Providing the right settings to support social and affordable housing

With the growing demand for accommodation driving rents beyond the reach of many low-income Australian households, there is a consensus that more social and affordable housing is urgently needed. The necessity to develop this housing has prompted the creation of several new government funding initiatives. They include the Federal Government’s $10 billion Housing Australia Future Fund (HAFF) and the $350 million National Housing Accord, which aim to deliver 40,000 social and affordable homes over the next five years. The initial funding allocation, announced last month, is said to fund nearly 14,000 social and affordable homes.

Government funding is crucial to the delivery of more homes. However, it is just as important to get the policy settings right. This is the conclusion of our new report, A Pulse on Social & Affordable Housing in Australia. To prepare the report, we asked 88 industry leaders in the community housing, private capital, financial, property development and advisory sectors how they think the nation is tracking towards the target of 40,000 homes and what’s required to get there.

Despite strong backing for the Federal Government’s initiatives, 49% of surveyed industry leaders think it could instead take up to a decade to reach the target.

“The establishment of the HAFF and National Housing Accord is a positive step towards supporting the delivery of more social and affordable homes,” says Herbert Smith Freehills Partner and Global Co-Head of Infrastructure Nicholas Carney. “But the industry has some reservations about its ability to meet the national target without reform.”

Opportunities for reform

Experience has shown the sector that finalising agreements to build new social and affordable housing is a complicated and time-consuming process, often involving multiple levels of government and numerous stakeholders. This has contributed to project delays and higher costs for project participants.

“Social and affordable housing deals are often quite small in dollar terms, but they are also invariably complex,” says Finance partner Erin Wakelin. “In addition to complicated deal structures, not all not-for-profit organisations have experience with project financing or with the overlay of state and federal funding requirements. It can be really challenging for them.”

Reforming the system will require quick action and buy-in from the Federal Government, state governments and the private sector.

“We know from our survey that industry leaders want a truly national system with consistent cross-border regulation and registration,” says Real Estate partner, Julie Couch.

To provide a path forward, Erin, Julie and Nick share some key ideas that could help speed up processes and reduce costs for organisations undertaking social and affordable housing projects.

Streamline planning approvals and regulatory frameworks

Reforming state planning approval processes to speed up project approvals is critical, according to many industry leaders.

“There is a universal view that planning approvals in some jurisdictions take too long and involve uncertainty,” says Nick. “One of the ways this manifests is in escalating construction costs. For example, a builder might only be able to hold its price for a project for six to eight weeks, but it could take up to 18 months to get planning approval.”

Reforming the national National Regulatory System for Community Housing framework is also necessary if community housing providers are to deliver social and affordable housing at the scale required to meet national housing targets. Almost two-thirds (62%) of those surveyed believe it needs some change, while 27% of respondents said it requires significant reform.

Respondents pointed out other measures that may assist in getting more housing into the system, including incentives for private investors, additional funding, quicker project approval timelines and cohesive policies and processes from the Federal and State governments.

Standardise deal structures and documentation

Respondents to our survey also called for standardisation of legal documentation across all Commonwealth, State and Territory affordable housing programs. If the relevant government entities could work together to standardise deal structures and  documentation for those structures and ensure the documents include an equitable risk- sharing mechanism this could help reduce complexity and expense for participants and accelerate project completion.

“To date we have found that social and affordable housing projects involve bespoke documents and structures, which means that the negotiation of transaction documents for projects is difficult and time-consuming,” says Julie. “This impacts the number of deals community housing providers can take forward and, ultimately, the amount of housing available.”

While standardisation would be welcomed, market consultation is needed to ensure that templates are widely understood, user-friendly and reflective of a risk sharing that the market can support.

“Standardising documents doesn’t help unless participants comprehend and can accept the risks allocated to the private sector in those documents,” says Erin. “To do this, organisations need people who understand the project risks and the deal structures.”

Reducing governance model complexity

Complex governance models that guide the development and operation of social and affordable housing are causing delays and inefficiencies in decision-making. In particular, our survey highlights the industry’s desire for the Federal Government to work more closely with State and Territory governments to coordinate housing project delivery.

“We’re working on some deals where community housing providers are simultaneously negotiating with the Federal Government and a State government,” says Nick. “States are also competing against community housing providers in their States for Commonwealth funding and issuing their own request for proposals. It’s very complicated.”

Creating a better environment for change

Despite current challenges, there is plenty of cause for optimism in the sector.

“The social and affordable housing sector was unloved for a long time,” says Nick. “But now, the housing crisis is on every front page. There is significant willingness and momentum from the Federal and State governments, as well as the private sector, to build more homes. And there is real money flowing into the sector. We just need to ensure we have the right settings in place to meet Australia’s targets faster.”