New dawn or chimera? Can institutional financing transform rental housing?

Abstract

Mainly stimulated by concerns over inadequate housing supply, both the UK and Australia have recently seen renewed policy-maker interest in channelling ‘institutional investment’ into rental housebuilding. This has coincided with the recognition that – as seen in both countries – ongoing changes in the demographics of expanding private rental sectors reinforce the need for new forms of provision.Drawing on recent ‘informed stakeholder’ perspectives in both countries, we build on existing accounts through our analysis of barriers to institutional financing of rental housing and our investigation of what, if any, fundamental changes in market conditions and investor sentiment have recently occurred, so that such obstacles might potentially be overcome. Further developing this story, we compare and contrast recent ‘policy reform’ recommendations proposed in both countries with the aim of stimulating institutional investment in housebuilding.Although impediments to large-scale institutional funding for rental housing remain substantial, we conclude that, should it take off, such financing could significantly affect the structure and quality of provision – especially via the involvement of not-for-profit landlords.

Keywords:

• housing policy
• private rental housing
• institutional investment

Acknowledgements

We would like to thank Judith Yates and Suzanne Fitzpatrick for their valuable comments on an earlier draft of this paper. We would also like to acknowledge the contribution of Judith Yates, Ilan Vizel and Carrie Hamilton to the 2013 Australian reports on institutional investment on which we have relied heavily in this paper, and we would like to thank the AHURI for funding the research for those reports. We are also grateful to Liss Ralston for her help on Australian private rental statistics.

Notes

1. Under the scheme, the US Government allocates tax credits to states which in turn allocate them to developers of affordable housing who then sell these, often via intermediaries, to investors in exchange for equity financing of projects. Returns to investors are received in the form of tax offsets for 10 years, but the housing supplied is generally required to remain at designated affordable rents for eligible households for a minimum 30-year term and longer in some jurisdictions. For over two decades, the scheme has been the mainstay of the provision of additional rental housing affordable to low- to middle-income households in the USA in lieu of investment in traditional public housing or direct subsidization of private rental housing (Desai, Dharmapala, & Sighal, 2008).

2. According to the model developed for the Australian Housing and Urban Research Institute, such panels facilitate systematically structured debate involving participants from research, policy and industry sectors selected for their expertise on the specified policy question.

3. Negative gearing is where rental income losses may be used to reduce taxable income from other sources (Oxley et al, 2010).

4. Indeed, it was reported in 2013 that Self Managed Super Funds had been rapidly expanding their involvement in the residential property market (Vedelago & Johanson, 2013)

5. Implicit here was a recognition of the importance of separating funding of the construction and operational (or ‘take out’) phases.

6. Note that, as a joint venture between a sovereign wealth fund and a private property company, the entity itself might not be considered as an ‘institutional investor’ of a mainstream kind.

7. It is, for example, notable that – unlike its Business Expansion Scheme and Housing Investment Trust predecessors – the UK residential REIT model incorporates no upper threshold dwelling value – a device with the potential to channel investment into smaller and/or more downmarket properties potentially accessible to lower income households (Crook & Kemp, 2011).