AFFORDABLE HOUSING - Finance and Governance May Adrian Harrington Head of Funds Management, Folkestone

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1 AFFORDABLE HOUSING - Finance and Governance May 2017 Adrian Harrington Head of Funds Management, Folkestone 1

2 AFFORDABLE HOUSING - POLICY REPONSE How do you balance the need for a framework at the macro level with an innovative and efficient delivery system at the local level? MACRO MICRO Real estate is a local product made of many different sub-markets, housing types, price points and planning requirements 2

3 INSTITUTIONAL INVESTMENT IN UK Legal and General Invests 225m With Place for People to Help Build 7,000 New Homes - 17 March 2014 Estuary Housing Association Plan 400 East London Homes Following 40m M&G Finding Deal - 6 July 2015 M&G Agrees 50m Private Placement Loan to Affordable Housing Group - 21 July 2016 AVIVA to Launch Private Rented Sector Fund With Housing Associations as Managers - 7 October 2014 Dutch Pension Fund PGGM Announce 3,000 New Homes With 600m Build to Rent Partnership - 27 January 2016 Legal and General Plan 1bn Private Rental Sector Investment After Signing 25m Deal - 27 February 2015 Hearthstone Aims for 150m Investment as Scottish Housing Fund Launches - 18 November bn Fund Launched With Backing of Institutions and Governments Homes and Communities Agency to Build 10,000 Homes on Council Land UK institutions are happy to provide equity into affordable housing 3

4 INSTITUTIONAL INVESTMENT IN AUSTRALIA Why Hasn t Happened to Date? Risk-adjusted returns (i.e yields) lower than for competing investment options Scale and fragmented nature of the industry Insufficient liquidity A lack rental housing product performance track record Uncertain government policy and regulatory environment Benefits for Institutional Financing Diversify ownership structure of market rental housing less reliance on mum and dad landlords Fund develop and ownership of large scale development in single ownership (multi-family apartment living) More efficient, professional management Focus on long-term tenure of tenancies More rental product designed for families Superannuation funds can, and should, play a role in helping to improve the supply of affordable housing for Australians through funds investing in this area; however Government needs to help build the structures to facilitate this. David Atkin, Cbus, 7 April 2016 "One of the things that actually fascinates me is why in Australia there isn't an institutional asset class for build-to-rent housing like there is other developed economies Lucy Turnbull, Chief Commissioner of the Greater Sydney Commission October

5 AFFORDABLE HOUSING - GOVERNMENT LEADERSHIP National Housing and Homelessness Agreement funding to State and Territory governments will be linked to outcomes in priority areas including: aggregate supply targets, including targets for social and affordable housing residential land planning and zoning reforms inclusionary zoning arrangements (land use planning intervention requiring or incentivising affordable housing including dedicated first home buyer stock) renewal of public housing stock & transfer of public housing to CHPs homelessness services National Housing Finance and Investment Corporation (NHFIC) an affordable housing bond aggregator to raise money at lower rates from the bond market for not-for-profit CHPs National Housing Infrastructure Facility (NHIF) $1bn to support local governments to finance critical infrastructure to speed up the supply of new housing Managed Investment Trusts to Build Affordable Housing Managed Investment Trusts (MITs) will be allowed to invest in affordable housing 5

6 AFFORDABLE HOUSING - BOND FINANCING MODEL The Affordable Housing Working Party Report to Heads of Treasuries argued: it enables providers to refinance their existing borrowings and finance new developments at lower cost and longer tenor it creates a market for private affordable housing investment that both normalises and expands flows of capital to the industry it best addresses the barriers of return and liquidity by providing an instrument that is understood by sophisticated investors as a fixed income investment due to its financial profile, it can be easily traded in a secondary market and would be seen as an attractive low-risk financial product The economies of scale a pooled borrowing vehicle brings the affordable housing sector are very attractive 6

7 Commonwealth Government AFFORDABLE HOUSING - BOND FINANCING MODEL Rental Assistance Affordable Houses Housing Providers Acquisition Management Refurbishment Development Principal & Interest Capital Regulation Housing Stock State Government Guarantee Housing Finance Corporation Credit assessments of housing providers Issue bonds Compliance Principal & Interest Capital Institutional Investor Capital Principal & Interest Affordable Housing Bonds Bond Rating Ratings Agency Debt capital should be a priority although long-term both debt and equity capital needed. Will require all key stakeholders (government, industry and investors) to work co-operatively together in order to boost the supply of affordable housing 7

8 AFFORDABLE HOUSING Managed Investment Trusts (MIT) ATO has generally adopted the position that investing in residential real estate is an active trading business (i.e. carried on for the purpose of deriving a profit upon sale) and are usually taxed at 30 per cent MIT regime will be amended to allow for the acquisition, construction or redevelopment of property for affordable housing if: at least 80% of its assessable income is derived from affordable housing the qualifying housing is provided to low to moderate income tenants, with rent charged at a discount to the private rental market rate the affordable housing must be available for rent for at least 10 years Non-resident investors from countries with which Australia has a recognised exchange of information arrangement, will generally be subject to a concessional 15 per cent final withholding tax rate on investment returns, including income from capital gains Resident investors in affordable housing MITs will continue to be taxed on investment returns at their marginal tax rates income from capital gains will be eligible for an increased CGT discount of 60 per cent for individuals where the property sold is managed by a registered CHP and has been held by the MIT for at least three years The establishment of Managed Investment Trusts with the sole purpose of developing or acquiring affordable housing to hold for rent, will enable institutional investors such as superannuation funds to make much needed investment in affordable housing. Wentworth Community Housing 2017 Federal Budget Response The changes to the rules to enable Managed Investment Trusts to invest in affordable rental housing are potential game changers Community Housing Industry Association 2017 Federal Budget Response 8

9 AFFORDABLE HOUSING - PARTNERING REGULATION DELIVERY AND MANAGEMENT FINANCING Tax Planning Regulations Private Sector Community Housing Providers Federal/State/Local Government Banks Capital Markets Identifying potential significant risks in a partnership is critical. Strategic, operational, financial, reputational and other risks can be managed but they need to be assessed and agreed between the participating stakeholders 9

10 AFFORDABLE HOUSING - GOVERNANCE KEYS TO SUCCESS Vision and Values Roles and Responsibilities Risk / Reward Sharing Decision Making / Controls Accountability Exit Mechanism Ultimately need a culture of trust driven around clear objectives and measurable outcomes 10

11 COMMUNITY HOUSING - SCALE Tier 1 CHPs strategies: New funding sources eg NDIS (71%) Partnerships & JVs with other organisations (71%) M&A Activity (65%) Tier 2 CHPs strategies: New funding sources eg NDIS (71%) Partnerships & JVs with other organisations (71%) M&A Activity (65%) Tier 3 CHPs strategies: No specific strategies dominating their growth plans Strategies for CHP Growth From 2015 Over Three to Five Years Transfer of public housing to the organisation Partnership/alliance/JV with another (private or NFP) organisation New funding sources (e.g. NDIS) Organisational merger(s) or takeovers(s) Expansion of current core service area(s) within one jurisdiction Additional revenue generating activity Introduction of one or more new housing services Current supply pipeline (e.g. NRAS) Expansion of current core service area(s) interstate or internationally Changing tenant mix Tier 1 Tier 2 Tier % Source: 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 11

12 COMMUNITY HOUSING - CAPCITY BUILDING Substantial common ground between Tier 1 and 2 CHPs as to areas most in need of capacitybuilding access to working capital development sites cash flows to support private finance Most Tier 2 CHPs also said they would also need to: develop their in-house project management abilities their ability to source external advice and technical support Area In Most Need of Capacity Building for Development Pipeline by CHPs Working capital for development Access to development sites Cash flows to support private financing In-house project management capability Contract negotiation and administration Audit control/risk mgt systems Community opposition to development Sourcing external specialist advice Board capacity and risk appetite Information on local housing needs Senior management capacity In-house treasury and financial Lack of suitable development partner(s) Other capacity building need areas Tier 1 Tier % Source: 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 12

13 LOOKING FORWARD Ultimately, we need government, the community and social housing sector and the property industry to work together, because one can t do it on their own. We need the built product. That s the property industry. We need the community housing groups to work with parts of the community that need assistance. And we need the federal government working with state governments and local councils to make it easier to facilitate supply into the markets in a rational and efficient way. This is not going to be solved in this cycle but we ve got a country that is going to continue to grow. We ve got to get our infrastructure right, our planning right, our funding right and our delivery right. And as a lucky country, we need a safety net for those who need it and an entrepreneurial spirit for those who can get up and go. 13

14 DIRECTORY FOLKESTONE LIMITED INDEPENDENT BOARD OF DIRECTORS HEAD OF FUNDS MANAGEMENT REGISTRY ASX Code: FLK Website: ABN: Level 14, 357 Collins Street Melbourne VIC 3000 T: Level 10, 60 Carrington Street Sydney, NSW 2000 T: Garry Sladden Non-Executive Chairman Mark Baillie Non-Executive Deputy Chairman Greg Paramor AO Managing Director Ross Strang Non-Executive Director COMPANY SECRETARY Scott Martin Telephone: Adrian Harrington Telephone: aharrington@folkestone.com.au INVESTOR RELATIONS Lula Liossi Telephone: lliossi@folkestone.com.au Boardroom Pty Limited P.O. Box R67, Royal Exchange NSW 1223 Telephone: or enquiries@boardroomlimited.com.au 14