Five myths about investing in social and affordable housing

S&A housing assets are almost always owned and operated by registered not-for-profit entities (who may also be a registered community housing provider (CHP). These entities are created as public companies limited by guarantee so they can be registered as charities and obtain charitable tax status. This means there are no shareholders  – these companies have members – and there are no payments of dividends to members because a condition of charitable registration is that members cannot receive financial benefits from the entity. Also, you cannot sell your member interest. Instead, investors usually derive returns from loans advanced to the company.

S&A housing is almost always funded in part by state and commonwealth grants or subsidies. In exchange, the government entity providing the grant or subsidy usually takes rights over the housing assets (either as security or registering an interest on the land title) for a set term. During this term, the owner will be obliged to operate that property as S&A housing and is prevented from renting to the general public at market rates. Consequently, S&A housing cannot usually revert to market rental housing until the expiry of the minimum use term as agreed with the relevant government entity. 

In most scenarios, the state or commonwealth entity with rights over the S&A housing assets will prevent transfer of ownership without its consent. Consent to transfer would likely only be given in limited circumstances (eg insolvency) and even then, where the transfer is to another registered  CHP or back to government. This makes negotiation of exit scenarios for investors different from standard project finance but also can provide a ready buyer (in the form of government or other CHPs) as the asset has to continue to be operated given tenants are involved. 

While tenanting at 75 per cent of market rent is the most commonly referred to test because of its GST application, qualifying as affordable housing is more nuanced than that. Tenant income thresholds will determine initial eligibility for affordable housing, and the size of the household determines the type of housing that can be applied for. In addition, most states are now starting to place an income limit (ie 30 per cent of tenant’s income) on affordable housing rent in addition to the 75 per cent of market rent test – meaning the lower of the two applies. Unfortunately, income limits and rent criteria differs among states and there is no national affordable housing test. 

Almost all social housing tenants receive commonwealth rent assistance payments. These can be arranged to be paid directly to the landlord, significantly reducing the risk of rental arrears. Affordable housing tenants on the other hand fund rent from their own income. However, given that their rent is capped at 74.9 per cent of market rent – and sometimes capped as a percentage of their income (whichever is less) – affordable housing tenants are arguably less likely to fall into arrears than market rental tenants without that rental protection in place.