NHFIC proposes funding model for social housing

The National Housing Finance and Investment Corporation (NHFIC) has released a research paper that explored how adopting a different financing approach could enable a faster rollout of new community and key worker housing.

The paper – titled Delivering More Affordable Housing: An Innovative Solution – has focused on utilising contributions from different stakeholders, including federal and state governments, institutional investors and community housing providers, to gather an “efficient” financing mix to drive more housing supply.

In the paper, the NHFIC said that it has commissioned new modelling from Paxon Group to assess the financial feasibility of new community housing projects, with the modelling based on two main scenarios.

The new financial modelling has shown that contributions of government-owned land, mixed-tenure developments, lower-cost NHFIC finance, and additional private sector finance could assist with addressing the “challenge of low rental returns for community housing projects”, the report said.  

The first scenario would involve a state government contributing land on a concessional 49-year lease to a community housing project (CHP) to redevelop an existing social housing site.

The modelling for scenario one is based on a reference project of delivering 100 medium-to-high-density dwellings in a large metropolitan area, with a total project cost of $50 million, including land, the housing body explained in its report.

The land would be provided to a CHP at a “peppercorn” lease rate for a 49-year term, allowing the CHPs to develop housing and manage the project for its economic life, before ownership of the land and assets reverts to the state government.

The second scenario would involve using private land (that is, no government land contribution) for the new housing project.

The report said that using the same parameters as the project reference model used in the first scenario, a new development on private land for 100 per cent affordable rental housing (such as for key workers in essential service sectors) could generate enough cash flow to service a combination of NHFIC senior funding debt and a layer of junior debt (junior debt funding could enable CHPs to meet a proportion of their remaining funding gap after receiving NHFIC financing), the report said.

It added that the level of junior debt needed to support the project would be higher than if there was a concessional land contribution, such as in the first scenario.

According to the NHFIC report, under the traditional delivery approach, the state government would need to pay the full cost of construction of the social housing upfront (excluding the value of government land), which it said would require the state government to contribute $375,000 per property, or a total of $15 million.

However, if the state government opts to use a CHP as the delivery agent, the CHP could access a combination of NHFIC finance and junior debt to fund a significant portion of the upfront construction costs, it said.

The report said that in this case, the state government would need to contribute $75,000 per social housing property, or a total of $3 million.

For affordable housing, a government contribution of 5 per cent for the project would total $25,000 in contributions per dwelling, it added.

The NHFIC said in the paper: “Growth in the stock of subsidised rental housing has not kept pace with growth in the number of households overall in Australia. Historically, governments built and owned social housing.

“In recent times, governments have turned to CHPs to manage and grow the supply of affordable rental accommodation. The demand for community housing is likely to increase as a result of the economic and social impacts of the COVID-19 pandemic.

“Australia’s CHP sector is still relatively nascent (with around 93,000 dwellings), and the funding gap is one of the widely acknowledged constraints on its growth.

“The paper draws on new financial modelling that shows how different combinations of federal, state and private sector support – and tenure mix and geographic location – can narrow the funding gap for community housing. It demonstrates that existing government resources such as underutilised land can be used more effectively to build more community housing across Australia.”

NHFIC CEO Nathan Dal Bon said that the research has followed the body’s recent commitment of $400 million in loans and grants to fund the building of homes in Melbourne as part a consortium from the not-for-profit, state government and private and industry sectors.

He said: “This project is transformative for social and affordable housing and can be scaled not only in Victoria but across the country.”

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Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.

Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.