The role of private capital in supporting Australia’s social and affordable housing

Australia is in a housing crisis, with not enough homes to satisfy demand. Rents have skyrocketed as demand for properties increases, forcing many tenants to spend an unsustainable proportion of their incomes or face homelessness. Too many others, including essential workers like paramedics and teachers, must commute long distances to their workplaces. Meanwhile, many of the 190,000 households on social housing waiting lists nationally have been waiting for years.

The federal government is committed to tackling the issue head-on with a goal of building 1.2 million well-located homes by 2029. It has also established a $10 billion Housing Australia Future Fund (HAFF) and a $350 million National Housing Accord, with the goal of delivering 40,000 social and affordable homes in the next five years. The first round of HAFF funding was announced this week by the Federal Government, giving the green light to more than 13,700 social and affordable homes.  

Funding, however, remains a significant constraint. Many industry leaders across the community housing, private capital, financial, property development and advisory sectors question whether this target is achievable.

In fact, new research published in our report, A Pulse on Social & Affordable Housing in Australia, reveals that 35% of leaders directly involved in making decisions about social and affordable housing believe that achieving the government’s target will only be possible with private capital investment. The research, conducted between 20 May and 24 June 2024, asked 88 senior leaders how they think the national social and affordable target is tracking and what’s required to get there.

“The top three sources of funding for social and affordable housing are federal funding, Housing Australia funding – which is also government-funded – and private capital,” says Herbert Smith Freehills Real Estate partner David Sinn. “But we can’t rely on government money to always be there. Our focus must be on how we make it more attractive for private capital investors to support this sector.”

Industry leaders have identified low return on private investment as a significant barrier to meeting Australia’s national target, which makes developing a new financial model for social and affordable housing developments crucial, according to David and Real Estate partner Julie Jankowski. However, delivering a higher return on investment is only part of the challenge, according to the business leaders surveyed.

“For private capital to invest in a project, it needs an appropriate return and risk profile,” says Julie. “It needs to be commercially viable. And it must be structured in a way that works for private investors.”

Creating a blueprint for future developments

Tackling Australia’s housing crisis requires governments and industry to work together to make the sector more attractive to developers, operators and investors. Based on our report’s findings, David and Julie share the following key areas that should be prioritised to better incentivise private funding and support the delivery of more social and affordable housing.

Supporting integrated developments that improve return on investment

Social and affordable housing used to be built in pockets. However, mixed-use developments that combine social, affordable, build-to-sell and build-to-rent homes in one development are increasingly recognised as a better alternative.

“This approach makes developments more commercially viable and enables private capital investors to achieve better returns,” says Julie. “Plus, governments prefer integrated developments because they help to reduce the stigma associated with social housing.”

Integrated developments also help to improve outcomes for communities through social and community connections, and improved access to amenities such as shops and healthcare facilities.

Reforming state planning processes to expedite project approvals

“Institutional investors want to deploy their capital at scale,” adds Julie. “But the longer projects take to get off the ground, the more complex and costly it becomes. Expediting planning pathways and simplifying documentation would make investing in mixed-use developments more attractive for investors.”

Industry leaders also called for the standardisation of legal documentation for new housing projects across Commonwealth, state and territory programs.

Increasing government support for projects  

The federal government has various levers it can use to decrease the overall financial burden on developers or otherwise incentivise them. For instance, providing an expedited planning process and offering tax concessions to developers, such as allowing them to bring forward tax deductions, could significantly improve the viability of development projects.

Recognising that profit isn’t inherently bad

“Historically, social and affordable housing models have been mostly not-for-profit,” says David. “However, this has led to issues for operators being unable to afford to maintain and repair properties to the standard required to continue to provide long-term accommodation.

“To ensure the ongoing success of projects, appropriate regulatory mechanisms are needed to ensure housing registrars that oversee operators’ performance understand the needs of private sector operators and work with them to minimise the ongoing capital burden of repairing and maintaining social and affordable housing using taxpayer money."

Releasing land for developments

The federal, state and territory governments control large tracts of land, which could be made available to developers for projects at a lower cost than they would otherwise encounter on the open market. This would considerably improve the bottom line of housing projects, making them more attractive to investors.