE Research Objectives 1. Evaluate the risk profile of affordable housing faced by the government 2. Assess quantitative value for money of the affordable housing 3. Evaluate the risk profile of affordable housing faced by the institutional investors 8
PARTNERSHIPS PATHWAYS POLICY PLACE Theoretical Framework • Incomplete Contract Theory (Hart, 1988) • Residual control rights (Hart, 2017) • Who has the right to decide about things that are not stated in the contract • Renegotiation process (Hart and Moore, 1988) • Build in a mechanism for revising the terms of trade 9
PARTNERSHIPS PATHWAYS POLICY PLACE Study 1: Government’s Perspective • Research Question 1 : What is the risk profile of affordable housing faced by the government? • Methodology • Public Sector Comparator (PSC) • Raw PSC, competitive neutrality, transferred risk and retained risk • Monte Carlo Simulation • Produce probability distribution of transferred and retained risks • Data from NAHC • Projects: North Melbourne, Frankston and Coburg 10
PARTNERSHIPS PATHWAYS POLICY PLACE Study 1: Government’s Perspective • Research Question 1 • What is the risk profile of affordable housing faced by the government? • Expected Outcomes • The probability distributions of retained risk, transferred risk and total PSC less retained risk show the nature of risk profile faced by the government. Hypothetical example of the cumulative probability of risk- adjusted PSC Hypothetical example of the probability distribution 11 of total PSC less retained risk
PARTNERSHIPS PATHWAYS POLICY PLACE Study 1: Government’s Perspective • Expected Outcomes • Output: Risk-adjusted PSC • Input: Capital expenditure, operating expenditure, discount rate, inflation rate and maintenance cost Risk-adjusted PSC Capital expenditure Operating expenditure Discount rate Inflation rate Maintenance cost Hypothetical examples of the tornado graph and the comparison of three project’s risk profiles 12
PARTNERSHIPS PATHWAYS POLICY PLACE Study 2: Housing Provider’s Perspective • Research Question 2 : Can affordable housing achieve quantitative value for money? • Methodology • Public Sector Comparator • Data from NAHC • Projects: North Melbourne, Frankston and Coburg 13
PARTNERSHIPS PATHWAYS POLICY PLACE Study 2: Housing Provider’s Perspective • Research Question 2 : Can affordable housing achieve quantitative value for money? • Expected Outcomes Hypothetical Example NPC gov’t NPC CHPs Quantitative Value for money North Melbourne 127M 100M 27M Coburg 150M 125M 25M Frankston 135M 130M 5M NPC gov’t : Net present cost of Public Sector Comparator NPC CHPs : Net present cost of the payment cash flows proposed by community housing providers 14
PARTNERSHIPS PATHWAYS POLICY PLACE Study 3: Institutional Investor’s Perspective • Research Question 3 : What is the risk profile of affordable housing faced by the institutional investors? • Methodology • Discounted Cash Flow Analysis • Monte Carlo Simulation • Data from NAHC • Projects: North Melbourne, Frankston and Coburg 15
PARTNERSHIPS PATHWAYS POLICY PLACE Study 3: Institutional Investor’s Perspective • Research Question 3 : • What is the risk profile of affordable housing faced by the institutional investors? • Expected Outcomes • The probability distribution of NPV is the nature of risk profile faced by the investors • Output: Net Present Value (NPV) • Input: Capital expenditure, operating expenditure, discount rate, inflation rate and maintenance cost 16
PARTNERSHIPS PATHWAYS POLICY PLACE Conclusion • The findings of this research • An alternative investment pathway to inform housing affordability issues, particularly in increasing the institutional investment in the affordable housing sector • Governments • Compilation and calculation of the risk-adjusted PSC • Determination of Value-for-money achievement • PPP Structure • Community Housing Providers • Project bundling process to address the problem of scale • Achievement of Value-for-money • Institutional Investors • Compilation and calculation of the risk-adjusted NPV • PPP Structure 17
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