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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.

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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

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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

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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
  • r 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)

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Options for unlocking institutional investment in affordable housing

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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)
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Options for unlocking institutional investment in affordable housing

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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

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Public-Private Partnerships model

  • What is PPPs? (DITCRD, 2018; DIRD, 2015)
  • What is Build & Operate Program? (IPA, 2019b)

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Development stage Operating Stage (30 years) Source of Fund Private sector Government rent subsidy Private sector Ownership Private sector: Development SPV Private sector: Housing Provider SPV Responsibility

  • Developers build the

property

  • Financiers provide

construction loan

  • Housing providers receive

government subsidy

  • Housing providers manage,
  • perate and maintain the

property

  • Financiers provide the investment

loan

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My Research: PPP model

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Institutional Investor’s perspective Government’s perspective Housing provider’s perspective RQ2

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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)

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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

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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

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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

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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.

11 Hypothetical example of the probability distribution

  • f total PSC less retained risk

Hypothetical example of the cumulative probability of risk- adjusted PSC

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Study 1: Government’s Perspective

  • Expected Outcomes
  • Output: Risk-adjusted PSC
  • Input: Capital expenditure, operating expenditure, discount rate, inflation rate

and maintenance cost

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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

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  • Research Question 2: Can affordable housing achieve quantitative

value for money?

  • Methodology
  • Public Sector Comparator
  • Data from NAHC
  • Projects: North Melbourne, Frankston and Coburg

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Study 2: Housing Provider’s Perspective

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Study 2: Housing Provider’s Perspective

  • Research Question 2: Can affordable housing achieve quantitative

value for money?

  • Expected Outcomes

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NPCgov’t NPCCHPs Quantitative Value for money North Melbourne 127M 100M 27M Coburg 150M 125M 25M Frankston 135M 130M 5M Hypothetical Example

NPCgov’t : Net present cost of Public Sector Comparator NPCCHPs: Net present cost of the payment cash flows proposed by community housing providers

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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

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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

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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

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References

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1. Milligan, V., Martin, C., Phillips, R., Liu, E., Pawson, H. and Spinney, A. (2016) Profiling Australia's affordable housing industry, AHURI Final Report No. 268, Australian Housing and Urban Research Institute, Melbourne, http://www.ahuri.edu.au/research/finalreports/268, doi:10.18408/ahuri-7108401. 2. Industry Super Australia (ISA). (2016). Options for unlocking institutional investment in affordable housing – submission regarding affordable housing working group issues paper. Retrieved from https://treasury.gov.au/sites/default/files/2019-03/C2016-050_Industry_Super_Australia.pdf 3. Lawson, J., Berry, M., Hamilton, C. and Pawson, H. (2014). Enhancing Affordable Housing Investment via an intermediary and guarantee, AHURI Final Report No. 220, Australian Housing and Urban Research Institute Limited, Melbourne, https://www.ahuri.edu.au/research/final-reports/220 4.

  • HESTA. (2018). Responsible Investment Policy. Retrieved from https://www.hesta.com.au/about-us/what-we-stand-for/responsible-investment/our-commitment.html

5. Phibbs, P. and Hanna, B. (2010). Lessons of Defence Housing Australia for Affordable Housing Provision, AHURI Final Report 153, Australian Housing and Urban Research Institute, Sydney. Retrieved from https://www.ahuri.edu.au/__data/assets/pdf_file/0016/2185/AHURI_Final_Report_No153_Lessons_of_Defence_Housing_Australia_for_affordable_housing_provision.pdf 6. National Affordable Housing Consortium (NAHC) (2016). BuyAssist. Retrieved from http://www.buyassistaustralia.com.au/homebuyers/ 7. Department of Infrastructure, Transport, Cities and Regional Development (DITCRD) (2018). National Guidelines for Infrastructure Project Delivery. Retrieved from https://www.infrastructure.gov.au/infrastructure/ngpd/index.aspx 8. Department of Infrastructure and Regional Development (DIRD) (2015). National Public Private Partnership – Policy Framework. Retrieved from https://www.infrastructure.gov.au/infrastructure/ngpd/files/National-PPP- Policy-Framework-Oct-2015.pdf 9. Department of Health and Human Services (DHHS) (2019). Victorian Social Housing Growth Fund. Retrieved from https://www.dhhs.vic.gov.au/victorian-social-housing-growth-fund

  • 10. Infrastructure Partnership Australia (IPA). (2019a). Social and Affordable Housing Fund. Retrieved from https://infrastructurepipeline.org/project/social-and-affordable-housing-fund/
  • 11. Infrastructure Partnership Australia (IPA). (2019b). Social Housing Growth Fund. Retrieved from https://infrastructurepipeline.org/project/social-housing-growth-fund/
  • 12. Department of Infrastructure and Regional Development (DIRD). (2008a). National Public Private Partnership Guidelines – Volume 4: Public Sector Comparator
  • Guidance. Retrieved from https://www.infrastructure.gov.au/infrastructure/ngpd/files/Volume-4-PSC-Guidance-Dec-2008-FA.pdf
  • 13. Department of Infrastructure and Regional Development (DIRD). (2008b). National Public Private Partnership Guidelines – Overview. Retrieved from https://www.infrastructure.gov.au/infrastructure/ngpd/files/Overview-

Dec-2008-FA.pdf

  • 14. National Audit Office (NAO). (1999). Examining the Value for Money of deals under the Private Finance Initiative. Retrieved from https://www.nao.org.uk/wp-content/uploads/1999/08/9899739.pdf
  • 15. New South Wales Treasury (NSWT). (2017). NSW Public Private Partnership Guidelines 2017. Retrieved from https://www.treasury.nsw.gov.au/sites/default/files/2017-07/TPP17-

07%20NSW%20Public%20Private%20Partnerships%20Guidelines%202017-1.pdf

  • 16. Department of Treasury and Finance (DTF). (2016). Partnerships Victoria Requirements. Retrieved from https://www.dtf.vic.gov.au/sites/default/files/2018-05/Partnerships-Victoria-Requirements-November-2016.pdf
  • 11. Milligan, V., Yates, J., Wiesel, I. and Pawson, H. (2013a). Financing Rental Housing through Institutional Investment – Volume 1: Outcomes from an Investigative Panel, AHURI Final Report No. 202, Australian Housing and

Urban Research Institute, Melbourne, http://www.ahuri.edu.au/publications/projects/p71016.

  • 12. Milligan, V., Yates, J., Wiesel, I. and Pawson, H. (2013b). Financing Rental Housing through Institutional Investment – Volume 2: Supplementary Papers, AHURI Final Report No. 202, Australian Housing and Urban Research

Institute, Melbourne, http://www.ahuri.edu.au/research/finalreports/202

  • 13. Infrastructure Partnership Australia (IPA). (2017). The Role of Superannuation in Building Australia’s Future. Retrieved from http://infrastructure.org.au/wp-content/uploads/2017/06/The-Role-of-Superannuation-FINAL.pdf
  • 14. Hart, O. (2017). Incomplete Contracts and Control. American Economic Review, 107(7), 1731-52. DOI: 10.1257/aer.107.7.1731
  • 15. Hart, O. and Moore, J. (1988). Incomplete Contracts and Renegotiation. Econometrica, 56(4), 755-85. http://www.jstor.org/stable/1912698
  • 16. Hart, O., Shleifer, A., and Vishny, R.W. (1997). The Proper Scope of Government: Theory and an Application to Prisons. The Quarterly Journal of Economics, 112(4), 1127-61. http://www.jstor.org/stable/2951268