This is the first of a series of articles Gadens will publish on specialised financing products.
In this first article, we discuss the focus the Commonwealth and state governments have placed on generating investment in affordable housing supply through finance by private institutions.
In 2009/2010, almost half of all private renters in New South Wales earning a low to moderate income faced ‘housing stress’ characterised by a significant amount of their household income being spent on rent, and an inability to meet other essential basic living costs.
Affordable housing schemes seek to tackle this problem. For lenders, these schemes have created the opportunity for them to provide financing arrangements with an attractive low loan-to-valuation ratio, and a government backed rental stream.
Affordable Housing – what is it?
Affordable housing is housing that is developed with assistance from the government, and is usually owned or managed by not-for-profit community housing providers, charitable organisations or private organisations. .
In NSW, there are close to 400 not-for-profit community housing providers who manage over 80% of affordable housing in NSW and as business partners, the government and community housing providers are able to work in consultation with each other, with each of them contributing funds and resources towards meeting growth targets.
Basics – the framework
Programmes such as the National Rental Affordability Scheme (NRAS) implemented under the National Rental Affordability Scheme Act 2008 (Cth) provide business and community sectors with financial incentives from both the Commonwealth and state governments to build homes and rent them considerably below market rate to target households. With a goal of creating 30,000 more homes by 2016, the Commonwealth government recently opened round 5 of funding under the scheme which targets the creation of approximately 11,000 homes.
At a state level, legislation, such as the Housing Act 2001 (NSW), has been implemented to, among other things, attract investment in public housing. Similar legislation targeted at the development of affordable housing has been enacted in other states across Australia.
Taking NSW as an example, eligible community housing providers are able to receive assistance in various ways from Housing NSW through the NSW Land and Housing Corporation, notably by way of debt equity funding or property transfers, in order to incentivise development of affordable housing.
Initially, Housing NSW only provided debt equity funding whereby Housing NSW would agree to contribute funding and the community housing provider would contribute equity and obtain private finance. However, following the introduction of an asset ownership strategy in 2009, Housing NSW now has the option of transferring properties to a community housing provider as an alternative to providing funding as a form of assistance where affordable housing can be developed.
How does it work?
Debt Equity Funding
Under debt equity funding, capital contributions are awarded to the community housing provider under a loan agreement to wholly or partly fund the purchase and development of the affordable housing. This contribution is secured by a mortgage in favour of Housing NSW over the property. To facilitate private finance, however, Housing NSW regularly enters into arrangements with the community housing provider and the financial institution to:
- enable the financial institution to obtain a first registered mortgage over theproperty;
- provide for priority arrangements between the financial institution and HousingNSW; and
- provide Housing NSW with an option from the community housing provider topurchase the property if it is in default, thereby effectively buying out the debtowing to the financial institution.
Where property is vested in or transferred to a community housing provider under a community housing agreement, Housing NSW maintains an interest in the property that is reflected as a notation on title. However, arrangements entered into with Housing NSW mean that:
- Housing NSW will consent to the registration of a first mortgage over thevested property by the financial institution; and
- priority arrangements will be provided for between the financial institution andHousing NSW.
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The various forms of assistance to community housing providers seek to ensure that they have a secured asset base and a means to attract and leverage additional private funding to raise the capital required to develop and manage the various projects they undertake, and to support the growth of a sustainable affordable housing scene.
With a clear regulatory framework in place for community housing providers, and the ability for financiers to benefit from first ranking mortgages over properties, the affordable housing market is fast developing into an attractive market for financiers.