Achieving a viable and sustainable community housing sector

Achieving a viable and sustainable community housing sector 

August 2009 

Table of contents


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Executive summary 

Background

This paper details the outcomes of an investigation to identify the policy settings, industry development initiatives and strategies required to:

  • support the development of a mature and high functioning community housing sector in Australia that can effectively contribute to the priority of improving the availability of affordable housing;
  • ensure financial incentives that are provided to the sector assist to build the capacity and sustainability of providers and facilitate continued growth that is not dependent on recurrent government subsidies beyond existing commitments; and
  • identify a framework within which to consider minimum performance standards for the sector that supports industry development, sustainability and establishes a level of accountability. 

To achieve this brief, the following tasks were undertaken:

  • literature and desktop review to identify existing optimal models for community housing providers and the sector more broadly within Australia and overseas, as well as best practice management and governance arrangements;
  • stakeholder consultation to inform the identification of optimal models for community housing providers and the sector generally, and the analysis of required implementation strategies;
  • identification of options (including the base case) which would achieve government policy and financial objectives for a viable and sustainable community housing sector;
  • development of a financial model which will analyse the options for the housing sector and identify revenues and costs, capital and recurrent funding requirements, funding shortfalls, the optimal levels and costs of debt, and capacity for growth.  This modelling will be based on the cash flow analysis of identified types of community housing providers1 and also enable sensitivity analysis of key variables;
  • analysis of the options for expanding and maturing the community housing sector, including assessment of tangible and intangible costs and benefits; and
  • policy analysis of the policy, program and regulatory requirements to support the achievement of the preferred options that address workforce capacity, risk management and governance requirements of the sector as well as maximise outcomes for low to moderate income earners and the community generally.

Further detail on the project methodology and the assumptions underlying the financial modelling component are detailed in Section 3 and Appendices A and B.  There are numerous limitations with the approach that confound comparisons of the results across jurisdictions, provider types and scale, and time.  These limitations are also detailed throughout the report.

Project context

The community housing sector is highly variable.  Survey data from the Australian Institute of Health and Welfare (AIHW) suggests that in 2007-08 there were a total of 1,069 community housing providers in Australia funded under the Commonwealth State Housing Agreement (CSHA), and managing a total of 38,519 dwellings2.  The sector predominately comprises small operators with less than 19 dwellings, however the number of larger providers is increasing, with those having over 200 dwellings accounting for 43 percent of the total housing stock3.

The majority of community housing tenants are low income households (93 percent).  A significant proportion of tenants are from Indigenous and non-English speaking backgrounds, have a disability, are aged, and/or homeless.  The majority of households for which complete rent and income details are known pay less than 30 percent of their income in rent (86 percent).  Over half (53 percent) of the households were paying more than 20 percent but not more than 25 percent of their income in rent4.

The community housing sector in Australia is increasing in size, and has grown by over 20 percent between 2005-06 and 2007-08.  This growth is being driven by growing demand for the supply of low cost rental housing in Australia and significant policy reform and government investment to respond to that demand.

At the national level, the Australian Government has strengthened its commitment to expanding the community housing sector in Australia and has recently implemented several significant new programs to invest in the sector’s growth.  This includes providing incentives for 50,000 new affordable rental dwellings under the National Rental Affordability Scheme (NRAS) and allocating capital funding for 20,000 new social housing dwellings under the Nation Building Jobs Plan (NBJP), of which it is expected that 75 percent will be transferred to the community housing sector.

Under the National Affordable Housing Agreement (NAHA), all Australian jurisdictions have reinforced their commitment to increasing the supply of affordable housing.  Considerable work is being undertaken by Australian governments through the Council of Australian Governments (COAG) to achieve the outcomes and objectives of the NAHA.

For nearly all jurisdictions, this includes progressing policy and program reforms to either increase the supply of community housing and/or strengthen the capacity of community housing providers.  States and territories have also targeted significant amounts of funding to grow the community housing sector, over and above the tied grants under the CSHA and NAHA.  Most state and territory housing authorities are also moving to enhance their regulatory capacity to facilitate a move away from direct government provision.  As a result of these measures, community housing providers are increasingly being transformed from small, niche housing providers or medium sized tenancy managers into larger organisations with commercial and property development skills. 

Operational viability and sustainability

For the purpose of this analysis, viability for community housing providers is understood to mean ‘operational viability’, namely that their revenues cover their existing costs of operation – that they ‘break-even’.  This includes the costs of servicing any existing finance and also includes the value of any existing recurrent or capital subsidies that they receive from government.  This means that a provider may be ‘operationally viable’ but not financially self-sufficient.  It is important to note in this context that the alternative of public housing also relies heavily on government subsidy and, internationally, all comparable community housing sectors rely on the provision of various forms of government funding.
Assessing overall viability for the community housing sector is difficult given the high degree of variability, which creates an average profile that may not accurately reflect the position of many providers. 
However, the financial modelling suggests that, on average, medium and large tenancy managers and housing owners / developers are operationally viable; however, the extent to which they are able to achieve surpluses varies and overall, is limited under current policy settings and funding models5.

Table 1.1: Summary of the financial modelling results on viability of provider types

Provider type Average number of dwellings Operating surplus per tenancy Operating surplus in year 1 Return on assets over five years
Medium tenancy manager 202 $38 $368,000 0.7%
Large tenancy manager 817 $65 $2.6 million 1.4%
Housing owner / developer 501 $11 $221,000 0.3%

The financial analysis also suggests that the three types of providers are not achieving a level of return which optimises their sustainability. They have relatively low returns on assets over five years ranging from 0.3 percent to 1.4 percent. International benchmarks for community housing suggest that a more optimal return on assets for social housing providers is in the range of four to six percent. The capacity of these providers to accumulate cash is minimal and insufficient to protect the organisations from any unforeseen, uninsured or catastrophic events and threats to their viability in the future.

It is important to note that community housing providers have limited scope to significantly increase their revenues through rent while maintaining affordability for their current tenants. Some additional viability and growth could be achieved by lifting average rents across the sector from 25 percent to 30 percent of tenants’ incomes. However, this could have a disproportionate impact on very low income tenants. Applying an average affordable market rent (set at 74.9 percent of market rent) or an average return based rent (securing a four percent return on assets for providers), would make rents unaffordable for the current profile of average very low, low and moderate income tenants.

While the project brief focused on the identification of policies, programs and initiatives required to improve viability and maximise growth without the need for additional recurrent subsidies, the modelling suggests that a return based rent would be the most effective of the rental policy levers available to providers to achieve viability and sustainability, however this cannot be implemented within current policy and subsidy arrangements without significant affordability impacts for tenants.

It is important to separate the objectives of achieving rents that are viable and sustainable for the provider and affordability for the tenant.  It is possible and desirable to achieve both objectives concurrently, through setting rents at a rate that achieves viability and sustainability for organisationally efficient organisations (i.e. a four percent return) , however the gap between the affordable level of rent and this return based rent would need to be funded by government.

Therefore, there is a funding gap between an affordable rent (30 percent of tenant income) and the achievement of an average return based rent.  This amounts to approximately $199 million per annum for all medium and large tenancy managers and housing owners / developers.  This provides some indication of the possible annual cost of an additional recurrent subsidy by government in order to achieve an international benchmark rate of a return on assets of four percent.

Robust cost benchmarking will be an important prerequisite to justifying an enhancement to the level of government investment in the community housing sector.  It will provide some assurance that providers are efficiently managed and are maximising their own viability and self-generated growth.

Growth capability

The financial modelling indicates that all three provider types have a limited capacity to grow through leveraging private finance because of their small operational surpluses.  By year five (2014):

  • a medium tenancy manager was found to be able to generate a two percent increase in stock – an additional four dwellings;
  • a large tenancy manager was found to be able to generate a four percent increase in stock, an additional 31 dwellings; and
  • a housing owner / developer was found to be able to generate a 21 percent increase in stock, an additional 107 dwellings (which largely reflects the significant capital investment being provided by the Victorian Government rather than self–generated growth).

An analysis of the additional impact of applying four policy levers to the three types of housing providers was undertaken, namely: increasing rents from 25 to 30 percent of tenants’ incomes; lowering the cost of debt (through government guarantees or a financial intermediary); title transfer of public housing stock under management; and expanding NRAS incentives for the community housing sector. 

Only relatively low levels of growth could be achieved by most of the policy levers because of continuing low surpluses. The best growth result comes from the expansion of NRAS, however there is a risk of a large proportion of properties being sold after 10 years when the scheme concludes. 

The following chart summarises the results of the financial modelling of the policy levers.  It highlights the contribution of each policy lever to the base case.  Note that the chart assesses the impact of the policy levers individually, however some levers are cumulative with others . When all levers are combined, there is also a small amount of additional growth generated by the synergies between some of the levers6a.

Figure 1-1: Summary results of the financial modelling

Description of Figure

 

chart

Figure 1.1 shows that if all policy levers were applied, the total size of the community housing sector would be 109,462 dwellings, which falls short of the Housing Ministers' target of 150,000 dwellings in the sector within five years (to 2014)6b, by 40,538 dwellings.  To achieve the target, additional measures would be required, for example allowing providers to undertake market profit activities, additional stock transfers and additional recurrent and capital subsidies.

Of the three provider types, the financial modelling of operational viability and sustainability, and the associated analysis of organisational capacity (through the literature review and consultation process), suggests that targeting large tenancy managers and housing owners / developers, and attracting large-scale new entrants to the community housing sector, are preferable strategies for governments to invest in sector growth.  This could be achieved through targeting of title transfers, NRAS and other capital and recurrent incentives to these types of providers.

Future directions and recommended actions

There are several major benefits of pursuing a strategy to increase the scale and capacity of the community housing sector to provide rental housing for low income people.  A core benefit is to achieve some additional self-generated growth on top of government investment to increase the overall supply of low cost housing.  Other benefits include the delivery of high quality services, greater choice for tenants, ability to leverage private capital and charitable contributions, more mixed communities, and innovation in housing delivery.

A further important benefit is the improvement that can be generated across the entire social housing sector by enabling a viable and quality alternative to public housing. This could include the establishment of a contestable multi-provider system, which would require significant national reform to the existing social housing system. It would include restructuring the large housing authorities into smaller, dynamic regional housing associations which operate at arm’s length from government, and deliver services on an equal footing with the community housing sector. Common funding arrangements and regulatory requirements would incentivise and support the delivery of the most efficient and effective housing services for low income people that can be achieved within the financial resources available to governments, the sector and tenants.

The following specific recommendations are put forward for consideration by Australian governments.

Strategic policy framework

  • A national community housing strategy is required to provide clarity in the vision for the sector, in the context of a broader strategy for reform of the social housing system. It should include viability and growth targets, policy and program supports, and priority actions.
  • An investment plan is also required to support the vision for the sector which is multi-jurisdictional and whole of government in focus, based on a robust assessment of housing need (which is considered at the national, state and local levels), and identifies the best mix of investment levers to deliver on the objectives and outcomes of the NAHA (covering all grants, subsidies and taxation incentives).
  • An industry development plan should also be a component of the national strategy to support the achievement of the overall growth objectives. The approach taken to developing the strategy should be one of partnership between the industry and government.

Enhancing viability and sustainability

The following actions are recommended for inclusion in the future strategy for the community housing sector to improve its viability and sustainability.

  • Include national rent setting guidelines in the national regulatory framework to maximise the collection of revenue within the affordability limits for low to moderate income earners – this should include collecting 100 percent of CRA, setting a minimum benchmark of 25 percent of tenant income for very low income tenants and 30 percent of tenant incomes for low and moderate income tenants, as well as other rent setting approaches that achieve higher rates of rental where this is within affordability limits.
  • Establish guidelines for identifying the optimal tenant mix which meets the provider’s social mission as well as local housing demands, while encouraging providers to take on a greater number of tenants at the higher income level of each income band, and a small proportion of moderate income tenants.
  • Regulate the performance of medium and large social housing providers against financial and commercial performance standards, including cost and other performance benchmarks that encourage providers to adopt an optimal business model which achieves organisational efficiency and maximises their viability and sustainability given their mission, location, and tenant mix.

Maximising sector growth

To achieve the growth target of a sector comprising 150,000 dwellings in five years6c, a mix of policy levers are recommended for inclusion in the future strategy for the community housing sector. These are presented in order of the likely additional cost to government (from lowest to highest cost).

  • Implementation of existing capital subsidies under the Nation Building Jobs Plan, with a dedicated proportion directed to the community housing sector (i.e. 75 percent) and the continuation and pooling of state government capital subsidies into a national investment strategy.
  • Encouraging providers to undertake a limited range of activities to achieve market profits, for example market sales of development properties, by removing the current taxation related barriers (the risk of losing charitable taxation status) and instituting regulatory oversight of these activities.
  • A large scale program of title transfer of public housing stock that is greater than the stock currently under management. This should include use of title transfers to increase the number of new providers in the sector, and regulatory and contractual arrangements that minimise risks to government related to provider failure without the imposition of caveats on title that constrain the ability to leverage private finance, and address stock condition and asset upgrades.
  • Investing in a national industry development program which prioritises building the commercial skills and property development capability of medium and large tenancy managers to pursue growth objectives.
  • Expansion of NRAS by 50,000 incentives, including a strategy that targets larger community housing providers and new entrants of a sufficient scale and capacity into the community housing sector (i.e. aged care providers), and optimises the pooling of other capital grants for the community housing sector with NRAS incentives to enable a greater proportion of lower income tenants to be housed and a reduction in the likely sell down of properties after 10 years.

Increasing recurrent subsidies to the sector to enable providers to achieve a more sustainable rate of return on assets, such as the four percent benchmark return on assets. This subsidy would cover the difference between the additional revenue providers can generate within affordability limits and the four percent rate of return. This could be delivered through an increase in the rates of CRA.

Implementation

COAG and Australian Housing Ministers are considering the detailed implementation of the NAHA reforms to social housing.  This study has been commissioned to provide strategic advice on the future viability of the community housing sector in order to assist with one part of the full range of considerations that are on the table.  It would appear to be an opportune time to revisit some of the strategies and actions in the NAHA and commitments under the NBJP and invigorate and strengthen the reform agenda consistent with the directions outlined in this report.

 


Figure descriptions

Figure 1-1: Summary results of the financial modelling

The number of dwellings under the base case scenario is 54,997 at year five.
If policy lever 1 - affordable rent was applied, this would increase the number of dwellings above the base case by 603 dwellings in five years resulting in a sector that has a total of 55,600 dwellings.
If policy lever 2 - title transfer was applied, this would increase the number of dwellings above the base case by 526 dwellings in five years resulting in a sector that has a total of 55,523 dwellings.
If policy lever 3 - lower the cost of debt was applied, this would increase the number of dwellings above the base case by 685 dwellings in five years resulting in a sector that has a total of 55,682 dwellings.
If policy lever 4 – NRAS scenario 1 and 2 was applied, this would increase the number of dwellings above the base case by 52,564 dwellings in five years resulting in a sector that has a total of 107,561 dwellings.
If combining the application of all policy levers to the base case, this would increase the number of dwellings above the base case by 54,465 in five years, resulting in a sector that has a total of 109,462 dwellings and therefore producing the best outcome.

[ back to Figure 1.1 ]

  • 1. An analysis was undertaken for three provider types: medium tenancy manager, large tenancy managers and housing owners/developers. These are defined in Table 2.1.
  • 2. AIHW (2009) Community Housing 2007-08: CSHA National Data Report, p.6-7
  • 3. Ibid
  • 4. Ibid
  • 5. It is important to note that results from the financial modellling reflect an average profile of the providers of the three types that operate within the jurisdictions to which the data is applies. They may not present an accurate picture of viability, sustainability or the rate of growth that an individual provider could achieve.
  • 6a.The total additional growth above the base case achieved through applying all the policy levers is greater than the sum of the result of applying each policy lever. This is because, if the affordable rent lever is applied as part of a package of levers, it would then increase the growth that can be generated from the other policy levers (as they are otherwise calculated on providers' current rent structures).
  • 6b.A Progress report to the Council of Australian Governments from Commonwealth, State and Territory Housing Ministers – Implementing the National Housing Reforms, November 2009 published by the Victorian Government Department of Human Services on behalf of the Housing Ministers Conference available at www.coag.gov.au p.26
  • 6c.Ibid

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1. Introduction and project context 

1.1 Background to the project

This report details the outcomes of an investigation to identify the policy settings, industry development initiatives and strategies required to:

  • support the development of a mature and high functioning community housing sector in Australia that can effectively contribute to the priority of improving the availability of affordable housing;
  • ensure financial incentives that are provided to the sector to assist to build the capacity and sustainability of providers and facilitate continued growth that is not dependent on recurrent government subsidies beyond existing commitments; and
  • identify a framework within which to consider minimum performance standards for the sector that supports industry development, sustainability and establishes a level of accountability. 

Project objectives

The objectives of this analysis are to:

  • develop a financial profile of typical community housing providers at present;
  • identify key options that optimise both the viability and sustainability of community housing providers;
    identify options and assess their ability to achieve rapid and significant growth of the community housing sector, specifically increasing the size of the community housing sector up to 150,000 dwellings across Australia within five years;
  • assess the impact of relevant options on affordability and social outcomes for tenants and the community; and
  • identify attributes of optimal business models for providers that may minimise the reliance of the community housing sector on ongoing, additional recurrent capital and operational subsidies over the medium to longer term.

Project activities

To achieve these objectives, the project comprises the following tasks:

  • literature and desktop review to identify existing optimal models for community housing providers and the sector more broadly within Australia and overseas, as well as best practice management and governance arrangements;
  • stakeholder consultation to inform the identification of optimal models for community housing providers and the sector generally, and the analysis of required implementation strategies;
  • identification of options (including the base case) which would achieve government policy and financial objectives for a viable and sustainable community housing sector;
    development of a financial model which will analyse the options for the housing sector and identify revenues and costs, capital and recurrent funding requirements, funding shortfalls, the optimal levels and costs of debt, and capacity for growth.  This modelling will be based on the cash flow analysis of a small number of indicative community housing providers and also enable sensitivity analysis of key variables;
  • analysis of the options for expanding and maturing the community housing sector, including assessment of tangible and intangible costs and benefits; and
  • policy analysis of the policy, program and regulatory requirements to support the achievement of the preferred option that address workforce capacity, risk management and governance requirements of the sector as well as maximise outcomes for low to moderate income earners and the community generally.

Guiding principles

The project is guided by underlying principles for the sector, which emphasise its social mission and its commitment to viability, sustainability and growth.  These principles are set out in the diagram on the following page.

Image description

Diagram 1

 

Image descriptions

Image 1

Achieving a viable and sustainable community housing sector for Australia means that

  • The sector is diverse between and within jurisdictions across Australia and covering growth, generalist and specialist community housing providers.
  • Community housing organisations target low and moderate income households whose needs can not be met in the private market.
  • Community housing organisations offer a range of products and services to low and moderate income households. The role, level and type of services and supports provided or facilitated by community housing organisations varies and could include developing and/or managing rental accommodation; brokerage of private rental opportunities and opportunities to purchase; providing services and support to tenants with high/intensive needs (such as mental illness, the aged, the unemployed, people with disabilities, homelessness); and addressing barriers to accessing private rental or home ownership.
  • Community housing providers generate income through rents, grants and other sources to cover all costs over the short and long term including;
    • Staffing and business administration
    • Immediate and future maintenance
    • Future asset replacement and upgrade
    • Tenancy management and support
    • Workforce development and training
    • Place management
    • Expansion and growth including through leveraging private finance.
  • Community housing providers are committed to
    • Achieving good social outcomes for tenants
    • Reinvesting surpluses in growth
    • Efficiency
    • Value for money
    • Quality
    • A strong balance sheet
    • Partnerships
    • Innovation
  • Community housing organisations are regulated, well managed and governed in order to protect public and private investment in social housing.

The aforementioned characteristics of a community housing sector will facilitate and contribute to good social housing outcomes. Such outcomes are listed below.

  • Tenants are able to access affordable housing and exercise choice which may include choice of
    • Provider
    • Tenure
    • Location
  • Affordability relative to a household’s income and circumstances, with incentives provided to tenants to move to lower subsidies or purchase arrangements if their circumstances improve.
  • Security and sustainability of tenure which means that tenants are provided with adequate support and access to services to maintain their tenancies. This includes providing options for tenants whose circumstances improve of staying within the community housing system (and pay higher rents) or provision of pathways to other forms of housing
  • Tenant participation and representation in tenancy management decisions in matters that affect them.
  • Housing that contributes to a household’s capacity to participate in economic and social activities because of (including but not limited to);
    • Its location
    • Its universal design
    • The stability and security it provides
    • Access and linkages to a range of services and supports
  • Allocation of suitable housing is made on a non-discriminatory basis
  • The community housing sector is inclusive and supports and abides by the principles of Universal Declaration of Human Rights and the United National Convention on the Rights of Persons with Disabilities.
  • Diverse and socially inclusive communities and the reduction of concentrations of disadvantage.
[ back to Image 1 ]

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2. Methodology 

Analysis of the viability, sustainability and growth of the community housing sector in Australia was undertaken using a combination of methods including review of existing policy and program documentation, evidence and expert opinion, stakeholder consultation, and financial and policy analysis. This section summarises our approach. More detailed information on the financial analysis, its assumptions and limitations is included in Appendices A and B.

2.1 Literature review

The purpose of the literature review was to build upon the researcher’s existing body of knowledge regarding community housing reform and to:

  • understand the community housing policy and regulatory context and optimal approaches within Australia and internationally;
  • identify the current position of the community housing sector in terms of its composition and scale;
  • identify optimal business models for community housing providers and models for the community housing sector generally that can be built upon in the Australian context; and
  • establish a body of knowledge regarding best practice management and governance arrangements for community housing.

The review of documentation firstly considered the ‘current situation’ in the community housing industry in Australia in terms of:

  • current configuration;
  • the projected demand for affordable rental housing;
  • the level of growth that can be achieved across the sector given current settings (in relation to financial incentives and regulatory arrangements); and
  • what additional measures might be required to achieve the optimal model for the size and capacity of the sector. 

The literature review secondly focused on optimal approaches to community housing delivery in international jurisdictions, particularly the UK, the Netherlands, the United States, Canada (focusing on initiatives at the national level and in Ottowa, Ontario and Newfoundland) and New Zealand.  It identified the key elements and preconditions to establishing successful and sustainable business models for community housing providers as well as the sector wide strategies that have been adopted by governments to facilitate and support a sustainable and viable community housing sector.

Documentation reviewed included:

  • key policy and program documentation, including the NAHA, the NBJP National Partnership Agreement, NRAS guidelines, and Housing Affordability Fund requirements;
  • internal policy, background and research material and data held by FaHCSIA that is relevant to identifying key policy objectives and framing options for financial and economic modelling and further policy analysis;
  • recent research reports including by the Australian Housing and Urban Research Institute (AHURI) focussing on affordable housing and private sector finance in the housing sector;
  • international literature and policy documentation; and
  • relevant documentation provided by individual jurisdictions and community housing providers during the stakeholder consultations (outlined below).

2.2 Stakeholder consultations

In tandem with the literature review, consultations were conducted to:

  • confirm our understanding of the current social housing sector in each jurisdiction, including the regulatory and policy context and current business and delivery models in use;
  • identify initiatives currently in place to support the development of the community housing sector;
  • consider key relevant policy objectives, including, for example, the application process for funding announced in the economic stimulus package for social housing;
  • identify key learnings from government and community housing organisations regarding necessary elements for encouraging growth and establishing sustainable community housing;
  • gauge private sector willingness to invest in affordable housing and identify necessary risk management, financial and other criteria the community housing sector organisations would need to meet in order to attract private sector finance;
  • identify perceived strengths and weaknesses and barriers to growth in the current system and opportunities for improvement (to inform the development of model options); and
  • consider the conditions that would need to be in place for improvements, from the perspective of government, providers and the private sector. 

Consultation with the national peak community housing organisations and experts in the sector, including from research and academic organisations, occurred throughout the project through their representation on the Project Reference Group.

Consultations were also conducted in major cities around Australia.  These included:

  • one focus group with FaCHSIA officers with an understanding of the Australian Government’s policy objectives, current environment and key initiatives;
  • one consultation with national peak organisations;
  • one consultation in each major city of each state and territory with policy advisors and social housing program managers from the relevant housing agency and representatives from the state-level community housing representative body, as well as community housing providers of varying sizes, types and geographical distribution (seven consultation forums); and
  • telephone interviews with experts who operate in the private financial sector (three interviews). 

A list of stakeholders consulted is included in Appendix D.

2.3 Financial analysis

The objectives of the financial analysis were to:

  • develop a base case which provides the financial profile of identified types of community housing providers at present;
  • identify key policy levers and assess their ability to increase the viability of providers and achieve rapid and significant growth of the community housing sector to 150,000 dwellings across Australia within five years.  This analysis included consideration at a broad level of the impact of relevant options on affordability outcomes for tenants and the community; and
  • identify attributes of optimal business models for providers that may minimise the reliance of the community housing sector on ongoing, additional capital, recurrent and operational subsidies over the medium to longer term.

To meet the above objectives, the financial analysis modelled both the community housing sector and types of community housing providers.  The overall approach to the financial modelling comprises a basic five–step process (with several sub-components) which is presented in the following diagram.

Figure 2-1: Summary of the approach to the financial modelling

Figure description

This approach is explained further in the following sections.

2.3.1 Approach to the base case

The financial analysis involved the development of a financial model to assess the nominal cash inflow and outflow to determine operational viability and growth capacity of medium tenancy managers, large tenancy managers and housing owners / developers, as defined in the table below. 

Table 2.1: Community housing provider types in the base case

Housing providers assessed
Type Description
Medium tenancy manager A medium tenancy manager is defined as a housing provider that manages a portfolio of between 50 and 499 tenancies.  The Tenancy Manager’s portfolio may include high need tenants, such as those with severe and profound disabilities.  The provider does not own or have control over its assets, and primarily has property and tenancy management functions.
Large tenancy manager A large tenancy manager is defined as a housing provider that manages a portfolio of greater than 500 tenancies.  The Tenancy Manager’s portfolio may include high need tenants, such as those with severe and profound disabilities.  The provider does not own or have control over its assets, and primarily has property and tenancy management functions.
Housing Owner / Developer A housing owner / developer owns a significant portion of its housing assets and has a land and development focus.  The housing provider can use the assets to leverage private capital and has the means to generate its own growth in housing stock through development as well as open market acquisitions.
Core data and information for each provider type has been provided by State Housing Authorities in NSW, Victoria and South Australia. 

For each of the housing provider types, the financial model:

  • estimates the annual net cash flow position;
  • identifies any funding shortfalls or requirements;
  • estimates the potential level of borrowing;
  • estimates the number of dwellings that can be procured within five years and over 25 years; and
  • facilitates the application of four key levers to improve viability and growth.

The financial model is based on actual FY2008 data provided by State Housing Authorities in New South Wales, Victoria and South Australia. The model also uses key inputs such as financing terms, rent and other revenue, operating costs, government grants and subsidies, capital costs, indexation/escalation, community housing dwellings and projects (NRAS/NBJP), as advised by members of the Project Reference Group and a number of financial assumptions, which are detailed in Appendices A and B. This base case data along with policy levers including rent policy, title transfer, lowering the cost of debt and a current and expanded NRAS scheme will provide a financial model that will be able to extract aforementioned information. There are also numerous limitations with the approach that confound comparisons of the results across jurisdictions, provider types and scale, and time. These limitations are also detailed in the appendices to the report.

The figure below provides an illustration of this approach in assessing financial viability and growth capacity of the three housing provider types.

Figure 2-2: Our approach to assessing financial viability and growth capacity

Figure description

2.3.2 Approach to the policy levers

In addition to the base case, the analysis also includes the application of four key policy levers to the base case of each housing provider type in order to assess the impact to financial viability and growth capacity for each housing provider type and the community housing sector nationally.  The following table outlines the four key policy levers that have been selected through consultations with both FaHCSIA and the Project Reference Group.

Table 2.2: Summary of key policy levers

Summary of key policy levers
Policy lever Key parameter
Rent policy Cost-based rent – Housing providers set rents at a weekly rental charge rate which enables them to recover their costs and break even (excluding costs of growth).
Affordability-based rent – Housing providers set rents at a weekly rental charge of 30 percent of tenants’ income.
Market-based rent – Housing providers set rents to a weekly rental charge of 74.9 percent of market rent (using a weighted average market rent derived from Victoria, South Australia and NSW figures).
Return-based rent – Housing providers set rents at a weekly rental charge rate that achieves a return on assets (return) of four percent7.
Title transfer Title to existing publicly owned housing stock under community housing sector management is transferred to both medium and large tenancy managers. It is assumed that the housing owner / developer already has title to its housing assets.
The title transfer of properties to housing providers has been assumed to enhance the balance sheet of the housing providers and allow for a degree of financing. In practice, benefits of title transfer will be dependant on the caveats included with the title transfer. Therefore, for the purpose of this analysis, It is assumed that there will be minimal caveats, which will allow for a greater degree of leverage and asset management sophistication.
Lowering of the cost of debt Depending on the financing arrangements negotiated by the community housing sector, the cost of debt could be lowered beyond the cost of debt associated with a BBB rated entity.
Mechanisms for the reduction may include:
  • government guarantees; and/or
  • the establishment of a financial intermediary to lend to providers at discounted rates.
To illustrate the impact of such arrangements, the analysis assumes a 200 basis-point reduction of the cost of debt.
Current and expanded NRAS scheme The provision of current NRAS incentives plus an expansion of the current NRAS program to provide incentives for an additional 50,000 dwellings in years 5 – 10 (total 100,000 dwellings).
Two scenarios8 assessed are as follows:
  • Scenario 1 – Scenario 1 assumes that 40 percent of the current remaining NRAS incentives will be awarded to the community housing sector for the procurement of new dwellings up to 30 June 2012. This scenario also assumes an expanded NRAS scheme with an additional 50,000 incentives beginning 1 July 2012 where 25 percent of the new incentives are awarded to the community housing sector for the procurement of new dwellings over five years to 30 June 2017. All projects under the current NRAS scheme and the expanded NRAS scheme are assumed to be fully funded by debt.
  • Scenario 2 – In addition to the procurement of new dwellings by the community housing sector as outlined under Scenario 1, a further 30 percent of the dwellings procured by the private sector under the current NRAS scheme are managed by medium and large tenancy managers (split evenly between them). Under the assumption of an expanded NRAS scheme, the remaining 75 percent of incentives are awarded to the private sector. These properties are also assumed to be managed by medium and large tenancy managers.
A sale rate of 80 percent has been assumed at the end of the 10th year of the scheme’s operation.

2.3.3 Analysis and outputs

Analysis and outputs are based on data received from each State Housing Authority (SHA) for each housing provider type.  The data for each housing provider type is consolidated using a weighted average approach by tenancies, which then forms the base case of a typical housing provider.  Following the initial assessment of each typical housing provider under the base case, policy levers are applied in turn to each base case and the results assessed individually.  The final step applies all levers concurrently to the base case to provide a consolidated result.

2.3.4 Options assessment

Following the completion of the financial modelling of each individual policy lever (which identifies its financial costs and benefits), the broader costs and benefits which were not accounted for in the financial modelling were assessed. 

A single preferred policy lever on the basis of ranking their relative costs and benefits was not selected, as is the usual practice when undertaking these kinds of assessments.  This is because it is likely that a package combining several of the levers would be applied in practice, and these may be applied differently to individual providers depending on their circumstances. 

2.4 Limitations of the approach

The data provided to the investigation is a consolidation of financial, operating and asset figures of housing providers in each state.  As such, the individual characteristics of each housing provider (e.g. location, tenant mix, operating costs, etc.) forms part of an average figure, and cannot be quantitatively addressed.

There are also instances where information for a particular revenue or cost category has not been individually identified due to either state housing authority data limitations or unavailability.  In these cases, the revenue or cost is included in another category and does not affect the overall financial result.

All data is used as received and has not been benchmarked, adjusted, or audited for accuracy. 

With the exception of housing owners / developers, the typical housing provider derived from state housing authority provided data is a proxy for all housing providers operating in the various policy environments of NSW, Victoria and South Australia.  As such, the typical provider of each housing provider type may not represent individual housing providers in each state.  For housing owners / developers, the profile is based solely on Victorian data and therefore reflects the policy and investment settings of that state. 

Overall, the limitations of the methodology make comparisons of the results across jurisdictions, provider types and scale, and time very difficult.

2.5 Assumptions underpinning the financial analysis

The implementation of the financial modelling approach discussed above requires fundamental assumptions that underpin the analysis.  The following table highlights the overarching assumptions of the analysis:

Table 2.3: Key assumptions underpinning the financial modelling

Key assumptions
General
1 The analysis focuses on long-stay community housing providers.
2 Community housing data provided by NSW, Victoria and South Australia is illustrative of national data.
3 Growth results for each housing provider type provide an indication of the growth of the whole sector.
4 Cash inflows from businesses other than community housing are excluded from the analysis.
5 Any leasehold related revenues and costs are constant and do not increase with the number of dwellings.
6 The policy environment under the base case will continue indefinitely in an “as-is” state.
7 All housing provider types will commit 80 percent of positive net cash flow to procure additional dwellings.  The remaining 20 percent will be allocated to a restricted cash fund to be used at the discretion of the housing provider.
8 Housing providers will own all new dwellings procured using positive net cash flow.
9 Community housing providers not in scope of the base case are assumed not to procure new dwellings or generate additional growth.
10 Growth due to the transfer of additional public housing stock to the community housing sector (beyond the publicly owned stock that is already under the providers’ management) has not been included.
11 Data received from the State Housing Authorities is accurate and does not require additional adjustments.
12 All community housing sector housing providers are assumed to have charitable tax (PBI) status and access to GST concessions.
13 Future capital grants above those already committed are not included in the analysis.
14 The number of housing providers does not increase.

A detailed list of assumptions for the housing provider types are provided in Appendix B.

2.6 Policy and implementation analysis

Following financial analysis and assessment of the policy levers, the likely implications of implementing these initiatives in the Australian community housing sector were considered.  This analysis focused on risks and barriers which will need to be addressed, through identification of mechanisms for intervention and broader supporting strategies and programs.  The attributes of optimal business models for community housing providers, drawing on evidence from the financial modelling, literature review and stakeholder consultations were also identified.  This was a qualitative assessment, and not based on the development of a separate financial model of an optimal provider.

This final analytical stage drew on evidence from the literature review, stakeholder consultations and financial modelling.  It considered:

  • any identified barriers to implementation;
  • alignment to the ability of the states and territories to contribute to NAHA outcomes and objectives for growth in the social housing sector;
  • current policy settings in states and territories and how these would impact, positively or negatively, on implementation;
  • legislative/regulatory requirements to support the system;
  • capacity of the community housing sector and the governance and management arrangements required to ensure successful implementation;
    risks involved in implementation and who faces these risks;
  • workforce planning issues;
  • mechanisms for intervention and supporting programs and strategies that can be delivered by the Australian Government; and
  • high level costs of implementation or other supporting strategies to achieve optimal business models in the community housing sector.

 

Figure descriptions

Figure 2.1: Summary of the approach to the financial modelling

Step one involves considering the base case. It involves developing indicative financial profiles of three types of providers including costs and revenues and assessing, viability and sustainability and growth prospects.
Step two involves considering provider level options. This involves assessing impact of rent and eligibility policy options on, viability, growth prospects and affordability for tenants.
Step three involves considering government subsidy options. This involves considering the need for and impacting of other policy options to improving viability and growth.
Step four involves analysis against growth targets. This involves assessing the combined impact of policy levers against the target in the sector within five years.
Step five involves identification of optimal arrangements. This involves considering the impacts and implications of the policy levers.

[ back to Figure 2.1 ]

Figure 2.2: Our approach to assessing financial viability and growth capacity

Figure 2.2 is a financial model based on actual FY2008 data provided by State Housing Authorities in New South Wales, Victoria and South Australia.  The model also uses key inputs such as financing terms, rent and other revenue, operating costs, government grants and subsidies, capital costs, indexation/escalation, community housing dwellings and projects (NRAS/NBJP), as advised by members of the Project Reference Group and a number of financial assumptions, which are detailed in Appendices A and B. This base case data along with policy levers including rent policy, title transfer, lowering the cost of debt and a current and expanded NRAS scheme will provide a financial model that will be able to extract aforementioned information. 

[ back to Figure 2.2 ]

  1. Based on advice from the Project Reference Group that there is an overseas benchmark targeting a four-six percent return.
  2. Scenarios have been defined based on advice from FaHCSIA

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3. Context 

3.1 Social housing in Australia

Public housing, since the introduction of the first Commonwealth State Housing Agreement (CSHA) in 19459, has been the predominant form of social housing provision in Australia.  However, the range of housing support provided by governments has expanded to also include private rental assistance, state funded and owned Indigenous housing, and community managed dwellings.  The range and scale of private housing support and social housing provision is summarised in the following table.

Table 3.1: Assistance across the rental sector, 2008

Category of housing Assistance program10 Number provided
Privately owned and managed dwellings Commonwealth Rent Assistance 943,901 income units
CSHA funded private rental assistance 122,162 households11
State/ territory owned and managed dwellings CSHA funded public rental housing 331,136 households
CSHA funded State owned and managed Indigenous housing 12,735 households
Community managed housing CSHA funded mainstream community housing 35,667 households
Indigenous community housing 21,127 households12
CSHA funded crisis accommodation 58,422 households13

Source: Productivity Commission, Report on Government Service Provision 2009, p.16.10

While there has been renewed interest in social housing in Australia, public housing has been in decline since the mid 1990s.  Real funding under the CSHA declined by 30 percent over the 10 year period 1994-1995 to 2004-200514.  This, coupled with declining revenues resulting from increased targeting of applicants in greatest need and changing tenant household profiles, saw public housing stock decline by more than 20,000 dwellings over that same period15.  Public housing stock has further declined since 2004-2005. As at 30 June 2008, total public housing stock in Australia was 337,86616

It should be noted that some of this decline has been associated with the growth in the community housing sector through public housing asset transfers, however a significant proportion can be attributed to the poor viability position of many state housing authorities which has been the product of declining rental revenues, declining Commonwealth and State funding, and increasing operating costs largely associated with an ageing asset base17.

The 1996 CSHA gave priority to targeting public housing to those most in need.  Tighter targeting of public housing has meant that a growing number of tenants are on low incomes, have complex needs or are entering public housing at a time of significant crisis in their lives.  This is impacting on revenue from public housing rents as well as costs18.

Community housing that is funded under the same Commonwealth and state agreements as public housing, in contrast, has experienced significant growth since 1995.  The CSHA funded community housing sector between 1998 and 2008 grew by 92 percent19 from 15,342 dwellings in 199820 to 38,519 in 200821.

3.2 Demand for social housing

There is strong evidence that housing affordability in Australia has declined dramatically in recent times, pointing to what has been referred to as an ‘emerging housing affordability crisis’22.  Forecasts have predicted that more than one million households could be experiencing housing stress by 202023.  The impacts of housing stress are expected to be felt most by younger renters and lower income home purchasers24.

Analysis of data from the 2002-2003 Survey of Income and Housing25 identified that 1.2 million or 15.8 percent of all households paid more than 30 percent of their income on housing costs26.  What is more significant is that, of this number, 863,000 were lower income households (those in the lowest 40 percent of incomes), constituting nearly 30 percent of all lower income Australian households.  Nearly half (417,000) of the lower income Australians who paid more than 30 percent of their income in housing costs were identified to be paying more than 50 percent of their household income and were experiencing severe housing stress27.  As housing costs have increased in recent times and the rental market has tightened considerably, it is likely that these figures are now higher. 

Other facts indicate there is a high level of demand for low cost housing.  In particular:

  • Many Australians are experiencing housing stress (noting, however, that the majority are private renters).  There are at least 600,000 families and single people in the private rental market in housing stress28
  • According to the National Housing supply Council, there was a shortfall of more than 250,000 dwellings that were affordable and available for lower income private renters in 200629.
  • More than 105,000 people are homeless on any given night30.  Only 4,500 people who were homeless were given priority access to public housing in 2006-0731.
    As at 30 June 2008, there were 177,652 households on public housing waiting lists32 and 23,731 new households were allocated public housing over the period 1 July 2007 to 30 June 200833.

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3.3 Scale and structure of the community housing sector

3.3.1 Providers funded under the CSHA / NAHA

Survey data from the Australian Institute of Health and Welfare (AIHW) suggests that in 2007-08 there were a total of 1,069 community housing providers in Australia funded under the CSHA, and managing a total of 38,519 dwellings34

New South Wales holds the majority of community housing stock, however there has been a significant increase in Victoria, Queensland and Western Australia.  The distribution of community housing stock across jurisdictions is shown in Figure 3‑1 below.

Figure 3-1: Distribution of CSHA funded community housing stock as at 30 June 2008

Figure description

Source: Data is drawn from AIHW, 2009, Community Housing: Commonwealth State Housing Agreement National Data Report, p.6-7

Nationally, the community housing sector consists of a large number of small organisations, each managing a small number of dwellings and tenancies.  According to the AIHW, the majority of providers (90 percent) manage less than 49 dwellings:

  • four percent of providers manage over 200 dwellings (47 providers);
  • two percent manage between with 100 and 199 dwellings (23 providers);
  • four percent manage between 50 and 99 dwellings (43 providers);
  • 15 percent manage between 20 and 49 dwellings (158 providers); and
  • 75 percent manage less than 19 dwellings (798 providers)35.

Across the sector however, the largest organisations (top four percent) manage 43 percent of all tenancies36.  In NSW, a survey of 42 housing associations found that four agencies were managing over 700 properties, and another five between 491 and 700 properties.  While smaller providers are more numerous, larger growth providers are responsible for an increasing share of total community housing stock37

In terms of location, the majority (67 percent) of CSHA funded community housing stock is located in major cities, followed by inner regional areas, which account for 20 percent of all stock.  An examination of the location of providers in NSW suggested that larger ones are located in metropolitan areas and large regional towns, and smaller providers in rural and regional areas38.  It is likely that these trends are occurring in other jurisdictions39 40.There is very little CSHA funded community housing in remote areas, at three percent.  It should be noted that community housing is distributed significantly differently in both Tasmania and the Northern Territory.  In Tasmania, more than 60 percent of community housing is located in inner regional areas with the remainder in outer regional and remote areas.  In the Northern Territory, more than 70 percent is located in outer regional areas with the remainder in remote locations41.  It should be noted that both Tasmania and the Northern Territory have small community housing sectors with 597 and 93 dwellings respectively42.

Nearly one quarter (10,975 dwellings) of all CSHA funded community housing dwellings are head leased from the private sector with the majority of these in NSW, as shown in Figure 3-2 below.

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Figure 3-2: Head leased and non head leased CSHA funded community housing stock

Figure description

Source: Data is drawn from AIHW, 2009, Community Housing: Commonwealth State Housing Agreement National Data Report, p.6-7

AIHW survey data reports that the majority (43 percent) of community housing dwellings are either detached or attached houses (31 and 12 percent respectively).  One third of CSHA funded dwellings are flats, units and apartments.  Boarding or rooming house dwellings made up nine percent of community housing stock43.  Boarding and rooming houses comprised community housing stock in all jurisdictions with the exclusion of New South Wales, South Australia and the Northern Territory44.

Nationally, one third of community housing properties have one bedroom.  Proportions of two and three bedroom properties are distributed evenly, with both being 30 percent of all stock.  Remaining properties have four or more bedrooms.  There is a significant difference across jurisdictions in the proportion of stock of different sizes as shown in Figure 3-3 below.

Figure 3-3: Dwelling size CSHA funded community housing stock

Figure description

Source: Data is drawn from AIHW, 2009, Community Housing: Commonwealth State Housing Agreement National Data Report, p.6-7

Location, house type and size are important factors in the current and future revenue capacity of community housing providers because these factors each impact on the potential rental revenue capacity of an organisation.  For instance, under an income based rent policy, the rental income a dwelling can potentially achieve is significantly constrained by the household types of those who can reside within it.  High proportions of one bedroom dwellings have limited capacity to house different types of households.  It is important to note that the appropriateness of the current configurations of stock should be determined on the basis of current tenant needs rather than its revenue raising capacity.

3.3.2 Other types of community housing

CSHA / NAHA funded community housing is not the sole community housing tenure in Australia.  Aged care providers, disability housing providers and Indigenous community housing providers are additional social housing tenures classified as community housing for the purpose of this study.  Table 3.2 below provides an overview of stock distribution across the social housing spectrum in Australia.

 

Table 3.2: Social housing stock distribution Australia45

  Community Housing
Public Housing CSHA Funded Community Housing Estimated non CSHA funded Community Housing 1999 Aged Care Housing (ILUs) Disability Housing Indigenous Community Housing Estimated minimum total Community Housing Total Social Housing
337,866 38,519 14,442 34,700   21,798 109,751 447,617

Source: Various sources as referenced.

Aged care providers

There is limited information available as to the size and scope of the community / independent aged care housing sector (as distinct from the residential aged care sector) in Australia. 

Independent living units are dwellings provided by the not for profit sector specifically targeted towards older persons on low incomes with low asset bases.  These units were Commonwealth funded under the Aged Persons’ Homes Act over the period 1954 to 1986.  After the subsidies under the Aged Persons’ Homes Act ceased in 1986, not for profit aged care providers continued to construct independent living units using resident contributions, grants, loans and donations.  In 2004, it was estimated that there were approximately 34,700 independent living units in Australia46.  Independent living units and mainstream community housing have some important common characteristics, as they both:

  • are provided by not for profit, community organisations which primarily target households with relatively low incomes and low value assets;
  • have a primary goal of providing good outcomes for residents;
  • provide supportive management and supportive environments for residents;
  • support residents by linking them with a range of other organisations providing other community and support services. 

A survey of aged care providers undertaken by AHURI’s Swinburne-Monash Research Centre in 2004 showed that, of those respondents, 172 providers delivered a total of 14,554 independent living units47, an average of 84 units per provider.  The survey showed that the majority of providers (91 providers) managed less than 50 independent living units.  Twenty five providers managed between 100 and 199 units, while a further 20 managed more than 200 units48

The survey highlighted that, of the 172 organisations providing independent living units, 39 percent intended to acquire new stock as a priority over the next three to five years at the time of the survey49.

Aligning with the housing requirements of the target age group, the majority of independent living units are small comprising one (63 percent) or two (18 percent) bedrooms.  A further 16 percent of units were bedsitters50.  Given the funding era during which much of Australia’s independent living unit stock was developed, it is understandable that a significant proportion is ageing.  From the same survey, 88 providers identified that more than 50 percent of their housing stock was aged between 20 to 40 years and a further 73 identified that more than 75 percent of their stock was in this age bracket.  Further to this, nine organisations identified that more than 50 percent of their stock was aged over 40 years and nine identified more than 75 percent was over 40 years old51

Of the independent living unit stock managed by organisations surveyed, 39 percent was identified as being below the current community standard for housing52.  Estimations based on the survey results highlighted that potentially 34 percent of all independent living units require significant upgrade53.  Related to this, 49 percent of organisations providing independent living units had vacant properties at the time of the survey equating to 4.6 percent of stock.  The majority (39 percent) of these vacancies were attributed to the dwelling requiring major upgrade.

Disability accommodation providers

Some community housing organisations provide specific accommodation, support and care to people with disabilities, but there is great variation in the type of housing and level of support provided to foster and sustain independent living within the community.  Some community housing organisations that focus on the provision of housing and support for people with disabilities receive funding through the NAHA, while other community housing organisations receive specific state or territory disability funding through mechanisms such as the National Disability Agreement which came into effect on 1 January 2009.

The housing needs of people with disabilities are shaped by the full range of factors that affect all tenants (family life cycle stage, labour force participation, age, gender, for example) and disability adds to this complexity, rather than being the sole driver of housing consumption.  As the term ‘disability’ encompasses a wide spectrum of conditions, housing needs will vary according to the type and severity of the disability54.  The evidence suggests that the overwhelming majority of people with a disability seek to live within the community and live as ‘normal’ a life as possible55

There is a growing recognition that there is a real need for suitable and affordable community housing for people with a disability and housing options must extend beyond the traditional public housing option, which has been the predominate response to date56.  For example, a number of state governments have developed strategic housing plans for people with a disability57 or incorporated housing objectives within wider state disability plans58 or state housing plans59.

In addition, there are a number of community housing organisations that have been set up to house people with a disability.  Examples include Copper Triangle Housing Co-operative, PARQUA Housing Co-operative and Riverland Housing Co-operative in South Australia, Bunbury Housing Association in Western Australia, Havenco Housing Cooperative in New South Wales and supported Housing Limited in Victoria to name a few.  There are a number of disability service providers owning or managing some housing stock, and there is also an indication that some disability organisations would like to move into the community housing sector. 

Indigenous housing providers

A 2006 survey identified 21,758 Indigenous community housing properties in Australia60 managed by 496 Indigenous community housing organisations61.  Of these dwellings, 57 percent are located in very remote locations and are managed by 42 percent of Indigenous community housing organisations.  Only four percent of Indigenous community housing dwellings are located in major cities and a further 10 percent in inner regional locations62.

The majority of Indigenous community housing organisations are small, managing an average of 44 dwellings each.  Research shows the Indigenous community housing organisations operating in major cities and inner regional areas are smaller, managing an average of 21 and 27 properties respectively63.

It has been estimated that 20 percent of Indigenous community housing stock requires major upgrade and a further 18 percent requires replacement64.  This has been costed as a $705 million backlog in capital expenditure65.  This backlog can, in part, be attributed to the limited revenue of Indigenous community housing organisations.  It was found that 90 percent of organisations managing 70 percent of all Indigenous community housing stock did not have the capacity to obtain enough revenue to undertake appropriate maintenance activity to professional standards66. In NSW, this has been attributed to various issues including the small size of providers and low rental revenues67.

In remote and very remote locations, the operating deficit per dwelling has been identified as $2,400 and $3,800 respectively68.  This is primarily attributed to geography and the costs of managing housing in remote locations; however, in part, it is also linked to significant levels of bad debt bourn by Indigenous community housing organisations.

Local government providers

A number of community housing properties in Australia are managed by local government authorities (LGAs), who may have small or large holdings of community housing that rest within the larger organisational structure of the LGA.  This is particularly the case in Western Australia and Queensland, where local government providers are recognised as key providers in the community housing sector.  There is no collective data available as to the number of local government housing providers in Australia, however a desktop analysis of the Community Housing Coalition of WA’s listed community housing providers indicated that there are at least 84 LGAs providing community housing in Western Australia69.

Profile of community housing tenants

AIHW data (relating to CSHA funded organisations) suggests that there were approximately 35,667 households living in community housing in Australia at 30 June 2008, occupying over 99 percent of tenantable community housing stock. Ninety-three percent of community housing households in Australia were low income households. Six percent were identified as Indigenous households, 28 percent contained households with a person with a disability, and 14 percent were from a non-English-speaking background. Seven percent of principal tenants were aged 24 years or under and eight percent of principal tenants were 75 years or over. Of the 8,728 new tenancies in 2007–08, 62 percent of these were classified as special needs households and 36 percent were homeless at the time of allocation70.

These demographic characteristics reflect that eligibility criteria for community housing is generally consistent with those for public housing, however many organisations specifically cater for target populations such as people with a disability, aged tenants, and women escaping domestic violence71 .

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3.5 Policy and regulatory context for the community housing sector

3.5.1 National policy framework

Since the early part of this century, Australia has seen a significant decline in housing affordability caused by a range of economic and social factors.  These factors, coupled with other social and economic circumstances, have created a climate where new ways of delivering housing services to those in need are critical in order to reverse current trends and provide sufficient affordable housing.

At a national and state and territory level, governments and their policy makers recognise the need to increase affordable and appropriate housing opportunities for a greater range of low to moderate income households.  The Australian Government has demonstrated a strong commitment to this and is pursuing significant reforms to funding, responsibilities and service delivery arrangements for housing and homelessness service systems. 

As a framework for reform, the NAHA has been agreed and is being developed by the Commonwealth and the states and territory governments.  The NAHA sets out the framework for governments to work together towards ensuring that "Australians have access to affordable, safe and sustainable housing that contributes to social and economic participation72".  It brings together the current range of housing programs including Commonwealth Rent Assistance, funding for public housing, responses to homelessness and the First Home Owners Grant.  The NAHA commenced on 1 January 2009 and replaces the previous housing Specific Purpose Payments provided through the CSHA and the Supported Accommodation Assistance Program (SAAP) Agreement. 

While there is no nationally specific community housing policy framework, the NAHA provides greater flexibility in addressing housing issues at state, territory and local levels through focusing and measuring performance against outcomes, committing to long term objectives, and establishing an ongoing rather than a time limited agreement, and facilitating a greater range of housing delivery mechanisms.  In contrast to previous arrangements, the NAHA does not require matched funding from state or territory governments.  The new agreement allows governments to use the specific purpose payments to address housing issues that are specific to their jurisdiction but enables greater flexibility in the delivery mechanisms and facilitates better clarification of the roles and shared responsibilities of the Commonwealth, states and territories, and local governments73

A range of other initiatives underpin and support the achievement of affordable housing and are relevant in the context of developing a mature and high functioning community housing sector in Australia.  These include:

  • the commitment by the Australian Government to invest $6.4 billion in the social housing system for maintenance and new construction as part of the NBJP;
  • the introduction of the National Partnership Agreement on Social Housing (as part of the NAHA) to increase the supply of social housing through new construction.  The agreement facilitates the Social Housing Growth Fund, in which the Commonwealth Government provides: $200 million in 2008-09 and $200 million in 2009-10;
  • introduction of a five-year plan, “A Place to Call Home”, to reduce homelessness through providing 600 new dwellings for homeless people;
  • the creation of a Housing Affordability Fund to assist developers and local government to unblock the supply of housing and pass the savings on to new home buyers;
  • the establishment of a National Rental Affordability Scheme (NRAS) which offers an incentive to providers to rent dwellings at below market rates.  NRAS aims to “facilitate large-scale investment by financial institutions and non-profit housing organisations in provision of this additional housing”74
  • the establishment of a new National Housing Supply Council to assist the government to assess current and future demand for housing across Australia; 
  • Commonwealth land release to help ease housing affordability across Australia; and
  • the establishment of First Home Savers Accounts to help first home buyers save for their first home and help fight inflation.

Work is being undertaken nationally to develop a national regulatory framework for community housing.  This framework is a matter of priority to:

  • enable the establishment of an affordable housing industry in Australia;
  • enhance the ability of providers to access and secure debt financing for growth; and
  • enable providers to operate across borders under a consistent regulatory framework.

Further analysis of the proposed national regulatory framework is included in section 8 of this report.

3.5.2 State and territory policy frameworks

Under the NAHA, all Australian jurisdictions have reinforced their commitment to achieving affordable housing.  Considerable work is being undertaken by states and territories, in conjunction with the Australian Government through COAG, to increase the provision of affordable housing. 

For nearly all jurisdictions, this includes progressing policy reforms to either increase the supply of community housing and/or strengthen the capacity of community housing providers.  In this respect, most state and territory agencies are moving to enhance their regulatory capacity to facilitate a move away from direct government provision.  Concurrently, community housing providers are being transformed from welfare agencies to organisations with better commercial skills that provide subsidised housing. 

Each jurisdiction is taking on different approaches due to:

  • local supply and demand issues;
  • supply targets;
  • policy and legislative context;
  • the extent of capital funding contributions by governments;
  • volatility of the property market; and
  • the range of housing prices in the property market. 

These issues are driving particular policy responses and, as such, there is currently no one size fits all approach to expanding community housing supply and capacity across the nation.  Examples include:

  • In Victoria, Western Australia and NSW, the strategic policy frameworks support the expansion of supply through the establishment of growth providers.  The Victorian and Western Australian programs encourage community housing providers to leverage equity (up to 25 percent of the value of new assets) to meet growth supply targets.  These arrangements are supported by significant new capital funding and ensure that both the state and community housing providers are maximising service delivery and new supply objectives.  New supply developed by community housing providers is to be owned by the sector, and this is the asset that will be leveraged to attract additional funding.  South Australia has also commenced a growth provider program.
  • The Queensland Government has developed a registration framework to regulate community housing providers and is currently building on this registration process and encouraging voluntary amalgamations and consolidation of community housing providers through incentive funding and new leasing agreements.  Registration frameworks are also in place in Victoria, NSW, Western Australia and South Australia. 
  • In Western Australia, the government has offered to transfer management of a number of public housing dwellings to housing providers.  Provisions to protect the government’s interests have been established through policy and enforced through service level and funding agreements, with the government’s equity interests secured by caveats on title. 
  • In South Australia, the government has been undertaking the transfer of title to housing providers.  Tasmania and Queensland have in the past explored title transfer.  Victoria has undertaken title transfer, and NSW recently announced a significant title transfer program.  Title transfers have also occurred recently in the ACT, with 135 dwellings being transferred to a not for profit corporation under a service agreement and performance management requirements.
  • Several jurisdictions have established innovations funds to support the development of affordable housing.  South Australia has established the Affordable Housing Innovations Fund for not for profit housing providers who can provide capital, land or equity to affordable housing projects.  In Western Australia, the Social Community Housing Innovations Program has committed $210 million over four years to grow the community housing sector.  In NSW, a three year $49.8 million Affordable Housing Innovations Fund has been established. 
  • In Tasmania, the Tasmanian Affordable Housing Corporation (an unlisted corporation) has been established to target new supply.  The corporation is supported by the state to expand the supply of affordable leasehold accommodation, by head leasing new housing from private and not-for-profit sector developers.  The government is currently exploring strengthening community housing through the re-design of its public housing system and the establishment of housing associations.
  • In the Northern Territory, individuals have greater opportunity to access public housing.  Consequently, while there is a strong and vibrant community housing sector, there are no new policy reforms for community housing due to the balance of resources and investment in public housing. 

The table below summarises the key policy initiatives, governance arrangements and stock ownership arrangements of community housing for each jurisdiction.

Table 3.3: Characteristics of community housing programs Australian states and territories

Jurisdiction Key Initiatives Governance Arrangements Stock Ownership
NSW The NSW Government has committed $49.8 million for the expansion of affordable housing. This includes $39.4 million for debt equity partnerships and $10.4 million for the construction of 70 new dwellings .75 Amendments to the NSW Housing Act have facilitated the establishment of not-for-profit housing regulation in NSW, including the establishment of a Housing Registrar. The Housing Registrar in NSW is a statutory position that reports to the Minister. This is important as it provides a degree of separation from the funding and policy setting body.
Rent and eligibility policies apply to the community housing sector76 . There is also a separate contractual framework to support the policy objectives set by the funder – Housing NSW.
Stock is head leased from Housing NSW and the private sector (costs of private sector head leasing are subsidised by Housing NSW).
On 25 June 2009, the NSW Government announced the transfer of ownership of government funded social housing to selected high performing community housing providers. The ownership of up to 7,000 social housing properties will be transferred to community housing providers by the end of June 2012. In addition, NSW has a property transfer program of a further 3,000 units over the next 18 months.
Victoria Towards an Integrated Victorian Housing Strategy provides direction for private market and social housing. It includes ongoing investment in growing not-for-profit housing providers. Regulation of not-for-profit housing providers occurs through the Housing Registrar that administers NGO housing regulation under the Housing Act 1983.
This includes:
  • registration criteria for rental housing agencies;
  • public register containing all registered agencies;
  • performance standards; and
  • intervention guidelines.
Housing providers generally lease State Housing Authorities from the Director General Housing under a five year rent retention lease.
Title has been transferred to a number of providers to facilitate growth.
QLD One Social Housing System is the key social housing policy direction for the Queensland Government. Under this direction, the Community Housing Directions Statement has the objective to refocus long-term community and local government housing towards targeting people in rural and remote areas and to those with special needs77 Providers providing long term community housing enter into a program and service agreement with the Department of Communities. This secures government interest in properties. Title is held by community housing providers with the Department's interest secured through assistance agreements and mortgages.78 Queensland had transferred title to providers but this was reviewed and amended in 2005 so that transferring title no longer occurs.
Title is also held by the state and properties are head leased to community housing providers under funding agreements.
WA The State Community Housing Investment Program commits $210 million over four years from 2007-2008 towards growing community housing providers. It is targeted towards growth providers79, however, preferred and registered providers can also apply for funding80. Requirements are contained in service level agreements and funding agreements. These agreements provide for default arrangements including an appointment of an administrator, transferring assets to another provider, or transferring assets to the state.
A registration and compliance system has been developed that stratifies providers into growth, preferred and registered categories. Legislation to support sector regulation is currently being developed81.
For assets owned by the state, head leasing arrangements up to 30 years along with service level and funding agreements.
Title on some assets has been transferred to providers. Government interest on some titles are secured by a caveat. There is capacity to lift this caveat to facilitate borrowings.
SA The current key policy initiative in South Australia is the Growth Provider Program. The aim of the program is to enable high capacity organisations to enter into alternative finance arrangements to leverage against their property portfolio and increase the supply of affordable housing. Registration and management of community housing providers is through the SA Cooperative and Community Housing Act 1991. The Act provides for the establishment, investigation and winding up of providers. Administration of the Act is undertaken by the Office of Community Housing. The Office of Community Housing is also responsible for community housing policy frameworks and capacity building. Community housing providers hold title to properties, however, the title is secured by a debenture (statutory charge) that retains the value of the assets on the government balance sheet and prevents the organisation from trading against the asset. Debentures are removed from title for growth providers to enable them to trade against assets.
TAS Reform options for the social housing sector are being considered. The system for regulating community housing in Tasmania is through monitoring of compliance with the Community Housing Program Funding Agreement. Ownership by state and not-for-profit sector. Only very minor stock transfers have occurred.
ACT The 2007 Affordable Housing Action Plan provides guidance to housing affordability initiatives in the ACT. The ACT Government is supporting Community Housing Canberra through the provision of direct grants of land and title transfer from ACT housing to CHC. A $50 million loan facility has also been provided. The intention is for CHC to provide 1,000 new affordable properties for sale and rent. A regulatory framework for Community Housing is currently under development.
Legislation specific to Community Housing Canberra is forthcoming.
Revenue Legislation (Housing Affordability Initiative) Amendment Act 2007 introduces provisions in the Duties Act, the Rates Act and the Land Tax Act that provide for organisations to be exempt from the payment of duty and land tax.
Community Housing Canberra Holds title to properties.
NT The Northern Territory does not have an affordable housing strategy or regulation but is in the process of developing an affordable housing strateSource: KPMG analysis of various sources as referenced.gy82.

3.5.3 State and territory regulatory frameworks

Nearly all states and territories have regulatory frameworks to protect government interests, however, these frameworks are either in agreements or in statutes. Table 3.4 broadly summarises the not-for-profit housing regulatory framework in place within the Australian states and territories. Also included in the table are the legislative and administrative capacity currently in jurisdictions, namely: contract management and funding arrangements; whether there is a link between registration and funding; and the presence of a legislative base.

Table 3.4: Overview of state and territory regulatory systems

State Contract / Funding Management Arrangements Registration tied to funding Regulatory Code Legislative base Tiers of registration Registrar or equivalent
NSW83
Vic84
SA85      
WA86   growth providers only under development
Qld87       for accreditation system only
Tas88          
ACT89        
NT90          

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3.5.4 Current government funding support for the community housing sector

There are a range of existing programs administered by the Australian Government and the states and territories that provide funding for the community housing sector. A snapshot of the key initiatives follows.

Australian Government funding

In 2007-2008 under the CSHA, $67.5 million in Australian Government funding was provided to state housing authorities for community housing programs91. Under CSHA bi-lateral and multilateral agreements, states were required to match funding. While the NAHA does not require states and territory governments to match funding, they have still committed significant funds towards community housing above minimum tied program levels.

The NBJP was announced in February 2009. The plan provides over $6 billion investment over three years (2008-09 to 2011-12) for the construction of approximately 20,000 new social housing dwellings and $400 million investment in repairs and maintenance of existing social housing infrastructure. It is the intention of the Housing Ministers' that over time 75 percent of the dwellings procured through the NBJP will be transferred to not for profit providers91a.

Capital funding under the plan is being administered in two phases, the first in 2008-09 and 2009-10. Under this phase, $692 million has already been approved targeting development projects that have already commenced. This phase will deliver approximately 2,696 additional dwellings. The second phase will allocate the remaining funds between 2009-10 to 2011-12. For this phase, states and territories were required to conduct competitive tendering processes for these funds by June 2009. Maintenance funds are to be allocated in 2008-09 and 2009-10 and are to be targeted to more than 60,000 dwellings92.

NRAS is also a key initiative of the Australian Government that seeks to provide an incentive for the construction of new affordable dwellings that are rented to eligible low and moderate income tenants at 20 percent below market rental rates. The incentive comprises:

  • a contribution from the Australian Government of $6,000 per dwelling per year for 10 years, in a refundable tax offset. Not for profit organisations receive the incentive as a payment; and
  • a contribution from the relevant state or territory government of $2,000 per dwelling per year for 10 years in the form of a payment or other in kind support.

The current scheme aims to provide incentives for 50,000 new dwellings between 2009 and 2012. The Australian Government has committed to expand the NRAS by a further 50,000 incentives in years five to 10.

Australian Government funding is also indirectly provided to community housing organisations through the capture of CRA, which is collected through a community housing tenants’ rent. In 2007-09, 946,641 people across the private and community housing rental sectors were eligible for CRA at a total cost $2.3 billion to the Australian Government93.

CRA is available to private tenants and tenants of community housing. Public housing tenants are not eligible for CRA. Given this, community housing tenants’ access to CRA is a distinct advantage of community housing arrangements as a social housing response. It is not necessary for community housing providers to own title to the properties to enable their tenants to access CRA. However, if the community housing provider is managing public housing stock, it is necessary for that provider to act as the landlord and to collect rent, as the payment of ‘government rent’ excludes the tenant from claiming CRA.

Rent assistance payments vary according to an individual's income levels, their household structure and the amount of rent they are paying. The table below outlines the rent assistance rates for a range of household types. It provides the maximum amount of CRA available to a household per fortnight, the minimum rent required to be eligible for CRA and the maximum fortnightly rent required to be eligible for the full amount of CRA.

Table 3.5: Current rates of Commonwealth Rent Assistance

Household type

Maximum amount of CRA (per fortnight)

Minimum fortnightly rent required to be eligible for Any CRA

Minimum fortnightly rent required to be eligible for maximum CRA

Single person $111.20 $98.80 $247.07
Single person in shared household $74.13 $98.80 $197.64
Couple $104.80 $161.00 $300.73
One of a couple separated due to illness $111.20 $98.80 $247.07
Couple who are temporarily separated $104.80 $98.80 $238.53
Single person with 1-2 children $130.48 $130.06 $304.03
Single person with 3 or more children $147.56 $130.06 $326.81
Couple with 1-2 children $130.48 $192.50 $366.47
Couple with 3 or more children $147.56 $192.50 $389.25

Source: http://www.facs.gov.au/internet/facsinternet.nsf/housing/rentassist.htm

Based on KPMG calculations and AIHW data, national average rent for community housing dwellings is $185 per fortnight (which includes varying degrees of CRA capture). Across the sector, there will be tenants who will be eligible for varying rates of CRA ranging from zero to the maximum amount. On average however, rent levels in the sector due to income based rent and discounted rent formulas do not facilitate the capture of the maximum rate of CRA. There are, however, an increasing number of providers that are moving to institute rent policies that capture 100 percent of CRA, consistent with state and territory policy directions. In this context, it is important to recognise that CRA maximisation strategies only maximise the capture of the amount of CRA for which a tenant is eligible.

State/ territory funding

There are a range of recurrent subsidies provided to CSHA / NAHA funded community housing providers by state governments. AIHW data suggests that the average net recurrent cost per unit of community housing to administrators (State Housing Authorities) in 2006-2007 was $1,06894. These subsidies may include:

  • state housing authority responsibility for maintenance costs (which may include programmed and responsive maintenance);
  • direct subsidies to cover the cost of head leasing properties from the private sector; and
  • procurement arrangements that enable the minimisation / subsidisation of administrative costs such as insurance and rates.

In addition, some jurisdictions do not charge community housing providers rent for head leased properties, or they may only charge a peppercorn rent. There are costs to government in the form of lost rent through such arrangements.

State and territory capital funding for community housing is provided through a range of means. It may be provided direct to providers in the form of grants, through capital funds targeted within state housing authority programs for the construction or acquisition of assets for the purpose of community housing provision, or a range of other mechanisms. The table below provides a snapshot of capital funding administered by state housing authorities to community housing programs in the 2007-08 financial year as follows: New South Wales received $64.01 million, Victoria received $12.26 million, Queensland received $24.15 million, Western Australia received $44 million and South Australia received $16.18 million. This may not contain the full value of capital funding to community housing programs in each jurisdiction.

Table 3.6: Snapshot of capital funding to community housing programs 2007-2008

NSW95 VIC96 QLD97 WA98 SA99
$64.01 million $12.26million $24.15million $44million $16.18million

Source: Various sources as referenced.

Furthermore, the table below broadly outlines some of the key community housing funding programs for a selection of jurisdictions.

Table 3.7: Snapshot of funding programs and initiatives for affordable housing

  Program Funding Term
NSW Affordable Housing Innovation Fund $49.8 million Three years to 2009-10100
SA Affordable Housing Innovations Fund $43 million (part funded from the sale of existing social housing assets)101 Ongoing
Vic Two funding rounds to support registered housing associations procure new supply $310 million that build on an initial allocation of $100 million102 2005 and 2007
WA State Housing Investment Program $210 million103 Four years from 2007/2008
QLD Capital Grants for the construction of Not for Profit Housing $150 million ($114million to Brisbane Housing Company)104 Since 2004

Source: Various sources as referenced

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3.5.5 International approaches

International approaches to social and affordable housing provision provide insight into future policy arrangements that could be applied in an Australian system. Significant research has been undertaken by AHURI into the applicability of international models to the Australian context, particularly in relation to the financing of new supply in affordable housing. For example, see Milligan et al, 2009105 and Lawson and Milligan 2007106. The tables below summarises some of the key characteristics of not for profit social housing provision in five countries.

Table 3.8: Overview of international affordable housing arrangements

Country Funding Arrangements Regulation and Accountability
United Kingdom New supply is funded through a debt/equity model whereby housing associations leverage private finance to grow107.
The United Kingdom’s regulatory model and rental framework that enables providers to generate sufficient rent revenue108 to support debt are reported to be key factors in encouraging private sector investment in social housing.
Generally highly regulated sector at national level
England was previously regulated and funded by the Housing Corporation.
Housing Regeneration Act (2008) established two new agencies:
  • Tenant Services Authority to regulate Social Landlords; and
  • Homes and Communities Agency Responsibility for land and funding for the deliver new housing and community infrastructure109.
Canada - Federal Providers have received government funding for the difference between their operating costs (including debt servicing) and their revenues, which are derived from rents. Cost sharing between the national and provincial governments for these operating subsidies has varied across programs and provinces.
Subsidies are separate from capital funding to support new supply and are directed towards operations not growth.
Debt finance has been used for growth but this does not comprise a significant component of sector.
Vehicles have been established to channel private investment (leveraged with government funds) into the provision of affordable housing for rent and/or sale110.
Accountability to the Canadian Government operates at three levels:
  • Independent audits are conducted annually to verify compliance with the terms and conditions of the agreements.
  • Annual performance reports must be provided to CMHC. The measures to be reported are limited to the amount and type of funding provided, the number of households assisted and the average incomes of those assisted that are targeted households.
  • Cyclical evaluations of specific programs are said to be required to assess their ongoing efficiency, effectiveness, appropriateness and any unintended consequences. In effect, this applies to new initiatives funded with savings, which have not occurred.
The Canada Mortgage and Housing Corporation Act is a federal act to incorporate the Canada Mortgage and Housing Corporation (CMHC). It outlines the general authority of the CMHC111.
Canada - Provincial Ontario
Under federal-provincial affordable housing agreements, the Ontario government has committed $622 million to match federal housing investment. The funding will be applied to repair and renovate 50,000 affordable homes and build 4,500 new dwellings112.
Service Managers administer the rent supplement program which is an affordability supplement paid to low income tenants or their landlords (social or private) to enhance the affordability of housing113.
Ontario
Social Housing in Ontario is regulated under the Housing Reform Assistance Act (2000) which facilitates the establishment of social housing corporations and prescribes the responsibilities for the efficient and effective administration of housing programs by service managers, which are the municipalities, agencies and boards charged with the administration of the regulations114. There are 47 Service managers administering social housing programs in Ontario.
Example Ottawa Community Housing – Ontario
In Ottawa, under the social housing administrative arrangements outlined above, the City of Ottawa subsidises 56 housing providers at a cost. In 2008, the cost of this was $109 million. Of this, $32.7 million comes from the federal government and $2.7 million from the provincially funded rent supplement program. The City of Ottawa directs $74 million to the program115.
Ottawa Community Housing is one funded organisation under the program. It is the largest community housing provider in Ottawa and provides 14,783 homes at both market and subsidised rental rates. Across its housing program, Ottawa Community Housing, 11 percent of tenant households are classified as ‘market households’116 Under the rent supplement scheme, Ottawa community housing in 2009 has budgeted to receive $6.9million in rent supplement income117.
Newfoundland
Under the federal provincial Affordable Housing Agreement between the Canadian and Newfoundland Governments, the province of Newfoundland will receive funding for an additional 700 affordable housing units118.
Newfoundland
The Housing Associations Loans Act sets the parameters under which the provincial government may make loans to housing associations. It prescribes that loans can only be made to housing providers that do not trade for profit and that are able to present a proportion of the capital for the loan119.
Netherlands Not for profit housing sector is financially independent and receives no direct government funding. It has however reached its current large size as a result of historical government investment in the sector and its tenants still receive a generous housing benefit. Government also assists NFP developers with access to sites at below market costs (through waiving developer charges) and there are other small subsidies available in some locations to stimulate supply. The sector is heavily financed by capital markets and it subsidises new investment in social housing through revenue and surpluses and asset sales.
Financial viability of housing associations is protected through the Central Public Housing Fund which is a government agency to which all housing associations pay a levy. The Central Public Housing fund uses these levies to respond to housing associations with financial issues.
The Guarantee Fund for social housing is a private body that guarantees housing association loans. This fund is supported by a government safety net.
Ministry of Housing, Spatial Planning and Environment has overarching responsibility for regulating housing associations. The Ministry’s key focus is the legitimacy of activities of housing associations.
Central Housing Fund is an independent agency operating on behalf of the Ministry of Housing, Spatial Planning and Environment to monitor the financial management of Housing Associations.
Central Housing Fund focuses on risk based assessment of associations and considers the adequacy of equity of organisations.
Internal supervision of associations by their respective boards.
Local housing covenants between housing associations and municipalities govern their operation and access to land.
Capital finance for housing associations is underpinned by national mortgage guarantee scheme which gives assurance to investors.
New Zealand Housing New Zealand Corporation provided funding to community housing organisations through loans via the Housing Innovations Fund. Loans were available to community organisations for the provision of affordable housing for rent or purchase. The fund is currently under review120.
Housing New Zealand has introduced a Housing Innovations Fund. In 2009/10, $20 million has been confirmed to this fund of which $15million is available for general affordable housing projects and $5million for Maori specific innovations121.
There is no specific regulation or performance management of community housing providers.
Community Housing Aotearoa Inc is a peak body established to provide community housing organisations with best practice guidance for community housing organisations.
Affordable Housing Enabling Territorial Authorities Act (2008) provides territorial authorities with powers to require developer contributions for affordable housing. It is expected that territorial authorities will develop local affordable housing policies to facilitate and align with this122.
United States The Low Income Housing Tax Credit scheme is the primary mechanism to increase the supply of affordable housing in the US. The scheme costs the US government US$5 billion dollars annually. Tax credits are allocated through competitive bid processes that occur twice each year. Organisations that are awarded tax credits raise development capital by selling tax credits to investors (usually to a syndicator operating on behalf of institutional investors). Investors in tax credits receive a dollar for dollar reduction in their tax bill for a 10 year period123.
The Unites State Government has historically had minimal involvement in the provision of affordable housing. The Home Program helps to expand the supply of decent, affordable housing for low- and very low-income families by providing grants to participating jurisdictions. It provides $2 billion nation wide to states and local governments.
HOME funds are awarded annually as formula grants to participating jurisdictions. HUD establishes HOME Investment Trust Funds for each grantee, providing a line of credit that the jurisdiction may draw upon as needed124.
Nor for profit housing projects are generally funded through ‘ring fenced tax credit schemes’. Some organisations providing high need housing may receive jurisdictional grants125
The United States also applies the Community Development Block Grant which is applied build capacity of organisations assisting lowing come households126
The Housing Tax Credit system is nationally legislated, however different states can overlay additional rules and requirements on the allocation of tax credits127
The Homes Statute sets out the legislative framework for the provision of funding through The Homes Program. Sub Part B of the statute requires no less than 15 percent of the funding is to be delivered to community housing organisations128.

Source: Various sources as referenced

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In addition to funding and regulatory support for non-profit housing, a range of mechanisms are in place to build the capacity of providers through information sharing and advice, building economies of scale and advocacy. Table 3.9 provides examples of international capacity building initiatives led by the non-profit sector and government bodies.

Table 3.9: Capacity building examples in the United States and United Kingdom

Country Advocacy Groups Advice and consultancy Information sharing
United States129 California Housing Consortium – small affordable housing advocacy group that is co-located with Non-Profit Housing, a ‘trade body’ for the sector. The group has close links with key players in the sector including providers, financiers and local government.
San Francisco Housing Action Coalition – Advocates for affordable housing in the San Francisco area.
California Housing Partnership Corporation – assists in the acquisition and preservation of low cost housing through the provision of advices and consultancy on tax credit finance. Co-located with Non-Profit Housing.
Enterprise Community Partners – works with housing non-profits and provides advice on tax credit finance.
Housing Partnership Network – a network of growth housing providers that meet to share ideas with members.
United Kingdom130 North West Housing Forum – advocacy and networking group for housing providers. Has strong links with politicians.
Association of Retained Council Housing – lobby group for the preservation of public (council) housing.
Northern Housing Consortium – provides research consultancy, training and procurement services to housing providers including councils, non profits and arms length management organisations (ALMOs).
G15 Group – advice, research and advocacy group, has membership of 15 large London housing providers.
Housing Quality Network – a national ‘ideas sharing’ network for social housing providers. Includes members from council, non profits and ALMOs.
Airport Group – has membership of 10 housing associations and is an information sharing forum for CEOs.

Source: Various sources as referenced.

3.6 Benefits of achieving a viable and sustainable community housing sector

A number of benefits of increasing the scale and capacity of the community housing sector emerged from the review of the literature and the stakeholder consultation undertaken for this project. These benefits are outlined in the following sections.

3.6.1 Access to additional sources of revenue

Many stakeholders perceive that a key advantage held by the community housing sector over the public housing system is its ability to access additional sources of income through CRA, the equity and financial resources of larger not for profit organisations, and other benevolent donations of cash and land.

The ability of not for profit providers to access CRA is often presented as a way in which providers can generate sufficient revenue surpluses to invest in growth, however this proposition has not been tested in any rigorous manner to date131. The financial analysis, presented in the following sections, suggested there is a material benefit from access to CRA, however at present, this is more strongly contributing to the viability of providers than being a significant contributor to their growth. It is also the case that CRA does not necessarily offer a distinct advantage over public housing, which receives its own operating subsidies under the NAHA and from state governments.

The ability of larger not for profit providers to access other sources of cash and capital can be a significant contributor to viability and growth. During the consultations, large not for profit providers, including aged care providers, indicated interest in growing their community housing portfolios, supported by their ‘asset rich’ organisations and existing strong cash flows.

A recent study of not for profit housing developers and providers in Australia suggested there could be more than 11 traditional ‘asset-rich’ service agencies and church organisations expanding into affordable housing. Examples include: Mission Australia; aged care providers such as UnitingCare Ageing NSW/ACT, CareHousing in Queensland and Southern Cross Care in WA; the Adelaide Benevolent Society; Access Housing in WA and STEPS (Southern Training Employment and Placement Solutions) in Tasmania132.

In addition, the greater autonomy from government, combined with the capacity to plan and undertake capital projects independently of government, may also open up further sources of funding which have not been readily available in the past. For example, local councils may be prepared to transfer funds raised through planning contributions or land that has been identified for affordable housing to an independent housing provider operating in their area, particularly where these contributions can be added to funds from other sources to enable viable projects to be undertaken. Such organisations could also attract from new sources such as local businesses seeking a philanthropic outlet.

In Victoria, for example, the housing associations initially provided a 25 percent contribution to their growth projects through contributing the organisation’s land, cash and philanthropic donations. However, increasingly, private debt is becoming the sole source of leverage for the Victorian growth providers133.

3.6.2 Access to additional capital subsidies and incentives

The ability of community housing providers to form partnerships to compete for funding under NRAS is also a key advantage of the sector in terms of its growth prospects. Building viable and strong community housing providers makes them more competitive in accessing capital funding incentives such as NRAS, and therefore growing the supply of affordable housing stock.

Housing Ministers have also earmarked a significant proportion (currently 75 percent) of the new social housing dwellings under the NBJP for the community housing sector133a.

3.6.3 Access to private finance

A leading benefit of community housing, as opposed to public housing, is its capacity to leverage other sources of finance and to generate its own growth over time. Well managed community housing providers, with a strong balance sheet, operating at scale, have a capacity to attract further private investment and grow.

In the consultations, stakeholders observed that there are several restrictions placed on public housing authorities in relation to raising debt (both public and private debt), which constrain their ability to leverage the value of their assets to generate growth in public housing stock.

In contrast, increasingly community housing providers, with a development focus and capacity, are accessing private finance. In Queensland, Brisbane Housing Company has accessed a loan facility to support its development role. In Victoria, the Housing Registrar has set a leverage target for development projects of 25 percent. Increasingly, debt is the sole source of leverage, and borrowings of the eight housing associations as at 30 June 2008 were $41.5 million, which represents a loan to value ratio of around five percent. It is expected that 2008-09 will see a much higher figure134.

3.6.4 Access to taxation incentives and procurement efficiencies

The potential for increased growth within the community housing sector is further enhanced by the benefits of GST savings and their scope for more cost effective housing procurement. In contrast, public housing authorities are subject to GST, and its procurement processes can be cumbersome and costly. Furthermore, community housing providers that have an in-house development capacity or are linked with a non-profit development vehicle will have the added benefit of avoiding developer profit margins, which is understood to represent at least 15 percent of the purchase price of new housing.

As the scale and size of community housing providers increase, there will be a greater ability to benefit from these procurement and operational cost efficiencies.

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3.6.5 Improved management of assets

There is some national statistical data collected on the management performance of the public housing and community housing sectors, however there are many limitations and qualifiers on the comparability of this data over time, between states and territories, and between the public and community housing sector. This is because of significant differences in policy and economic settings in different locations and differences in data collection methods. However, where relevant, some of these data results are presented as illustrative of certain issues, however caution is made in relation to using them as a tool for comparative performance evaluation between the housing sectors.

The declining condition of public housing stock, and its lack of suitability for purpose, has been well documented. Across Australia, of the 306,000 public housing dwellings, approximately 65 percent (or 259,000 dwellings) were built before 1980. In the late 1990s, some public housing estates were un-lettable, mostly because of their age, condition and reputation. The nation’s public housing stocks are ageing, however, maintenance, repair and replacement costs are increasing, and available resources for public housing are shrinking135.

The net recurrent operating costs per dwelling for public housing was $6,064 nationally in 2007-08, having increased from $5,556 in 2004136. There are also known to be significant maintenance backlogs to varying extents across all states and territories, although unfunded maintenance liabilities are not consistently and regularly measured or published137. Concerns have been expressed about the inadequacy of public housing maintenance in many states in Australia138. Tenant survey reports in Australia show a high level of dissatisfaction with the quality of public housing conditions and maintenance139.

Comparisons with community housing cost data is problematic because of the variation across the sector and differences in program and policy responses across jurisdictions. Recurrent operating costs per community housing dwelling in 2007-08 were $6,032 nationally, with the highest being in NSW with $8,176 and the lowest in the ACT at $3,969. The large variation in costs reflects the extent to which the public sector leases properties from the private sector which is subsidised by the state governments (as in NSW and Queensland), and the extent to which providers are responsible for asset management costs.

Nevertheless, it is generally understood, and was stated in the consultation process, that community housing providers which fully own the assets are in a more effective position to integrate asset management and housing procurement with their corporate directions and planning processes. These organisations are better able to manage and reconfigure their housing portfolio in response to changing client needs and investment opportunities through a combination of sale and acquisition or redevelopment, disposing of poorly performing and/or unsuitable stock where appropriate.

Further, asset management decisions can be linked to an organisation’s particular stock profile, rather than subject to the different set of management imperatives and priorities governing the larger and generally older stock portfolio of public housing. Community housing providers are well placed to exercise control over lifecycle planning and costs. Typically, because of their more limited scale and local focus, such organisations are more familiar with their property portfolios, and so are able to undertake appropriate, timely and effective maintenance.

3.6.6 Benefits from capital gains

Well managed community housing providers are able to take a responsive approach to changing housing needs by coordinating asset reconfiguration with market conditions to realise the greatest capital growth.

In contrast, public housing authorities are less well placed to do this because they cannot trade in their assets as readily without attracting adverse public reaction and perceptions about the sell-off of public housing.

3.6.7 Improved tenant outcomes

During the consultations, stakeholders consistently commented on the higher quality of service delivery, more localised responses, and more flexible and tailored supports that community housing providers can offer to their tenants. This improves tenant satisfaction and improves the stability and maintenance of tenancies. This high level of satisfaction of community housing tenants in terms of the quality of the housing, its location and amenity, was also found during a recent study that included focus groups with 16 community housing tenants across three Australian jurisdictions140.

Nationally, survey data reinforces these observations and, in February – March 2007, 71 percent of public housing tenants were either satisfied or very satisfied with the overall service provided by their state housing authority141. For community housing, in March – April 2007, nationally 82 percent of tenants were satisfied or very satisfied with the services provided by their community housing organisation142.

3.6.8 Better community outcomes

The ability of community housing providers to operate more locally and be connected to and engaged with their surrounding community has been noted in the consultations as an important benefit. In addition, it has been argued that the ability of community housing providers to broaden their tenant mix, including through expansion under the NRAS scheme, will enable the achievement of more mixed communities, with less concentrations of disadvantage in particular locations.

Some community housing providers that participated in the consultations also referred to a broader social and community development role that providers are undertaking. This ranged from improved place management, including garnering additional investment into public spaces, as well as linking tenants with broader support programs including employment and training services. However, national data collected by AIHW suggests that there are less providers offering personal, community living or employment related support to tenants (between 38 and 88 providers), as opposed to those offering tenant information, advice and referral services (384 providers)143.

3.6.9 Stimulus for better outcomes across the social housing system

A further benefit of increasing the capacity and scale of the community housing sector is the broader impact this can have on driving improvements in performance across the entire social housing sector.

Creating a viable and sustainable community housing sector, that operates alongside public housing, can offer increased choice for low income tenants and create more competition in housing provision, which in turn can increase efficiencies and improve performance across the sectors. To achieve these goals however, it will be necessary for fundamental and systemic reform to be considered that creates a ‘more level playing field’ between public and community housing providers, in terms of their performance expectations and their access to recurrent and capital funding. It would also need to be supported by the collection of better data and information on current and best practice operational costs, and comparative performance data across the two sectors.

These proposals are explored further in section 8 of this report.

Key findings
There are several major benefits of pursuing a strategy to increase the scale and capacity of the community housing sector to provide rental housing for low income people. A core benefit is to achieve some additional self-generated growth on top of government investment to increase the overall supply of low cost housing. Other benefits include the delivery of high quality services, greater choice for tenants, ability to leverage private capital and charitable contributions, more mixed communities, and innovation in housing delivery. A further important benefit is the improvement that can be generated across the entire social housing sector by enabling a viable and quality alternative to public housing.

 


Figure descriptions

Figure 3.1: Distribution of CSHA funded community housing stock as at 30 June 2008

This figure identifies the distribution of CSHA funded community housing stock across jurisdictions. They are as follows

  • NSW holds 15,397 dwellings
  • Vic holds 6,162 dwellings
  • Qld holds 6,550 dwellings
  • WA holds 4,474 dwellings
  • SA holds 4,538 dwellings
  • Tas holds 597 dwellings
  • ACT holds 708 dwellings
  • NT holds 93 dwellings

[ back to Figure 3.1 ]

Figure 3.2: Head leased and non head leased CSHA funded community housing stock

This figure highlights that the composition of private leases to stock owned or leased from a Public Housing Authority varies across jurisdictions.

  • In New South Wales, 5,672 stocks were head leased and 9,725 stocks were owned or leased from a Public Housing Authority.
  • In Victoria, 2,037 stocks were head leased and 4,125 stocks were owned or leased from a Public Housing Authority
  • In Queensland, 1,705 stocks were head leased and 4,845 stocks were owned or leased from a Public Housing Authority.
  • In Western Australia, 1,258 stocks were head leased and 3,216 stocks were owned or leased from a Public Housing Authority.
  • In South Australia, no stock was head leased and 4,538 stocks were owned or leased from a Public Housing Authority.
  • In Tasmania, no stock was head leased and 597 stocks were owned or leased from a Public Housing Authority.
  • In the Australian Capital Territory, 303 stocks were head leased and 405 stocks were owned or leased from a Public Housing Authority.
  • In the Northern Territory, no stock was head leased and 93 stocks were owned or leased from a Public Housing Authority

[ back to Figure 3.2 ]

Figure 3-3: Dwelling size CSHA funded community housing stock

Figure 3.3 shows there is a significant difference across jurisdictions in the proportion of stock of different sizes. Nationally, one third of community housing properties have one bedroom. Proportions of two and three bedroom properties are distributed evenly, with both being 30 percent of all stock. Remaining properties have four or more bedrooms.

[ back to Figure 3.3 ]


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  1. Hall, J. and Berry, M. (2004) Operating deficits and public housing: policy options for reversing the trend AHURI, Melbourne, Victoria.
  2. Additional households and dwellings are funded under programs other than the CSHA.
  3. For year ended 30 June 2007
  4. As at 30 June 2007. Includes permanent dwellings managed by funded/actively registered and unfunded Indigenous community housing organisations. Of these dwellings, 18,897 were managed by organisations administered by the state governments and 2,230 managed by organisations administered by the Australian Government.
  5. For year ended 20 June 2007
  6. Hall, J. and Berry M. (2007) Public Housing: shifting client Profiles and public housing revenues, AHURI, Melbourne Victoria.
  7. Public housing stock as at 30 June 1995 was nearly 365,000 dwellings and at 30 June 2005 it was 343,301 dwellings. Productivity Commission (1995) 1995 Report on Government Services, Australian Government, page 125 and Productivity Commission (2006), 2006 Report on Government Services, Australian Government, Table 16A.1
  8. Productivity Commission (2009), Report on Government Services, Australian Government, Table 16A.1
  9. Hall, J. And Berry M. 2007 Operating deficits and public housing: policy options for reversing the trend: 2005/06 Update, Australian Housing and Urban Research Institute, Melbourne.
  10. J Hall & M Berry (2007) Public housing: shifting client profiles and public housing revenues, Australian Housing and Urban Research Institute Final Report no. 108, AHURI, Melbourne, p.1.
  11. Calculation from available data
  12. Productivity Commission (1999) 1999 Report on Government Services, Housing Chapter, Australian Government, Canberra
  13. AIHW (2009) Community Housing 2007-08: CSHA National Data Report, p.6-7
  14. Yates, J. Berry, M. Burke, T. Milligan, V. and Randolph B. (2004) Housing Affordability for Lower income Australians: Plan, AHURI, Melbourne.
  15. Ibid
  16. Yates, J. and Gabriel, M. (2006) Housing affordability in Australia , AHURI, Melbourne, p2
  17. Analysis based on the application of the 30/40 rule of housing affordability
  18. Yates, J. and Gabriel, M. (2006) Housing affordability in Australia, AHURI, Melbourne, p.2
  19. Ibid
  20. AIHW (2007) Australia’s Welfare, 2007, Canberra, p.219.
  21. National Housing Supply Council (2009) 2009 State of Supply Report, Australian Government, Canberra.
  22. 2006 Census data quoted in CHFA, NAHA Discussion Paper: appendices, 2008.
  23. AIHW (2008) “Who receives priority housing and how long do they stay?”, Bulletin Number 63, p.1.
  24. AIHW (2009) Public Housing: Commonwealth State Housing Agreement National Data Report, p x.
  25. Ibid p ix.
  26. Ibid, p.6-7.
  27. AIHW (2009) Community Housing 2007-08: CSHA National Data Report, p.6-7 http://www.aihw.gov.au/publications/hou/ch07-08/ch07-08.pdf
  28. AIHW (1999) quoted in Gilmour, T and Bourke, E (2008) ‘The role of organisation structure, relationships and networks in building Australia’s community housing sector’, Paper for the 3rd Australasian Housing Researchers Conference, 2008.
  29. Data from NSW Federation of Housing Associations quoted in Bisset, H and Milligan, V (2004) Risk Management in Community Housing: managing the challenges posed by growth in the provision of affordable housing, AHURI, p.16.
  30. Data from NSW Federation of Housing Associations quoted in Bisset, H and Milligan, V, (2004) Risk Management in Community Housing: managing the challenges posed by growth in the provision of affordable housing, AHURI, p.16.
  31. Bisset, H and Milligan, V, (2004) Risk Management in Community Housing: managing the challenges posed by growth in the provision of affordable housing, AHURI, p.16.
  32. CHFA (2007) 2005-2006 Community Housing Mapping Project: Report on Findings, pp. ii.
  33. AIHW (2009) Community Housing 2007-08: CSHA National Data Report, p x.
  34. Ibid p 5.
  35. AIHW (2009) Community Housing 2007-08: CSHA National Data Report p x
  36. Ibid p 6
  37. Productivity Commission (2009) Report on Government Services, Australian Government, Tables 16A.1 AIHW (2009) Community Housing: Commonwealth State Housing Agreement National Data Report, p.6-7 AIHW (1999) quoted in Gilmour, T and Bourke, E, ‘The role of organisation structure, relationships and networks in building Australia’s community housing sector’, Paper for the 3rd Australasian Housing Researchers Conference, McNeils, S. (2003) Independent Living Units the forgotten Social Housing Sector, Presentation to Housing Futures in an Ageing Australia Conference Melbourne 10 November 2003, Aboriginal and Torres Strait Islander Communities Australia Community Housing and Infrastructure Needs Survey(CHINS) 2008, cited in AHURI (2009) Capacity of Indigenous Community Housing Organisations, RAP Issue 111, April 2009 AHURI, Melbourne.
  38. McNeils, S (2003) Independent Living Units the forgotten Social Housing Sector, Presentation to Housing Futures in an Ageing Australia Conference Melbourne 10 November 2003.
  39. McNeils, S. 2004 Independent Living Units the forgotten Social Housing Sector, AHURI Swinburne-Monash Research Centre, Melbourne pii
  40. McNeils, S. 2004 Independent Living Units the forgotten Social Housing Sector, AHURI Swinburne-Monash Research Centre, Melbourne p 4
  41. Ibid p5
  42. Ibid p8
  43. Ibid p8
  44. Ibid p9
  45. Ibid p9
  46. Beer, A. Faulkner, D. and Gabriel, M. (2006) 21st Housing Careers and Australia’s Housing Future: Literature Review. Research Paper 1. Australian Housing and Urban Research Institute.
  47. Ibid
  48. Ibid.
  49. Department of Housing and Works Government of Western Australia (2004); Department of Housing Queensland Government n.d; Department of Housing New South Wales Government (2001) and (2004).
  50. Department of Human Services, Victorian Government (2002); State Government Victoria (2004).
  51. State Government, South Australia (2005).
  52. Aboriginal and Torres Strait Islander Communities Australia Community Housing and Infrastructure Needs Survey(CHINS) 2006 cited in AHURI, 2009 Capacity of Indigenous Community Housing Organisations, RAP Issue 111, April 2009 AHURI, Melbourne
  53. Alternative figures show that there may be as many as 616 Indigenous community housing organisations managing 21,257 properties. Hall, J. & Berry, M. (2006) Indigenous Housing: Assessing the Long Term Costs and the Optimal Balance Between Recurrent and Capital Expenditure, Australian Housing and Urban Research Institute, Royal Melbourne Institute of Technology, AHURI RMIT-NATSEM Research Centre, May, Final Report No. 93.
  54. Aboriginal and Torres Strait Islander Communities Australia Community Housing and Infrastructure Needs Survey(CHINS) 2006 cited in AHURI, (2009) Capacity of Indigenous Community Housing Organisations, RAP Issue 111, April 2009 AHURI, Melbourne.
  55. Aboriginal and Torres Strait Islander Communities Australia Community Housing and Infrastructure Needs Survey 2006 (CHINS) cited in AHURI (2009) Capacity of Indigenous Community Housing Organisations, RAP Issue 111, April 2009 AHURI, Melbourne
  56. Hall, J. & Berry, M. (2006) Indigenous Housing: Assessing the Long Term Costs and the Optimal Balance Between Recurrent and Capital Expenditure, AHURI, Royal Melbourne Institute of Technology, AHURI RMIT-NATSEM Research Centre, May, Final Report No. 93.
  57. Ibid
  58. Ibid
  59. Comments provided by NSW to the project team on 4 August 2009.
  60. AHURI (2009) Capacity of Indigenous Community Housing Organisations, RAP Issue 111, April 2009 AHURI, Melbourne.
  61. Community Housing Coalition WA, Community Housing Providers Map http://maps.google.com.au/maps/ms?msa=0&msid=110154062129137840626.000459e4ba91382a5db4f, Accessed 24 July 2009.
  62. AIHW (2009). Community Housing: Commonwealth State Housing Agreement National Data Report.

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  63. CHFA (2007). 2005-2006 Community Housing Mapping Project: Report on Findings.
  64. COAG Fact Sheet on National Affordable Housing Agreement, sourced from www.coag.gov.au/ on 9th February 2009.
  65. Council of Australian Governments National Affordable Housing Agreement. Sourced from www.coag.gov.au/ on 9th February 2009.
  66. Australian Government (2008) National Rental Affordability Scheme – technical discussion paper, May 2008.
  67. Centre for Affordable Housing www.housing.nsw.gov.au and Milligan, V. Gurran, N. Lawson, J. Phibbs, P. and Phillips, R (2009), Innovation in Affordable Housing in Australia: Bringing Policy and Practice for Not for Profit Housing Organisations together, AHURI.
  68. NSW Government (2009) NSW Affordable Housing Guidelines, available at www.housing.nsw.gov.au/NR/rdonlyres/6A758B23-C2B4-4D5F-855C-6A82A3AB71F8/0/NSWAHGuidelines.pdf, accessed 28 July 2009, p 1
  69. Department of Housing of Qld (2006) One Social Housing System: A New Direction for Community and Local Government Managed Housing in the Smart State . Available at www.housing.qld.gov.au/programs/pdf/ch_direction_statement.pdf, accessed 28 July 2009.
  70. Queensland Government, Housing and Homelessness website, available at http://www.housing.qld.gov.au/programs/ch/support/longterm.htm, accessed 28 July 2009.
  71. Department of Housing WA, (2008) State Community Housing Investment Program, available at http://www.housing.wa.gov.au/, accessed 28 July 2009.
  72. Department of Housing WA, (2009) Community Housing Regulation Framework, available at http://www.housing.wa.gov.au/, accessed 28 July 2009.
  73. Milligan, V. Gurran, N. Lawson, J. Phibbs, P. and Phillips, R (2009), Innovation in Affordable Housing in Australia: Bringing Policy and Practice for Not for Profit Housing Organisations together, AHURI.
  74. Housing NSW (2008), Community Housing Regulation and Registration System, available at http://www.housing.nsw.gov.au/NR/rdonlyres/F7E938D8-9EE7-47BA-8BDD-2DF41..., accessed 28 July 2009.
  75. Housing Registrar, (2007) Our Regulatory Framework, available at http://www.housingregistrar.vic.gov.au/__data/assets/pdf_file/0017/10436..., accessed 28 July 2009.
  76. Office of Community Housing South Australia, http://www.communityhousing.sa.gov.au/site/page.cfm?u=101, accessed 28 July 2009.
  77. WA Department of Housing Regulation and Compliance Unit http://www.dhw.wa.gov.au/400_1716.asp, accessed 28 July 2009.
  78. QLD Department of Housing, http://www.housing.qld.gov.au/programs/ch/publications/index.htm, , accessed 28 July 2009.
  79. ARTD Consultants (2007) Proposal for a National Regulatory Framework for Affordable Housing.
  80. Ibid.
  81. Ibid.
  82. Productivity Commission, (2009), 2009 Report on Government Services, Australian Government, p. 16.8.

    91a. A Progress report to the Council of Australian Governments from Commonwealth, State and Territory Housing Ministers – Implementing the National Housing Reforms, November 2009 published by the Victorian Government Department of Human Services on behalf of the Housing Ministers Conference available at www.coag.gov.au p.26.
  83. FaHCSIA, http://www.fahcsia.gov.au/
  84. Productivity Commission (2009) Report on Government Services, Canberra.
  85. AIHW (2009), Community Housing: Commonwealth State Housing Agreement National Data Report.
  86. Housing NSW (2008) 2007-2008 Annual Report.
  87. Office of Housing Victoria (2008) Summary of Housing Assistance Programs http://www.housing.vic.gov.au/__data/assets/pdf_file/0018/343035/Summary..., accessed 28 July 2009.
  88. Note that figure includes community housing grants and subsidies. QLD Department of Housing 2007-2008 Annual Report.
  89. Funding primarily provided through the Social Community Housing Investment Program which provides $210m over four years from 2007-2008. Department of Housing, 2008-2009 Annual Report, available at http://www.housing.wa.gov.au/Files/HA_AnnualReport_0708.pdf , accessed 28 July 2009.
  90. Includes capital funds directed towards new construction and the value of public housing assets transferred to community housing, excludes funds for purchased properties, http://www.communityhousing.sa.gov.au/webdata/resources/files/SAHT_Annua..., accessed 28 July 2009.
  91. Milligan, V. Gurran, N. Lawson, J. Phibbs, P. and Phillips, R (2009), Innovation in Affordable Housing in Australia: Bringing Policy and Practice for Not for Profit Housing Organisations together, AHURI.
  92. Ibid
  93. Advice provided to the project team by Anthony Hardy, Victorian Housing Registrar, on 4 August 2009.
  94. Department of Housing WA (2008) State Community Housing Investment Program, available at http://www.housing.wa.gov.au/Files/comm_schip0903a.pdf, accessed 28 July 2009.
  95. Milligan, V. Gurran, N. Lawson, J. Phibbs, P. and Phillips, R (2009), Innovation in Affordable Housing in Australia: Bringing Policy and Practice for Not for Profit Housing Organisations together, AHURI.
  96. Ibid
  97. Lawson, J. and Milligan V. (2007) International Trends in Housing and Policy Responses, AHURI
  98. Milligan, V. Gurran, N. Lawson, J. Phibbs, P. and Phillips, R (2009), Innovation in Affordable Housing in Australia: Bringing Policy and Practice for Not for Profit Housing Organisations together, AHURI.
  99. Housing Benefit Allowance is an income supplement. It is the mechanisms that ensures affordability for the tenant – covers the difference between affordable rent for the tenant and the affordable property rent set as per social housing rent setting guidelines.
  100. Former Housing Corporation website, available at http://www.housingcorp.gov.uk/server/show/conWebDoc.16281, accessed 28 July 2009
  101. Lawson, J. and Milligan V. (2007) International Trends in Housing and Policy Responses, AHURI
  102. Ibid
  103. Ministry of Municipal Affairs and Housing, http://www.mah.gov.on.ca/Page6336.aspx, accessed 24 July 2009.
  104. Ministry of Municipal Affairs and Housing, Strong Communities Rent Supplement Program, http://www.mah.gov.on.ca/Asset952.aspx, accessed 24 July 2009.
  105. Social Housing Reform Act (200) http://www.e-laws.gov.on.ca/html/statutes/english/elaws_statutes_00s27_e..., accessed 24 July 2009.
  106. City of Ottawa http://www.ottawa.ca/residents/housing/social_housing/index_en.html, accessed 24 July 2009.
  107. Ottawa Community Housing, 2009 Operating Budget http://www.och.ca/site/images/stories/downloads/corporate/ochcbudgetfina...
  108. Ibid
  109. Canada Mortgage and Housing Corporation http://www.cmhc.ca/en/corp/nero/nere/2005/2005-11-25-0930.cfm
  110. Housing Associations Loans Act http://www.assembly.nl.ca/Legislation/sr/statutes/h12.htm#4_
  111. Housing New Zealand Corporation, http://www.hnzc.co.nz/hnzc/web/councils-&-community-organisations/counci..., accessed 24 July 2009.
  112. Housing New Zealand Corporation, http://www.hnzc.co.nz/hnzc/web/councils-&-community-organisations/counci..., accessed 24 July 2009.
  113. Housing New Zealand Corporation, http://www.hnzc.co.nz/hnzc/web/councils-&-community-organisations/counci..., accessed 24 July 2009.
  114. Gilmour, T. and Milligan, V. (2008) Stimulating Institutional Investment in Affordable Housing in Australia: Insights from the US, 3rd Australasian Housing Researchers Conference Melbourne June 18th to 20th 2008.
  115. US Department of Housing and Urban Development, http://www.hud.gov/offices/cpd/affordablehousing/programs/home/, accessed 24 July 2009.
  116. Gilmour, T (2009) Network Power: Building the Capacity of the Nonprofit Housing Sector, ENHR 2009 Prague Conference ‘Changing Housing Markets: Integration and Segmentation.
  117. Ibid
  118. Gilmour, T and Milligan, V. (2008), Stimulating Institutional Investment in Affordable Housing in Australia: Insights from the US, 3rd Australasian Housing Researchers Conference Melbourne June 18th to 20th 2008
  119. US Department of Housing and Urban Development Homes Statute, http://www.hud.gov/offices/cpd/affordablehousing/lawsandregs/, accessed 24 July 2009.
  120. Ibid
  121. Ibid
  122. Milligan, V. Gurran, N. Lawson, J. Phibbs, P. and Phillips, R (2009), Innovation in Affordable Housing in Australia: Bringing Policy and Practice for Not for Profit Housing Organisations together, AHURI.
  123. Ibid, p.73.
  124. Advice provided to the project team by Anthony Harding, Acting Director Housing Sector Development, Housing and Community Building, Department of Human Services, 21 July 2009.

    133a. A Progress report to the Council of Australian Governments from Commonwealth, State and Territory Housing Ministers – Implementing the National Housing Reforms, November 2009 published by the Victorian Government Department of Human Services on behalf of the Housing Ministers Conference available at www.coag.gov.au p.26.
  125. Advice provided by Anthony Harding, Acting Director Housing Sector Development, Housing and Community Building, Department of Human Services, 21 July 2009.
  126. Kenley, R, Chaizor, M, Heywood, C, and McNeilis, S (2009) Towards Best Practice Public Housing Management, AHURI Swinburne, p. 16.
  127. This includes administration costs, operating costs, depreciation costs, and the user costs of capital. This however excludes the costs of capital.
  128. Kenley, R, Chaizor, M, Heywood, C, and McNeilis, S (2009) Towards Best Practice Public Housing Management, AHURI Swinburne, p. 18
  129. Auditor General of Victoria (2004). Maintaining Public Housing Stock, in Auditor General Report. Melbourne, Government of Victoria, Australia. Auditor General of NSW (2005). Implementing Asset Management Reforms, The Audit Office of New South Wales.
  130. Kenley, R, Chaizor, M, Heywood, C, and McNeilis, S (2009) Towards Best Practice Public Housing Management, AHURI Swinburne, p.18.
  131. Milligan, V. Gurran, N. Lawson, J. Phibbs, P. and Phillips, R (2009), Innovation in Affordable Housing in Australia: Bringing Policy and Practice for Not for Profit Housing Organisations together, AHURI, p.118.
  132. AIHW (2009) Public Rental Housing 2007-08: CSHA National Data Report, Canberra, p.16
  133. AIHW (2009) Community housing 2007-08: CSHA National Data Report, Canberra, p.18.
  134. Ibid, p.p. 6-7.

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4. Viability and sustainability of the community housing sector 

4.1 Meaning of viability and sustainability

For the purpose of this analysis, viability for community housing providers is understood to mean ‘operational viability’, namely that their current revenues cover their existing costs of operation – in other words, that they ‘break-even’. This includes the costs of servicing any existing finance and also includes the value of any existing recurrent or capital subsidies that they receive from government. This means that a provider may be ‘operationally viable’ but not financially self-sufficient. The analysis of operational viability does not include an assessment as to whether an organisation’s existing cost structures are appropriate and sufficient for their purpose.

Sustainability is understood to be achieved when a community housing provider is operationally viable and is making adequate provision for asset maintenance and replacement, and earns a surplus. This surplus enables the accumulation of reserves of cash or capital that could be used to address emergency or unforseen events in the future that have the potential to make the provider unviable, and investment into growing organisational capacity and housing stock. This level of operation is achieved without reliance on additional recurrent or capital subsidies from government.

4.2 Viability of the community housing sector

Assessment of the overall viability of the sector is difficult as it is characterised by a high degree of variation and diversity in terms of provider type, function, tenant groups and rent policy. Data that is collected nationally by the AIHW is also limited to providers that received funding under the CHSA and therefore exclude aged care, disability accommodation and Indigenous housing providers that are part of the broader sector but are funded under different arrangements.

Operational viability is influenced by a combination of rental and other revenues derived through the provider’s activities and subsidies provided by government. The national data enables an analysis to be conducted of rental revenue against the providers’ operational costs. This enables a rudimentary assessment of whether, at a national level, providers are currently able to cover their costs through their rental incomes. It does not include the government or other subsidies that a provider may receive; therefore, in total, the providers may be operationally viable, however, it may suggest that they are to an extent reliant on subsidies to achieve operational viability.

The table below analyses AIHW data to provide an overview of the rental revenue and the costs associated with the provision of community housing.

Table 4.1: Community housing rents and the costs of housing provision
 

NSW

Vic

Qld

WA

SA

Tas

ACT

NT

Total

Total tenancy units 144 12,256 4,673 6,275 4,137 4,460 529 684 92 33,106
Total annual rent collected from tenants ($’000) 145 60,557 29,215 26,206 17,235 22,087 2,296 2038 n.a 159,637
Total annual rent collected per tenancy unit 146 4,940 6,250 4,180 4,170 4,950 4,340 2,980 n.a 4,820
Total provider recurrent costs per dwelling (excluding capital) 147 8,176 6,043 3,521 6,176 3,795 6,425 3,969 n.a 6,032
Annual surplus or shortfall between rent revenue and cost per unit 148 -3,236 207 659 -2,006 1,155 -2,085 -989 n.a -1,212

Source: analysis of data from AIHW (2009) Community Housing 2007-08: CSHA National Data Report, pages 22 and 24.

The AIHW data on revenue and costs, along with additional analysis, suggests that nationally, there could be a shortfall between rental revenues and providers’ recurrent operating costs, of just over $1,200 per dwelling per year. It is important to note that this figure represents an average for the entire sector and includes small providers with less than 50 dwellings. The shortfall is more pronounced in NSW, Western Australia, and Tasmania. It may suggest that, on average, providers are likely to be reliant on recurrent operating subsidies, from government or from private and charitable sources, to continue operating. In NSW, community housing consists of more than 5,000 leasehold properties, representing more than 50 percent of the national leasehold portfolio. The increase in operating cost due to leasing payments is reflected in the higher operating cost compared to the national average. The extent of a funding deficit will also differ across the states and territories based on the extent to which the sector manages public housing assets and therefore receives additional government subsidies to cover maintenance and other costs. In NSW, all maintenance costs and other costs are reflected in the operating cost and therefore the ‘funding gap’. The government separately pays for the maintenance costs on properties used as crisis accommodation, which are not long-stay community housing.

Rent policies and arrangements also vary across jurisdictions, particularly in relation to the treatment of CRA and this will be reflected in the data. In Victoria, Queensland and WA, 100 percent of CRA is included in rent. In South Australia and NSW, a proportion of CRA is included in rent as assessable income. In addition, the reliability of these observations is limited because of other methodological weakness in the data sources149.

In general, it was commonly observed by most stakeholders during the consultations that the capacity of the sector to generate surpluses and invest in growth is inevitably limited by its core social mission, which is to provide housing to low income and high need groups. This social mission, by its very nature, generates lower rental revenue and can involve higher operational costs.

According to the AIHW, as at 30 June 2008, 93 percent of community housing households in Australia were low income households150. Over half (53 percent) of the households for which complete rent and income details were known were paying more than 20 percent but not more than 25 percent of their income in rent. Nearly one-fifth (18 percent) of households were paying 20 percent or less and only 14 percent of households were paying more than 30 percent of their income in rent. Overall, community housing tenants retained almost three-quarters (74 percent) of their household income after rental payments.

In terms of operating costs, one study indicated that around 60 percent of not-for-profit housing organisations surveyed provide some sort of non-shelter assistance to their tenants in addition to the provision of housing. The majority of this assistance is information, referral and/or advice, and personal support151. In relation to other operating costs, this same study found that the operating costs for community housing providers may not reflect the full commercial costs of operating. This was attributed to: extensive use of volunteers for property management, tenancy support and maintenance; provision of concessions for charitable activities; lack of costs associated with debt (costs of capital); and lack of provisioning for future asset replacement through depreciation152. The findings of this survey should however be qualified by its sample size, as it comprised 613 organisations and had a 35 percent response rate.

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4.3 Barriers to viability and sustainability

4.3.1 Mainstream community housing providers

The key barrier to viability and sustainability of mainstream community housing providers (those funded under the CSHA/NAHA) that was identified through the consultations and the literature review is the limited revenue generating capacity of community housing providers, which is primarily constrained by rent policy and tenant allocation policies that are often set by state housing authorities.

Most community housing rent policies apply either an income based rent, set at an affordable proportion of income (usually between 25 and 30 percent), or a proportion of market rent (usually 74.9 percent of market rent) 153. The rent charged to a tenant may or may not capture the full amount of the tenant’s CRA entitlement. Section 4.2 provides an overview of rental revenues and operating costs of community housing provision and shows that nationally there was an average shortfall between rental revenue and operating costs for community housing providers.

Given the current tenant mix of community housing, comprising over 90 percent low income households, many of which have high and complex needs, community housing providers do not have the capacity to generate revenues sufficient to generate significant operating surpluses.

In addition to this, stakeholders who were consulted as part of this project indicated that where the organisation provides housing to tenants with high and complex needs, there are additional support costs borne by the organisation due to the effort required to sustain individual tenancies and the limited availability of outside support. There is limited information about the extent and costs of this additional tenancy support, however AIHW survey data suggests that 40 percent of community housing providers were able to offer support services to tenants154.

The small size of organisations was also identified through the consultations as a potential barrier to viability and sustainability. It has been highlighted that smaller organisations managing less than 20 dwellings (which currently make up 75 percent of providers) do not have the capacity to develop economies of scale which can assist in lowering the cost of procurement, reducing staffing costs per dwelling and providing other cost saving opportunities. However, research into the viability and sustainability of the community housing sector also suggested that access to volunteer labour may be a significant cost saving attribute of community housing providers, particularly those that are smaller in nature155. There may be no definitive answer to the question of the most optimal size of a community housing provider to achieve economies of scale, which can contribute to their viability and sustainability. The consultations with community housing providers undertaken for this review suggested that the ability and willingness of an organisation to achieve economies of scale will depend on its objectives (including whether it wishes to act more commercially and grow), its role and functions, and level of specialisation.

4.3.2 Aged care providers

Key barriers to the viability of aged care providers providing independent living units relate to the age and condition of stock, and the often related issue of higher vacancy rates than other social housing sectors.

The survey undertaken by AHURI’s Swinburne-Monash Research Centre in 2004 of aged care providers showed that 88 providers identified that more than 50 percent of their housing stock was aged between 20 to 40 years and a further 73 identified that more than 75 percent of their stock was in this age bracket. Further to this, nine organisations identified that more than 50 percent of their stock was aged over 40 years and nine identified more than 75 percent was over 40 years old156.

Of the independent living unit stock managed by organisations surveyed, 39 percent was identified as being below the current community standard for housing157. Estimations based on the survey results highlighted that potentially 34 percent of all independent living units require significant upgrade158. It is currently unknown whether aged care providers have the capacity to fund required upgrades.

Related to this, 49 percent of organisations providing independent living units had vacant properties at the time of the survey, equating to 4.6 percent of stock. The majority (39 percent) of these vacancies were attributed to the dwelling requiring major upgrade, and resulted in extended periods of lost rental revenue for providers159.

Aged care providers in the consultations undertaken for this review also referred to barriers they faced in achieving government recognition and funding support for independent living units as a key player in the community housing sector. Many providers are looking more closely at housing options to replace independent living units and attempting to meet burgeoning demand for community based living. However, on many occasions, they are forced to the middle and high ends of the market as there is no capital support from government. Aged and Community Services Australia (ACSA) has advised that the models that the progressive providers are interested in developing meet many of the agreed COAG community housing reform objectives, including the following.

  • Better social and economic participation for social housing tenants by locating housing closer to transport, services and employment opportunities – many not for profit providers have land in desirable areas such as activity centres. One ACSA member has a parcel of land valued at $15 million in the inner eastern suburbs of a capital city that could contain some social housing as part of a mixed development if there were capital funding available, but will not participate because of the current funding rules.
  • Reducing concentrations of disadvantage and improving social inclusion – models such as Apartments for Life stress mixed models in terms of age, frailty and income. Community facilities are included in all developments that are open to the local community. Such a development of 100 units might include around 30 social housing units. State community housing registration systems work against such developments as they often require some sort of caveat over all the land or winding up clauses.
  • Introducing contestability in the allocation of funds to encourage a new range of providers and to create diversity in the not for profit sector – aged care providers fit this criteria, and many operate in regional and rural areas. They are ideal housing providers where small numbers are required as they are well linked to the community.
  • Leveraging private capital – aged care providers leverage private finance now and therefore have experience and capacity to meet these requirements160.

4.3.3 Disability housing providers

Operational viability issues for disability housing providers have not been quantified. Research has shown that households where one or more people have a disability have significantly reduced income levels and a higher incidence of poverty. A study based on data from 1997-1998 and 2002 showed that, even in working families where one or more person had a disability, the incidence of poverty was significantly higher161. As with CSHA / NAHA funded community housing providers, there are tensions between affordable rent levels for tenants on low incomes and the revenues required to run a viable housing provider.

The cost of adapting existing dwellings, as well as the maintenance costs of housing for people with a disability, can be significantly higher. The latter can be due to, for example, the cost of replacing a dwelling which would be of a more durable nature, the fair wear and tear incurred through the use of mobility devices, or through tenant damage that may be caused by household members with a disability. The higher costs of maintaining housing for people with a disability could present viability issues to providers.

The stakeholder consultations suggested that these cost issues are manifesting themselves in significant barriers for people with a disability to gain access to mainstream community housing services. These include:

  • the difficulty housing providers face in providing the full support package for people with a disability due to limited resources, and therefore having to make alternate arrangements which may not be optimal. There needs to be an acknowledgement that there are additional costs associated with housing people with a disability;
  • those who most need housing support are often the most severely disabled and vulnerable who are generally in the lowest income bracket with little or no savings, and with a higher cost of living. They are also reliant on others to be an advocate for them to find suitable community housing;
  • most community housing stock that is available is old and not universally designed (for example, no disabled access, use of ramps, wider doors, installation of rails etc). This also applies for the aged population. Many community housing providers cannot afford to adapt mainstream housing stock for people with a disability (or the aged) and so this is essentially excluding people with a disability; and
  • people with a disability often need an extra bedroom for a carer, however, they cannot afford the additional rent that a two-bedroom unit could attract and therefore are not an ‘attractive’ tenant for community housing providers.

In addition, consultation undertaken with a specialist provider of services for people with an intellectual disability suggested that there are barriers for specialist providers to offer housing that suits the individual needs of people with a disability because of the additional costs. In this case, access to government capital support was limited to a standard construction price which would not cover the cost of building dwellings with ‘person centred’ and adaptable designs.

4.3.4 Indigenous community housing providers

As with mainstream community housing providers, limited rental revenue and size are key barriers to viability for Indigenous housing organisations. However, as outlined in section 3.3.2, these issues are significantly more pronounced for Indigenous community housing organisations as a result of higher levels of bad debts borne by organisations, remoteness and the rent setting policies of these organisations. In addition, the significant maintenance backlog identified in the Indigenous community housing sector is also a significant barrier to viability.

During the consultations undertaken as part of this project, Indigenous community housing providers identified that, while they receive subsidies from government, these subsidies have not increased over time to cover growing costs. Some providers pointed to the rules governing community housing funding programs as a barrier to accessing these funding sources, for example requirements to relinquish or reduce their ownership of property that they believe is Indigenous land, and the loss of autonomy over the use of that land.

4.4 Analysis of the viability of different provider types

Financial modelling was undertaken to analyse and make observations about the viability of certain types of community housing providers in Australia. The analysis considered their cash flows over a 25 year time horizon, including their annual returns or surpluses, in order to determine their current level of viability and sustainability.

As detailed in section 2.3 of this report, the current financial profile of three types of providers were analysed: medium tenancy managers, large tenancy managers and owners/developers. In total, the analysis sample includes 55 community housing providers and approximately 20,090 tenancies, representing 52 percent of the 38,519 total tenancies nationally in the mainstream community housing sector.

The key finding is that, on average162, medium and large tenancy managers and owners/developers are currently operationally viable and are generating varying levels of operating surpluses. However, their cash flow does not generate sufficient cash surpluses for significantly increasing growth capacity.

It is important to note that this analysis has limitations which are detailed in section 2.4 and Appendix B. Overall, these limitations mean that the findings only provide an average picture of these provider types across NSW, Victoria and South Australia. The applicability of the findings to the entire sector and to providers in other states and territories is limited.

4.4.1 Medium tenancy managers

Our analysis of the typical medium tenancy manager is a consolidation of relevant providers in NSW, Victoria and South Australia. These housing providers manage 67 percent of all tenancies in NSW, 23 percent of all tenancies in South Australia and 10 percent of all tenancies in Victoria.

The typical medium tenancy manager in the base case has an average of 202 tenancies under management. It is operationally viable, and generates an operating surplus of $38 per tenancy. The following table outlines the weekly operating revenues and costs per tenancy of a typical medium tenancy manager.

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Table 4.2: Revenues and costs for a medium tenancy manager (weekly per tenancy)
Revenues
Rent revenue $100
Other revenue  
  Interest, water charges, damages recovered, bad debts recovered, donations etc. $5
  Leasing subsidies and fees $47
  Commonwealth rent assistance 1 $25
Sub-total $177
Costs
Operating costs  
  Maintenance (including lifecycle costs) $(20)
  Salaries and administration $(24)
  Tenancy management $(11)
  Property development  
  Rates $(10)
  Insurance $(3)
  Bad debts $(1)
  Leasing and related costs $(70)
Sub-total $(140)
Operating surplus (deficit) $38
Tenancies (Est. FY2010) 202

1 NSW rental revenue provided to the investigation did not include CRA, therefore, CRA for NSW has been estimated using the Single no Children category as defined by Centrelink.

The following table highlights the operating cash flow of a typical medium tenancy manager at a portfolio level.

Table 4.3: Cashflow of medium tenancy managers at the portfolio level

Operations: Medium Tenancy Manager
 

Weekly
tenancy

All tenancies (‘000)

Year 1

Year 2

Year 3

Year 4

Year 5

NPV – 25yrs

Revenues              
  Rent revenue $100 $1,025 $1,066 $1,109 $1,153 $1,199 $16,247
  Other revenue $78 $810 $835 $861 $887 $915 $11,777
Expenses $(140) $(1,467) $(1,515) $(1,564) $(1,615) $(1,667) $(21,609)
Operating surplus/(deficit) $38 $368 $386 $405 $426 $447 $6,415
   

Assets

   

Year 1

Year 2

Year 3

Year 4

Year 5

NPV – 25yrs

Tenancies   202 203 204 205 206 233
Assets managed (market value; ‘000)   54,992 55,953 56,953 57,992 59,073 92,553
Assets owned (market value; ‘000)   - 272 558 859 1,175 16,169
Return on assets (all assets2)   0.66% 0.68% 0.69% 0.70% 0.72% 0.96%
Restricted cash fund (cumulative; ‘000)   $74 $151 $233 $318 $408 $3,561

2 It is acknowledged that the housing provider does not own the assets, however, ROA is a measure of operational efficiency regardless of ownership.

A typical medium tenancy manager generates an operating surplus of $368,000 in year one and has an operating margin163 of 20 percent. Although operationally viable, the five-year average return on assets of 0.7 percent suggests this provider type can only generate a low quantity of growth on the basis of its core operations, excluding capital grants and financing.

There are some important points to note about the policy and program environment in NSW, South Australia and Victoria which influence this financial profile.

  • The South Australia community housing sector does not currently collect 100 percent of CRA received by the tenant, rather varying levels of CRA is collected as part of the income based rent.
  • NSW data includes leasing subsidies that are provided to its tenancy managers for managing dwellings leased from the private sector. The majority of the leasehold properties are leased by providers from private landlords and all maintenance remains the responsibility of the landlord. Housing NSW reimburses community housing providers for any shortfalls between the lease payments they make to the landlord and the rental income they receive from tenants, as the latter is capped at the median market rent. Leasehold stock averages 28 percent of all stock under a typical provider or 57 dwellings and lease subsidies average $36 per week on a per tenancy basis ($1,849 per annum). The subsidy is estimated to cost the State $22.4 million per annum for all medium tenancy managers in the sector. It important to emphasise, however, that the lease subsidy is not a viability subsidy but rather an affordability subsidy – without it, the provider would have a smaller number of properties that are affordable for low income tenants and therefore could not provide the same level of housing assistance.
  • The NSW data provided includes the former Housing NSW management fee for all the management services that they provided and a support fee where external support services are procured for and on behalf of the tenants. However, since 1 July 2009, Housing NSW no longer pays any recurrent subsidy to providers for capital properties.
  • The NSW data for the sample year (2007-08) did not include collection of 100 percent of CRA. However, all CRA that is received by tenants will be included in the income stream for NSW community housing providers from 2008-09. Therefore, in order to reflect NSW’s initiative to capture the full amount of CRA received by a tenant and to recognise that income from CRA will be a key factor in the planned future growth of the sector, CRA has been estimated using the “Single, No Children” category as defined by Centrelink.

4.4.2 Large tenancy managers

The large tenancy managers analysed are all operating in NSW, therefore the results are primarily influenced by NSW’s policy environment. In particular, the results include leasing subsidies to its tenancy managers for managing dwellings leased from the private sector, as discussed in the previous section.

A typical large tenancy manager averages 817 tenancies under management. It is operationally viable and generates an operating surplus of $65 per tenancy. The following table outlines the weekly operating revenues and costs per tenancy.

Table 4.4: Revenues and costs for a Large Tenancy Manager (weekly per tenancy)
Revenues  
Rent revenue $100
Other revenue  
  Interest, water charges, damages recovered, bad debts recovered, donations etc. 12
  Leasing subsidies and fees 65
  Commonwealth rent assistance3 38
Sub-total $214
Costs  
Operating costs  
  Maintenance (including lifecycle costs) $(20)
  Salaries and administration $(26)
  Tenancy management -
  Property development -
  Rates $(13)
  Insurance $(4)
  Bad debts $(1)
  Leasing and related costs $(85)
Sub-total $(150)
Operating surplus (deficit) $65
Tenancies (Est. FY2010) 817

3 NSW rental revenue provided to the investigation did not include CRA, therefore, CRA for NSW has been estimated using the Single no Children category as defined by Centrelink.

The following table highlights the operating cash flow of a typical large tenancy manager at a portfolio level.

Table 4.5: Operating cash flow of the large tenancy manager

Operations: Large Tenancy Manager
 

Weekly
tenancy

All tenancies (‘000)

Year 1

Year 2

Year 3

Year 4

Year 5

NPV – 25yrs

Revenues              
  Rent revenue $100 $4,150 $4,332 $4,527 $4,730 $4,943 $68,630
  Other revenue $115 $4,839  $4,997  $5,164  $5,337  $5,515  $71,929
Expenses $(150) $(6,367) $(6,582) $(6,808) $(7,042) $(7,283)  $(95,219)
Operating surplus/(deficit) $65  $2,622 $2,747  $2,883  $3,026  $3,175  $45,339
   

Assets

   

Year 1

Year 2

Year 3

Year 4

Year 5

NPV – 25yrs

Tenancies   817 824 832 840 848 1,041
Assets managed (market value; ‘000)   $192,414 $196,710 $201,179 $205,827 $210,660 $360,346
Assets owned (market value; ‘000)   - $1,902 $4,185 $6,587 $9,115 $116,695
Return on assets (all assets4)   1.34% 1.34% 1.35% 1.35% 1.35% 1.41%
Restricted cash fund (cumulative; ‘000)   $524 $1,075 $1,653 $2,260 $2,896 $25,036

4 It is acknowledged that the housing provider does not own the assets, however, ROA is a measure of operational efficiency regardless of ownership.

This table demonstrates that a typical large tenancy manager generates an operating surplus of $2.6 million in year one and has an operating margin of 29 percent. A typical large tenancy manager has a five-year average return on assets of 1.4 percent. This suggests that this provider could generate moderate growth; consequently, a typical large tenancy manager has the potential to procure an additional 31 dwellings by year five without additional funding.

It is important to note some points about the analysis of large tenancy managers:

  • Leasehold stock comprises, on average, 42 percent of all stock or 343 dwellings. Lease subsidies provided by the Housing NSW average $48 per week on a per tenancy basis ($2,482 per annum). The subsidy is estimated to cost the state $22.3 million per annum for all large tenancy managers in the sector. It important to emphasise, however, that the lease subsidy is not a viability subsidy but rather an affordability subsidy – without it, the provider could not provide the same level of housing assistance.
  • Tenancy management costs were not provided in the data provided by NSW, however, tenancy manager costs are included in the ‘Salary and administration’ category. Our analysis suggests that a typical large tenancy manager is achieving a 26 percent saving on combined salaries, administration and tenancy management costs relative to a typical medium tenancy manager.
  • As for medium tenancy managers, the NSW data has been adjusted to include the receipt of 100 percent of CRA at the rate of the “Single No Children: tenant category.

4.4.3 Housing owners / developers

The housing owners / developers included in the analysis are all located in Victoria and are therefore influenced by the Victorian policy and operating environment. Victorian providers have significantly different organisational structures and objectives and are currently gearing for growth. The following points highlight the key limitations on the direct comparison of typical housing owners / developers to typical tenancy managers:

  • There is significant difference in the policy environment in Victoria that has been created specifically for asset-owning and developing organisations with a mandate to achieve growth and leverage, particularly when compared to tenancy managers in other states.
  • Housing owners / developers in Victoria do not receive any operating subsidies that tenancy managers may receive for managing publicly owned housing stock.
  • Housing owners / developers may have income from other businesses, such as those from transitional housing and development activities, which are not included in the analysis.

On average, the typical owner / developer owns 501 properties. The analysis suggests that this provider type is operationally viable and generates an operating surplus of $11 per tenancy per week.

The following table outlines the weekly operating revenues and costs per tenancy of a typical owner / developer.

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Table 4.6: Revenues and costs for a Large Tenancy Manager (weekly per tenancy)
Revenues  
Rent revenue $114
Other revenue  
  Interest, water charges, damages recovered, bad debts recovered, donations etc. $1
  Leasing subsidies and fees -
  Commonwealth rent assistance (included in rent)
Sub-total $115
Costs  
Operating costs  
  Maintenance (including lifecycle costs) $(14)
  Salaries and administration $(41)
  Tenancy management $(16)
  Property development -
  Rates $(18)
  Insurance $(12)
  Bad debts $(3)
  Leasing and related costs -
Sub-total $(104)
Operating surplus (deficit) $11
Tenancies (Est. FY2010) 501

Relative to typical medium and large tenancy managers, a typical housing owner / developer appears to have the lowest overall costs. However, there are limitations in comparing housing owners / developers to the tenancy managers as there may be significant differences in the cost base across these categories such as the lack of leasehold related costs.

Limitations in data availability have resulted in not being able to isolate ‘property development’ costs from the other categories. In order to derive costs associated with property development, it is assumed that the ‘salaries and admin’ plus ‘tenancy management’ cost per tenancy are the same as the weighted average of medium and large tenancy managers. This is $30, plus it is reasonable to add $5 for increased overheads. The remaining $22 per tenancy per week ($573,000 per annum) spent by the housing owner / developer is assumed to be on property development related costs (e.g. consultant fees, in-house skills, legal costs, contingencies, etc.). This result is consistent with qualitative evidence that housing owners / developers are investing in their property development functions and augmenting these capabilities to manage future growth. The following table highlights the operating cash flow of a typical housing owner / developer at a portfolio level.

Table 4.7: Cash flow of a housing owner / developer

Operations: Housing owners / developers
 

Weekly
tenancy

All tenancies (‘000)

Year 1

Year 2

Year 3

Year 4

Year 5

NPV – 25yrs

Revenues              
  Rent revenue $114 $2,901 $3,182 $3,417 $3,653 $3,893 $50,833
  Other revenue $1 $22 $24 $26 $27 $29 $355
Expenses $(104) $(2,702) $(2,950) $(3,153) $(3,353) $(3,557) $(45,160)
Operating surplus/(deficit) $11 $221 $256 $290 $326 $365 $6,029
   

Assets

   

Year 1

Year 2

Year 3

Year 4

Year 5

NPV – 25yrs

Tenancies   501 531 551 569 586 616
Assets managed5 (market value; $’000) - - - - - -
Assets owned (market value; $’000) $100,552 $106,781 $114,817 $122,699 $130,667 $244,395
Loan to Value Ratio (LVR) 1.2% 1.1% 1.0% 0.8% 0.7% 1.8%
Return on assets (all assets) 0.22% 0.24% 0.25% 0.26% 0.27% 0.56%
Restricted cash fund (cumulative; ‘000) $111 $190 $272 $354 $422 $3,638

5All housing assets are assumed to be owned by the Housing owner / developer.

This table demonstrates that currently the typical Victorian housing owner / developer has a relatively low operating surplus of $221,000 in year one and an operating margin of eight percent.

Although operationally viable, the five-year average return on assets of 0.3 percent suggests these providers can only generate a low rate of growth. It is important to note, however, that there is potential for the return on assets to increase as the housing owners / developers reach a more mature phase where revenues and costs are better matched. This can also be explained by the fact that other sources of income for transitional housing are excluded, and this activity enables providers to spread their costs. Many housing owners / developers may also experience lower operating surpluses due to incurring higher operating costs associated with asset management strategies, which includes improving the condition of public housing stock transferred to the housing owner / developer164.

Key findings
The financial modelling suggests that, on average, medium and large tenancy managers and housing owners / developers are operationally viable however, the extent to which they are able to achieve surpluses varies and, overall, is limited under current policy settings and funding models .

The financial modelling did not indicate that there is a clear minimum size for viability of these provider types. This is because optimal size will depend on a provider’s rental policies, tenant mix, core functions, and location. However, it suggests there are some cost efficiencies for large tenancy managers which have over 500 dwellings (relative to medium tenancy managers). Anecdotally, achieving this size also enables providers to employ skilled staff and/or procure expertise to grow including a property development role.

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4.5 Sustainability of community housing providers

The analysis suggests that, while medium and large tenancy managers and owners / developers are operationally viable, the extent to which they are able to generate surpluses is variable, and overall, is limited by current policy and program settings. The analysis of the typical providers also suggests that, on average, they are not achieving a level of return which optimises their sustainability.

Sustainability is attained when a community housing provider is operationally viable, is making adequate provision for asset maintenance and replacement, and earns a surplus. This surplus enables: the accumulation of reserves of cash or capital that could be used to address emergency or unforseen events in the future that have the potential to make the provider unviable; and investment into growing organisational capacity and housing stock. This level of operation is achieved without reliance on additional recurrent or capital subsidies from government.

It was not within the scope of this project to undertake benchmarking of the costs of housing providers. Nevertheless, a preliminary observation on the basis of previous research evidence is that the spending on asset maintenance and replacement costs by each of the provider types appears to be below estimates of reasonable expenditure that have been made in previous studies. For example, one study suggested that the planned and responsive maintenance provision for community housing should be $1,250 per dwelling per annum (in 2003 dollars), which is around $24 per dwelling per week (in 2003 dollars)165. There could be a sustainability issue if housing owners / developers are spending or provisioning $14 for maintenance lifecycle costs in 2007-08, however there is insufficient evidence available to substantiate this or to test whether this is appropriate for the quality and other characteristics of the assets. It is therefore important that robust cost benchmarking is undertaken as a priority for the future, as outlined further in section 4.6.2 below.

Lastly, the financial analysis suggests that the capacity of the typical providers to accumulate cash for their restricted cash funds is minimal, with total amounts over 25 years being $3561 million for medium tenancy managers, $25036 million for large tenancy managers, and $3638 million for housing owners / developers. This is insufficient to protect the organisations from any unforeseen, uninsured or catastrophic events and threats to their viability in the future.

Key findings
The three types of providers modelled are not achieving a level of return which optimises their sustainability. They have relatively low returns on assets over five years ranging from 0.3 percent to 1.4 percent. International benchmarks suggest that a more optimal return on assets for social housing providers is in the range of four to six percent. The capacity of these providers to accumulate cash is minimal and insufficient to protect the organisations from any unforeseen, uninsured or catastrophic events and threats to their viability in the future.

Robust cost benchmarking will be an important prerequisite to justifying an enhancement to the level of government investment in the community housing sector. It will provide some assurance that providers are efficiently managed and are maximising their own viability and self-generated growth.

4.6 Policy levers to enhance viability and sustainability

This section considers the potential impact of a range of policy levers on the viability and sustainability of community housing providers. These include levers to enhance revenues and levers to reduce costs. Financial modelling has been undertaken of a selection of these policy levers and the results of this analysis are also included. Lastly, the intangible costs and benefits and other implications of each policy lever are explored.

4.6.1 Revenue options

Rental policy

Overview

A key policy lever available to community housing providers and government is to alter rental policy to increase revenues.

There is a variety of approaches to rent setting in the community housing sector for tenants within different income ranges and locations. For the purpose of this study, an analysis was conducted of scenarios in which the typical providers could achieve an average rent per property, per week, that was set at various levels. This includes rental policies that are set at a cost-based rent, an affordable income-based rent, an affordable market-based rent and at a return-based rent166.

In addition to the range of assumptions that apply to the profiles of the typical providers outlined above (and provided in more detail in Appendix B), the analysis of the rental policy lever also assumes the following key assumptions:

  • the tenant mix of the typical providers are constant;
  • increases to rents are evenly distributed across the tenant types;
  • the current rent is set as a percentage of tenants’ income, at 25 percent;
  • any rental charge above 30 percent of a tenant’s income is not considered affordable;
  • the analysis of rent as a proportion of income excluded any CRA payment received by the tenant, therefore, if a tenant is eligible for CRA and the provider captures part or all of that payment, the full rent paid by the tenant may exceed 25 or 30 percent;
  • a market-based rent is 74.9 percent of the weighted average median rent of NSW, Victoria and South Australia; and
  • a return-based rent is targeted at achieving a return on assets of four percent167.

As all typical housing providers in this analysis are operationally viable and generating operating surpluses, applying a cost-based rent policy to the three provider types is not required as it would reduce rental revenue to cover costs only.

Results of the financial analysis for the medium tenancy manager

The following key results emerged from the analysis of changes to rent policy for medium tenancy managers.

  • Increasing rent as a percentage of income from 25 percent to 30 percent across all income groups does not provide the catalyst for significant growth capacity.
  • Market-based and return-based rents are not affordable for the current profile of very low, low or moderate income tenants of medium tenancy managers.
  • To achieve a return on assets of four percent and increase growth capacity equal to a return-based rent by year five, annual recurrent funding of $106 million would be required for all medium tenancy managers in the community housing sector.

The following table highlights in more detail the impacts to operational viability, growth capacity and affordability for tenants as a result of changing the rent policy of medium tenancy managers.

Table 4.8: Rent setting policy lever results – Medium Tenancy Managers
 

Base Case

Affordable Income-based rent

Affordable Market- based rent

Return-based rent

Operating viability

Rent revenue        
  Very low income households $67 $80 $161 $190
  Low income households $106 $128 $255 $302
  Moderate income households $150 $179 $359 $425
  Weighted average rent $100 $120 $239 $283
Other revenue $78 $88 $90 $90
Expenses $(140) $(140) $(140) $(140)
Operating surplus/(deficit) $38 $68 $189 $233

Growth capacity

Cumulative new stock in year 5        
  Per medium tenancy manager 4 8 23 29
  Nationally 240 480 1,380 1,740
Total stock for all medium tenancy managers in year 5 12,360 12,600 13,500 13,860
 Percent increase 2% 4% 11% 14%
Return on Assets (5-year average) 0.7% 1.2% 3.3% 4.0%

Affordability

Rent as a percent of income 25% 30% 60% 71%
Affordable rent Yes Yes No No
Less than 74.9% of mkt. rent Yes Yes Yes No

In terms of affordability for tenants, raising rents to 30 percent of tenants’ incomes increases the average rental charge by $20, to $120 per week. This results in an increase in operating surplus to $68. This rent policy also achieves a 1.2 percent return on assets and a four percent increase in total dwellings, and results in a total of 480 new dwellings for all medium tenancy managers or 12,720 in total community housing sector dwellings by year five.

An affordable market-based rent and return-based rent achieve relatively greater growth capacity, however, the rent charged to the typical tenants is not affordable. These rents as a percentage of tenants’ incomes are 60 percent and 71 percent, respectively. The table below outlines the funding requirement in order to achieve a target return on assets of four percent, while keeping rents affordable for tenants (at 30 percent of income).

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Table 4.9: Additional funding requirement – Medium Tenancy Manager
 

Affordable Income-based rent

Return-based rent

Gap

Rent revenue $120 $283 $163
Other revenue $88 $90 $2
Expenses $(140) $(140) -
Operating surplus/(deficit) $68 $233 $165
Additional annual funding per housing provider required to achieve a four percent return $1.8m
Total additional annual funding required to achieve a four percent return for the sector $106m

Large tenancy managers

The following key results emerge from the analysis of changes to rent policy for large tenancy managers.

  • Increasing rent from 25 percent to 30 percent of tenant income across all income groups does not provide the catalyst for significant growth capacity.
  • Market-based and return-based rents are not affordable for typical very low, low or moderate income tenants of large tenancy managers.
  • To achieve a return on assets of four percent and increase growth capacity equal to a return-based rent by year five, annual recurrent funding of $50 million is required for all large tenancy managers in the community housing sector.

The following table highlights the impacts to operational viability, growth capacity and affordability for tenants as a result of applying each rent policy to large tenancy managers.

Table 4.10: Rent setting option results -Large Tenancy Manager
 

Base Case

Affordable Income-based rent

Affordable Market- based rent

Return-based rent

Operating viability

Rent revenue        
  Very low income households $70 $84 $177 $157
  Low income households $105 $126 $264 $234
  Moderate income households $150 $180 $378 $335
  Weighted average rent $100 $120 $251 $223
Other revenue $115 $130 $133 $133
Expenses $(150) $(150) $(150) $(150)
Operating surplus/(deficit) $65 $100 $234 $205

Growth capacity

Cumulative new stock in year 5        
  Per medium tenancy manager 31 49 120 105
  Nationally 341 539 1,320 1,155
Total stock for all MTMs in year 5 9,328 9,526 10,307 10,142
  Percent increase 4% 6% 15% 13%
Return on Assets (5-year average) 1.4% 2.0% 4.5% 4.0%

Affordability

Rent as a percent of income 25% 30% 63% 56%
Affordable rent Yes Yes No No
Less than 74.9% of mkt. rent Yes Yes Yes Yes

Setting rents at 30 percent of tenants’ incomes increases the average rental charge by $20 to $120 per week and increases the operating surplus for the provider to $100. This rent policy also achieves a two percent return on assets and a six percent increase in total dwellings. This results in a total of 539 new dwellings for all large tenancy managers, or adds 9,526 dwellings to the community housing sector by year five.

Affordable market-based rent and return-based rent achieve relatively greater growth capacity, however, the rent charged to the typical tenants is not affordable, as rent is 63 percent and 56 percent of the average tenant’s income, respectively.

The table below outlines the funding requirement in order to achieve a target return on assets of four percent, while keeping rents at 30 percent of tenants’ incomes.

Table 4.11: Additional funding requirement – Large Tenancy Manager
 

Affordable Income-based rent

Return-based rent

Gap

Rent revenue $120 $223 $103
Other revenue $130 $133 $3
Expenses $(150) $(150) -
Operating surplus/(deficit) $100 $205 $106
Additional annual funding per housing provider required to achieve a 4.0% return $4.5m
Total additional annual funding required to achieve a 4.0% return for the sector $50m

Housing owner / developer

The following key results emerge from the analysis of changes to rent policy for housing owners / developers.

  • Increasing rent from 25 percent to 30 percent of incomes across all tenant groups does not provide the catalyst for significant growth.
  • Market-based and return-based rents are not affordable for typical very low, low or moderate income tenants of housing owners / developers.
  • To achieve a return on assets of four percent and increase growth capacity equal to a return-based rent by year five, a total annual recurrent funding of $44 million is required for all housing owners / developers in the community housing sector.

The following table highlights the impacts to operational viability, growth capacity and affordability for tenants as a result of applying each rent policy to the housing owners / developers in the base case.

Table 4.12: Impact of rent policy changes for owners / developers

Rent setting option results – Housing Owner/Developer
 

Base Case

Affordable Income-based rent

Affordable Market- based rent

Return-based rent

Operating viability

Rent revenue        
  Very low income households $81 $97 $146 $199
  Low income households $114 $137 $207 $281
  Moderate income households $166 $199 $301 $408
  Weighted average rent $114 $136 $205 $279
Other revenue $1 $1 $1 $1
Expenses $(104) $(104) $(104) $(104)
Operating surplus/(deficit) $11 $33 $103 $176

Growth capacity

Cumulative new stock in year 5        
  Per medium tenancy manager 107 122 172 235
  Nationally 1,177 1,342 1,892 2,585
Total stock in year 5 6,446 6,611 7,161 7,854
  Percent increase 21% 24% 35% 48%
Return on Assets (5-year average) 0.3% 0.8% 2.4% 4.0%

Affordability

Rent as a percentage of income 25% 30% 45% 61%
Affordable rent Yes Yes No No
Less than 74.9% of mkt. rent Yes Yes Yes No

Increasing rents to 30 percent of tenants’ incomes raises the average rental charge for tenants by $22 to $136 per week. This results in an increase in the provider’s operating surplus to $33. This rent policy also achieves a one percent return on assets and a 24 percent increase in total dwellings (totalling 1,342 new dwellings for all housing owners / developers or an additional 6,611 dwellings in the community housing sector by year five).

Affordable market-based rents and return-based rents achieve relatively greater growth capacity, however, the rents charged to the typical tenants are not affordable, with rent as a percentage of tenant incomes rising to 45 percent and 61 percent, respectively.

The table below outlines the funding requirement in order to achieve a target return on assets of four percent, while holding rents at 30 percent of tenants’ incomes.

Table 4.13: Additional funding requirement – Housing Owner/Developer
 

Affordable Income-based rent

Return-based rent

Gap

Rent revenue $136 $279 $143
Other revenue $1 $1 -
Expenses $(104) $(104) -
Operating surplus/(deficit) $33 $176 $143
Additional annual funding per housing provider required to achieve a 4.0% return $4.0m
Total additional annual funding required to achieve a 4.0% return for the sector $44m

Overall impact of increasing rents on sector growth

The table below outlines the results to the base case of increasing rents to 30 percent of tenants’ incomes (i.e. applying an affordable rent policy).

Table 4.14: Summary of the impact of increasing rents to 30 percent of income

Lever 1 – Summary of affordable rent results (Total community housing sector)
 

Ave rent
(weekly)

At Year five

New dwellings

Total dwellings

% Change

Medium tenancy manager $120 480 12,600 4%
Large tenancy manager $120 539 9,526 6%
Housing owner / developer $136 1,342 6,611 24%
Totals (excl. small/specialised providers and NBJP) 2,361 28,737 6%
Total CH dwellings (incl. small/specialised providers, NBJP6 55,600 45%

6 It has been assumed that the Nation Building and Jobs Plan (NBJP) will increase dwellings by 20,000, 75% of which will be in community housing.

7 The results do not include the impact of additional funding to achieve a ROA of 4.0%.

If small and specialised housing providers already in the community housing sector, and the new dwellings projected to result from the NBJP are included, the number of dwellings in the community housing sector is expected to total 55,600 dwellings, a 45 percent increase by year five.

Implications

Return based rents provide a clear financial reconciliation between the asset value and the commercial yield that a property owner could expect to receive for holding that asset. They offer a transparent approach to rent setting that is based on the achievement of the viability and sustainability of providers. They would also provide a stronger basis on which providers can achieve self-generated growth on top of title transfers, and other subsidies and incentives.

However, in the context of social housing, there are important implications that must be considered for tenants. Firstly, they may lead to the exclusion of those tenants for whom return based returns are unaffordable. In the context of the analysis, it is assumed that the benchmark return is approximately four percent which, as outlined earlier, would be considered reasonable for viability and growth. The modelling suggests that a return based rent exceeds affordability benchmarks for very low, low and moderate income tenants. It is therefore reasonable to assume that, if government wishes for return based rents to be levied and for low and moderate income tenants to be housed, a financial obligation to government (usually in the form of a rental subsidy or rebate) would arise, to ensure that providers can recover the shortfall between what their tenants can afford and the return based rent. Subsidies can and should be directed to those tenants for whom viable rents are not affordable to ensure they have equitable access commensurate with their need.

If the affordability issue outlined above were resolved, it is fair to say that significant practical benefits (albeit intangible in the context of this analysis) accrue as a result of return based rents. In particular, they provide more equitable assistance to tenants as the rental subsidy (however delivered) is not based on the idiosyncratic features of a tenant group but rather on the gap between affordable rental benchmarks and prevailing market conditions, and that impacts on socio-economic cohorts equally. Further, compliance may not be as intrusive (for the asset owner and tenant) as other approaches to setting affordable rents that require some form of means testing or intervention. Finally, return based rents can be targeted and applied to specific properties and locations without disadvantaging property owners or tenants.

Lastly, recurrent subsidies ensure that the tenant has adequate disposable income irrespective of location and/or amenity. This is a tangible outcome with intangible benefits and costs that include the following:

  • provide improved standard of living for those tenants who receive assistance;
  • may enable tenants to secure housing closer to places of employment and provide access to required amenities and services;
  • may provide additional certainty of revenue to the property owner and facilitate greater capacity leverage funds to invest and grow;
  • may act as a disincentive to less vulnerable tenant groups to change their situation (and improve their socio-economic condition); and
  • may create a mismatch between the rent commanded by the prevailing market conditions in certain locations (where the tenant is located) with the tenants’ ability to pay rents in alternative locations.

There are also a number of implications associated with lifting rents to 30 percent of tenants’ incomes, particularly for very low income tenants. It is understood that a 30 percent threshold represents a very high fixed cost for the most income-constrained households, and further assessment would be required to assess whether the after-housing income for lower income bands will meet budget or poverty line standards. This threshold is also a higher affordability benchmark than for comparable countries – only the United States and Canadian rent setting standards use 30 percent thresholds for very low income tenants and this includes the costs of utilities168.

Key findings

Community housing providers have limited scope to significantly increase their revenues through rent while maintaining affordability for their current tenants. Some additional viability and growth could be achieved by lifting average rents across the sector from 25 percent to 30 percent of tenants’ incomes. However, this could have a disproportionate impact on very low income tenants. Applying an average affordable market rent (set at 74.9 percent of market rent) or an average return based rent (securing a four percent return on assets for providers) would make rents unaffordable for the current average very low, low and moderate income tenant.

While the project brief focused on the identification of policies, programs and initiatives required to improve viability and maximise growth without the need for additional recurrent subsidies, the modelling suggests that a return based rent would be the most effective of the rental policy levers available to providers to achieve viability and sustainability, however this cannot be implemented within current policy and subsidy arrangements without significant affordability impacts for tenants.

It is important to separate the objectives of achieving rents that are viable and sustainable for the provider and affordability for the tenant. It is possible and desirable to achieve both objectives concurrently, through setting rents that are set at a rate that achieves viability and sustainability for organisationally efficient organisations (i.e. a four percent return), however the gap between the affordable level of rent and the return based rent would need to be funded by government.

Therefore, there is a funding gap between an affordable rent (30 percent of tenant income) and the achievement of an average return based rent. This amounts to approximately $199 million per annum for all medium and large tenancy managers and housing owners / developers. This provides some indication of the possible annual cost of an additional recurrent subsidy by government in order to achieve an international benchmark rate of a return on assets of four percent.

Other options for increasing rental revenue

The sector-wide statistics suggest that, nationally, the majority of community housing tenants (71 percent) pay less than 25 percent of their income in rent169. There would appear, therefore, to be capacity for many providers to increase rental revenues, and there are a number of potential options or levers that are available. The application of each of these levers will impact on the affordability of rents for tenants to the extent that any resulting increases in rent are not matched by a rental subsidy from government.

During the stakeholder consultations, many community housing providers expressed concern at the challenge providers face in increasing their rental revenues while continuing to fulfil their social mission. Others pointed to restrictions in altering their eligibility or rental policies that are imposed by state government agencies as a condition of transferring public housing stock or investing capital funding in the organisation. Many stakeholders and commentators also argue strongly that, as the provision of social housing is a public good, it is a government responsibility to provide subsidies that fill the gap between rental revenues that are set at an affordable level for those tenants most in need, and the level of revenue required to achieve viability for the community housing provider170.

Nevertheless, many community housing providers are pursuing strategies to increase their revenues with the objective of improving their viability and generating growth in housing stock. The following table summarises some key rental and eligibility levers, associated implications of pursuing them and examples of where they are being applied in practice.

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Table 4.15: Additional levers for increasing rental revenues

Lever Description Implications Examples
Rent policies
Capturing the full amount of CRA received by a tenant Charging eligible tenants 100 percent of the CRA that they receive, in addition to rent which is set at 25 percent of their other income. Impact will depend on providers’ current rent setting and eligibility policies. In some jurisdictions, providers already have put in place rent reform to capture the full amount of CRA received by a tenant.
May improve viability of providers and incremental growth.
Increased cost of CRA for the Australian Government.
Minimal impact on new tenants as rent difference is covered by CRA. Some existing tenants may lose some of the CRA they had previously retained as income support.
NSW and Victoria have in place a policy requirement for providers to collect 100 percent of the CRA that is received by tenants.
Tenant eligibility
Increase proportion of moderate income tenants Revenue increased by including a higher proportion of moderate income earning tenants Impact will depend on providers’ current rent setting and eligibility policies. Increased revenues for providers will improve viability and growth prospects. Possible reduction in capacity to meet the needs of low income (higher need) tenants. May be inconsistent with the provider’s social purpose and core mission.
Possible impact on charitable status of the organisation if primary purpose is no longer housing people on low incomes. May be challenging to implement in the context of the national commitment to establish common waiting lists for public and community housing under the NBJP.
City West Housing in NSW has an eligibility policy that includes less than 40 percent moderate income tenants and in 2007/08 ,39 percent of tenants were in this band. Tenants in the moderate income band are charged 30 percent of their income.171.
London Mallee Housing has an eligibility policy that includes moderate income tenants (who are also eligible for at least $1 in CRA). It also charges up to 90 percent of market rent depending on the capacity of the tenant to pay and the quality of the property172.

4.6.2 Cost options

Cost benchmarking

Overview

A policy lever or tool that can be used to encourage greater cost efficiency across the social housing sector, including public and community housing provision, is cost benchmarking.

The lack of robust comparable data on the operating costs of public and community housing is apparent within the existing national survey reports for the sectors, namely the AIHW’s Community Housing and Public Housing surveys, and the Productivity Commission’s Annual Report on Government Service Provision. Both studies repeatedly caution the use of the operating cost data in a comparative sense, across jurisdictions and over time, because of variation in the way that data is collected and the policy and program context in different states and territories. The fact that this data is difficult to interpret and utilise in a comparative sense strengthens the case for a better central resource to be available for community housing regulators and providers to assess whether operations are being delivered as cost effectively as possible and available government funding is being put to the best use.

The Social Housing Initiative of the NBJP included a national commitment to three actions that are relevant in this context:

  • improved tenancy management and maintenance benchmarks for social housing;
  • increased transparency through the establishment of consistent and comparable accounting and reporting standards across jurisdictions that allow clear and objective assessments of performance that meet public accountability requirements; and
  • social housing providers to be subject to independent prudential supervision to protect public investment in the sector.

The development of cost benchmarks at the national level will be essential to gain a better understanding of the performance of housing providers and the dissemination of best practice. As a matter of principle, it is important that such benchmarking cover core operational costs like tenancy management and asset maintenance. Consideration could also include inclusion of property development and acquisition functions, in order to assist providers to ensure that the use of any growth funds achieves the greatest benefit.

The benchmarking project should be undertaken nationally, either by FaHCSIA or by a new national regulatory body. Some principles for the benchmarking project include:

  • ensuring that initial mapping of existing costs covers or is representative of the full range of social housing providers in terms of cost drivers such as their functions, tenant mix, size and locations (high and low cost locations);
  • setting benchmarks is based on known drivers of cost, i.e. for providers in metropolitan, regional/remote locations, provider size, tenancy profiles (high and low needs tenants), dwelling size and/or function etc. However, there should not be different benchmarks simply on the basis of whether the housing is owned or managed by public authorities or not for profit organisations;
  • identifying the reasonable cost per dwelling of different functions based on comparable providers’ existing costs (e.g. set at the middle 50 percent of performers), which recognises existing good performance but will also require some providers with higher costs to work towards lowering them;
  • in setting benchmarks, private sector cost benchmarks (for example in asset management or property development) could also be considered as a point of reference where this is appropriate and reasonable to do so;
  • ensuring cost benchmarks are used for continuous performance improvement, are developed collaboratively with providers and shared freely with them; and
  • facilitating opportunities for sharing of information between providers about best practice which achieves or performs more highly than the cost benchmarks.

Implications

Robust cost benchmarking will be an important prerequisite to justifying any enhancement to the level of government investment in the community housing sector. It will provide some assurance that providers are efficiently managed and are maximising their own viability and self-generated growth.

A key implication from undertaking cost benchmarking for the whole social housing sector will be a better understanding of the current activities and performance of community and public housing providers.

The project will be complex given the high degree of variation and large number of providers across the sector, and could therefore be usefully undertaken in stages based on government priorities and future funding decisions.

A risk of the approach will be that providers perceive the exercise as a threat to their own managerial decision making and that it does not recognise the diversity and local variation of their particular mission or activities. Others may be concerned that it stifles innovation. To address these issues, it will be essential to use the information in a reasonable and flexible way, as guidance rather than prescription, and allow variations to the benchmarks where they can be clearly justified. It can also be argued that improving cost efficiency overall can also enable and facilitate innovation by freeing up and directing resources to higher priorities and to developing more effective services.

Key finding
Robust cost benchmarking will be an important prerequisite to justifying an enhancement to the level of government investment in the community housing sector. It will provide some assurance that providers are efficiently managed and are maximising their own viability and self-generated growth.

Lower cost procurement

Overview

There is a considerable lack of robust and comparable data as to the procurement costs of community housing. However, as with any cost related lever, lowering the cost of procurement for community housing providers could have a significant impact on their viability without impacting on affordability for tenants.

Key options to lower the cost of procurement for community housing providers include enhancing economies of scale – either by growing community housing providers to a point where they achieve a point of equilibrium or creating economies of scale through partnership models; and accessing products and services at lower costs by accessing, for instance, public housing procurement channels for maintenance items.

With regard to the former, as mentioned in section 4.2, there is no consensus on the optimal size of a community housing provider required to achieve economies of scale. However, it is recognised that very small organisations with less than 20 properties have constraints in terms of achieving economies of scale. It is also recognised that some jurisdictions, such as Queensland and South Australia, have provided opportunities for providers to amalgamate to improve their viability position. Queensland is proactively pursuing this approach through its policy direction to strengthen service delivery through the consolidation of providers. The Department has developed a manual to support agencies choosing to amalgamate and is actively supporting them in this amalgamation173.

Partnership arrangements have also been promoted in the community housing sector as a way that community housing providers can create economies of scale without losing their organisational identity. These partnership arrangements may include:

  • joint procurement practices for maintenance items, such as white goods or hot water services or administrative supplies;
  • joint tenancy management initiatives; for instance, in South Australia there are community housing organisations that only act as ‘holding agencies’. Under these arrangements, another agency undertakes the tenancy management functions on behalf of the holding agency;
  • cooperative arrangements where the sector establishes a ‘cooperative’ or another organisation that undertakes services or procurement on behalf of the member providers for a membership or service fee. The Comhouse Cooperative in South Australia operates as a maintenance insurance fund for member community housing providers. Members are required to pay their major maintenance provisions to the Cooperative who becomes responsible for funded maintenance requirements of its members. Members have a five-year, no draw down period during which they make payments to Comhouse before they can access the maintenance services; and
  • coalition arrangements or the formation of new entities. From a growth perspective, there are opportunities for organisations to come together as a coalition or to develop a parent company to draw them together and achieve economies of scale. This has been successfully achieved in NSW where five housing associations have come together to form the parent company Blue Community Housing Providers (Blue CHP) to facilitate the growth of the individual associations. The role of Blue CHP is to act as a housing developer. Already, this model has enabled access to funds for the acquisition of nearly 300 dwellings through direct grants and NRAS174.

Implications

The key implication of the above options for lowering the cost of procurement is that they are largely voluntary on the part of the community housing provider and often require capital outlay or the up-front investment of resources in negotiating partnership arrangements. For providers to grow and achieve economies of scale they must acquire additional stock. As the analysis of viability suggests, the capacity of providers to attain new assets through the reinvestment of surpluses is limited. Further, the following section demonstrates that large scale growth in line with the Housing Ministers' indicative targets would require additional government investment. Provider consolidation approaches are currently self selecting and may require significant incentive for providers to participate, or conversely, may only be considered by providers who are already in a poor viability position.

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4.7 Conclusions

The analysis of the viability and sustainability of the three provider types in the base case suggests that they are operationally viable, however the extent to which they are able to generate surpluses is variable, and overall, is limited in terms of the growth these surpluses can generate due to current policy settings and funding models. It also indicates that they are not achieving a level of return which optimises their sustainability.

Financial modelling of the application of rental policy levers demonstrates that community housing providers have limited scope to significantly increase their revenues while maintaining affordability for tenants and their existing tenant mix. Some additional viability and growth could be achieved by on average, lifting rents across the sector to 30 percent of tenants’ incomes. However, applying an average affordable market rent (set at 74.9 percent of market rent) or an average return based rent (securing a four percent return on assets for providers), would make rents unaffordable for the current profile of very low, low and moderate income tenants.

The implications of this analysis are that there is essentially a funding gap between an affordable rent (30 percent of tenant income) and the achievement of an average return based rent. This amounts to approximately $4 million per provider per annum, or $199 million per annum for the entire sector, resulting in an additional 5,705 dwellings by year five (115,167 nationally). This would be the annual cost of an additional recurrent subsidy by government in order to achieve an international benchmark rate of return on assets of four percent.

Other key actions recommended to improve the viability and sustainability of community housing providers, for inclusion in a national community housing strategy, are:

  • include in the national regulatory framework national rent setting guidelines to maximise the collection of revenue within the affordability limits for low to moderate income earners – this should include: collecting 100 percent of CRA, setting a minimum benchmark of 25 percent of tenant income for very low income tenants and 30 percent of tenant incomes for low and moderate income tenants, as well as other rent setting approaches that achieve higher rates of rental where this is within affordability limits;
  • establish guidelines for identifying the optimal tenant mix which meets the provider’s social mission as well as local housing demands, while encouraging providers to take on a greater number of tenants at the higher income level of each income band, and a small proportion of moderate income tenants; and
  • regulate the performance of medium and large social housing providers against financial and commercial performance standards, including cost and other performance benchmarks that encourage providers to adopt an optimal business model which achieves organisational efficiency and maximises their viability and sustainability given their mission, location, and tenant mix.
  1. AIHW, 2009, Community Housing: Commonwealth State Housing Agreement National Data Report, p.19 http://www.aihw.gov.au/publications/hou/ch07-08/ch07-08.pdf
  2. Ibid, p. 22.
  3. calculation based on available data.
  4. AIHW, 2009, Community Housing: Commonwealth State Housing Agreement National Data Report, p.24 http://www.aihw.gov.au/publications/hou/ch07-08/ch07-08.pdf
  5. Calculation based on available data.
  6. It is noted that, in relation to the AIHW data categories, some ‘dwellings’ may contain more than one ‘tenancy unit’, for example boarding houses, group homes and semi-institutional facilities. This would have the effect of reducing the recurrent costs per dwelling, and therefore the surplus may be greater or deficits may be less than presented. The effect may also be uneven depending on the number of relevant dwellings in each state. Data on page 6 of the same report suggests most of these dwellings may be located in Victoria, Queensland and WA. This analysis is also limited by the comparison and mix of AIHW’s administrative and survey data and by differences in data collection methods used across the states and territories. For example, the total tenancy units and the total annual rent collected may refer to a different set of properties. In NSW, the total tenancy units is the number of properties used to calculate the operating cost, sourced from administrative data, whereas the total rent collected is a figure collected from the annual data collection and its coverage is dependent on the response rate of the data collection.
  7. AIHW (2009) Community Housing: CSHA National Data Report 2007-08, Canberra, p.ix.
  8. CHFA (2007) 2005-2006 Community Housing Mapping Project: Report on Findings.
  9. Ibid, pp.73-74.
  10. Setting maximum rent below 74.9 percent of market rent enables providers to maintain tax exemptions as charitable organisations.
  11. Figure calculated using data in AIHW (2009) Community Housing 2007-08: CSHA National Data Report, Canberra, p.p. 6-7
  12. Ibid
  13. Ibid p 8
  14. Ibid p9
  15. Ibid
  16. Ibid
  17. Comments provided to the project team by Dredge, L of Aged and Community Services Australia, dated 20 July 2009.
  18. Beer, A, Faulkner, D, Gabrielle, M. (2006) 21st Century Housing Careers and Australia’s Housing Future, AHIRI, Melbourne
  19. Data from this analysis has been compiled on a weighted average basis, therefore, although there may be some housing providers that are not operationally viable, on the whole, the data received indicates operational viability.
  20. The operating margin is an indicator of operating performance and measures how much a company makes after operating costs for each dollar or revenue. Also known as ‘operating profit margin’ or ‘net profit margin’.
  21. The investigation has been advised by the Victorian Department of Human Services that the matching of capital grants by an organisation has been reduced from 25 percent to 15 percent as a consequence of consideration given to the condition of stock transferred (July 2009).
  22. Bissett, H (2003) Tenants contribution to social housing finance, Presentation to NSW Shelter Seminar, November 2003.
  23. A detailed explanation of how these rents are calculated is set out in Appendix A.
  24. The rate of return on assets is based on comments from Vivienne Milligan to the project team (provided 21 July 2009) that limited profit housing companies overseas often work to a target yield of four percent to six percent. This is seen as inducing business discipline and provides capacity/incentives for self generated growth.
  25. Advice provided by Milligan, V to the project team, 5 August 2009.
  26. AIHW, 2009, Community Housing: Commonwealth State Housing Agreement National Data Report, p.ix. http://www.aihw.gov.au/publications/hou/ch07-08/ch07-08.pdf
  27. Milligan, V. Gurran, N. Lawson, J. Phibbs, P. and Phillips, R (2009), Innovation in Affordable Housing in Australia: Bringing Policy and Practice for Not for Profit Housing Organisations together, AHURI, p.25. The following papers also articulate the ongoing need for government subsidies: CHFA (2008) The National Affordable Housing Agreement: A Community Housing Perspective, Canberra. National Affordable Housing Forum (2006) Achieving a National Affordable Housing Agreement: Background Paper 1 A National Approach to a National Problem, available at http://www.housingsummit.org.au/media/BP1c.pdf, accessed 21 July 2009.
  28. Ibid.
  29. Ibid.
  30. Department of Housing Strengthening Service Delivery Through Consolidation Information Sheet http://www.housing.qld.gov.au/programs/ch/consolidation/information_shee...
  31. Milligan, V. Gurran, N. Lawson, J. Phibbs, P. and Phillips, R (2009), Innovation in Affordable Housing in Australia: Bringing Policy and Practice for Not for Profit Housing Organisations together, AHURI.

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5. Growth of the community housing sector 

5.1 Recent growth of the sector

The community housing sector in Australia grew by over 20 percent between 2005-06 and 2007-08. State and territory governments have maintained or reduced public housing stock over the past five years in favour of increasing community sector managed housing. In many cases, state and territory governments plan to increase this transition from public to community housing and, under new federal financial arrangements, that trend may increase over the next few years.

A 2005-06 survey of 728 community housing providers found that just over half of all respondents had grown since 1999. This growth was most prominent amongst community housing organisations (when compared to welfare organisations, housing co-operatives and local councils) and had occurred through new developments (44 percent) and stock transfers (31 percent). Most growth was financed through capital grants (44 percent) and partnerships / joint ventures within the private sector or government (33 percent). Of those organisations surveyed, 67 percent would like to grow in the future175.

5.2 Barriers to growth

The table below provides an overview of the key barriers to growth identified through the research and the stakeholder consultations undertaken for this project.

Table 5.1: Identified barriers to growth
Barrier Description
Insufficient equity base to facilitate leveraging debt against assets The core barrier to growth identified by participants at the consultations was the lack of a sufficient equity base, in the form of title on properties, to enable providers to leverage debt against their assets.
Inadequate revenue base to support debt Income based rent policies for some providers do not provide sufficient income to sustain operations and thus constrain the capacity of organisations to sustain debt financing for growth.For viable and sustainable operations small operating surpluses can only support limited growth through debt176.
Lack of consistent policy backing and a regulatory framework Participants in consultations identified a changing policy landscape at the state and federal level as a barrier to growth because it constrained their ability to plan for the future.International examples where growth has been facilitated through debt demonstrate that financiers require some degree of certainty in the policy framework in which community housing operates. For instance in the UK government policy ensures consistent income to community housing providers through community housing rent policy that covers costs and housing support payments to tenants to maintain affordability.
Limited organisational capacity for some providers and economies of scale Some previous research into the required capacity of growth providers in the Australian context in 2004 identified the critical size for an organisation by identifying the core functions for a growth provider and the mix of skills and employees required to operate a viable and growing community housing organisation. Starting with this assumption a calculation was undertaken to identify the minimum scale of a 'growth' housing provider to be viable and cost effectively manage its commercial and operational risks. It suggested that 12.5 EFT staff are required, at a cost of approximately $1.25 million per annum, as the minimum level for a 'growth' housing provider undertaking all core functions. Employing industry benchmarks for the unit cost of these functions it concluded that the minimum size of a 'growth' housing provider that is capable of comprehensive risk management that would operate cost effectively is one with a portfolio under management of 500 dwellings and which is developing 25 additional dwellings each year177.

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5.3 The growth potential of provider types

Financial modelling was undertaken as part of this project to analyse and make observations about the growth potential of certain types of community housing providers in Australia. The analysis considered their cash flows over a 25 year time horizon, including their annual returns or surpluses, in order to determine their current capacity to grow through reinvesting surpluses and leveraging private finance.

As detailed in section 2.3 of this report, the current financial profile of three types of providers was analysed: medium tenancy managers, large tenancy managers and owners/developers. In total, the analysis sample includes 55 community housing providers and approximately 20,090 tenancies, representing 52 percent of the 38,519 total tenancies nationally in the mainstream community housing sector.

The key finding from this analysis is that, on average178, medium and large tenancy managers and owners/developers do not generate sufficient cash flow for generating significant growth capacity.

It is important to note that this analysis has several limitations which are articulated in detail in section 2.4. Overall, these limitations mean that the findings must be understood as providing at most, an average picture of these provider types across NSW, Victoria and South Australia. The applicability of the findings to the entire sector and to providers in other states and territories is limited.

5.3.1 Medium tenancy managers

The key finding from the analysis of medium tenancy managers is that nationally, they have the potential to procure a total of 240 new dwellings by year five, with total dwellings managed increasing by two percent to 12,360. By year 25, total dwellings owned or managed by all medium tenancy managers in the community housing sector will increase to 13,980, an increase of 15 percent.

The following chart illustrates the growth in total dwellings owned or managed by all medium tenancy managers nationally over a 25-year period.

Figure 5-1: Growth in medium tenancy managers housing stock over 25 years

Figure description

A typical medium tenancy manager generates an operating surplus of $368,000 in year one and has an operating margin179 of 20 percent. Although operationally viable, the five-year average return on assets of 0.7 percent suggests low growth (e.g. growth funded by core operations excluding capital grants and financing). Without additional funding, each typical medium tenancy manager has the potential to procure an additional four dwellings by year five.

Medium tenancy managers procuring new dwellings with their own positive net cash flow are assumed to own the dwellings. New dwellings begin building the provider’s balance sheet and result in an asset value of $1 million in year five and $16 million by year 25.

5.3.2 Large tenancy managers

The key finding from the analysis of large tenancy managers is that nationally, they have the potential to procure a total of 341 new dwellings by year five with total dwellings managed increasing by four percent to 9,328.

By year 25, the total number of dwellings owned or managed by large tenancy managers in the community housing sector will increase to 11,451, an increase of 27 percent. The following chart illustrates the growth in total dwellings owned or managed by all large tenancy managers nationally over a 25-year period.

Figure 5-2: Growth of large tenancy managers over 25 years

Figure description

A typical large tenancy manager is operationally viable and generates an operating surplus of $2.6 million in year one and has an operating margin of 29 percent. A typical large tenancy manager has a five-year average return on assets of 1.4 percent which suggests moderate growth. Consequently, a typical large tenancy manager has the potential to procure an additional 31 dwellings by year five without additional funding.

Similar to medium tenancy managers, it is assumed that large tenancy managers procuring new dwellings with their own positive net cash flow are assumed to own the dwellings. New dwellings begin building the provider’s balance sheet and result in an asset value of $9 million in year five and $117 million by year 25.

5.3.3 Owners / developers

The key finding from the analysis of housing owners / developers is that nationally, they have the potential to procure a total of 1,177 new dwellings by year five with the total dwellings owned increasing by 21 percent to 6,446.

On the basis of current cash flows however, nationally, total dwellings owned by housing owners / developers in the community housing sector at year 25 is 6,776, an increase of 28 percent. The greatest growth, however, occurs in the first five years and is primarily driven by the existing capital grant funding that has been received. The following chart illustrates the growth in total dwellings owned and total debt outstanding of all housing owners / developers nationally over a 25-year period180.

Figure 5-3: Growth in housing owners / developers over 25 years

Figure description

As detailed in section 5, several factors are impinging on the results for the Victorian owners / developers, largely because the growth figures include the significant capital funding being provided by the Victorian Government. This includes $310 million in growth strategy funding that built on the previous $100 million capital investment and an allocation of $72 million in new NAHA funding. It is also expected that $750 million of NBJP funding will be directed to the Victorian housing associations181.

The Victorian housing owner / developers are however in a capacity-building phase which has resulted in relatively high costs and low revenues. This has generated a lower operating surplus than expected- $221,000 in year one and an operating margin of just eight percent for a typical housing owner / developer. Although operationally viable, the five-year average return on assets of 0.3 percent suggests these providers on their own can only generate low growth. It is important to note, however, that there is potential for the return on assets to increase as the housing owners / developers reach a more mature phase where revenues and costs are better matched.

Based on the current situation, a typical housing owner / developer has the potential to procure an additional 107 dwellings by year five. This growth is directly attributable to existing capital grants182 and, to a lesser extent, private financing.

Nationally, housing owners / developers have the potential to procure 1,177 new dwellings by year five. Total dwellings owned by all housing owners / developers in the community housing sector increases to 6,446, an increase of 21 percent by year five.

Total financing183 is expected to total $197 million over 25 years, resulting in an average loan to value ratio of two percent - well below the Victorian target of 15 - 25 percent184. It is noted, however, that much of the current leveraging has been achieved through land, cash and philanthropic donations, which has not been included in the analysis. Further, assuming revenues and costs become better matched, there is potential for an increase in cash available to service debt, which would enable an increase in borrowings.

Key finding

All three provider types have a limited capacity to grow because of small operational surpluses. By year five: a medium tenancy manager was found to be able to generate a two percent increase in stock – an additional four dwellings; a large tenancy manager was found to be able to generate a four percent increase in stock, an additional 31 dwellings; and a housing owner / developer was found to be able to generate a 21 percent increase in stock, an additional 107 dwellings (which largely reflects the significant capital investment being provided by the Victorian Government rather than self–generated growth).

 

5.4 Policy levers to enhance growth

This section considers the potential impact of a range of policy levers on the growth prospects of community housing providers. These include both levers to enhance revenues and levers to reduce costs. Financial modelling has been undertaken of a selection of these policy levers and the results of this analysis are also included. Lastly, the intangible costs and benefits and other implications of each policy lever are explored.

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5.4.1 Revenue options

Expansion of NRAS

Overview

This project includes financial analysis of the impact to the growth capacity of the community housing sector from the inclusion of not only the current NRAS incentives but also an expansion of the NRAS program of an additional 50,000 incentives. Two scenarios were analysed as follows:

  • Scenario 1 – Scenario 1 assumes that 40 percent of the current remaining NRAS incentives will be awarded to the community housing sector for the procurement of new dwellings up to 30 June 2012. This scenario also assumes an expanded NRAS scheme with an additional 50,000 incentives beginning 1 July 2012 where 25 percent of the new incentives are awarded to the community housing sector for the procurement of new dwellings over five years to 30 June 2017. The total procurement schedule spans eight years.
  • Scenario 2 – In addition to the procurement of new dwellings by the community housing sector as outlined under Scenario 1, a further 30 percent of the dwellings procured by the private sector under the current NRAS scheme are managed by medium and large tenancy managers (split evenly between them). Under the assumption of an expanded NRAS scheme, the remaining 75 percent of incentives are awarded to the private sector but also managed by medium and large tenancy managers.

In addition to the assumptions that informed the construction of the base case (which are detailed in section 2.5 and Appendix A), a number of additional key assumptions informed the analysis of the NRAS policy lever. There are a range of NRAS funding arrangements available to housing providers that can be influenced by their relationships with financial institutions, participation in government funding programs, contributions by local government, partnership opportunities with the private sector, equity contributions, etc. Therefore, it was necessary to make broad assumptions based on the following:

  • An NRAS project will not be awarded an incentive if it is net cash flow negative. Therefore, it can be assumed that the project is at least break-even on a net cash flow basis (cash flow after operations, capital expenditure and financing).
  • All dwellings procured by the community housing sector will be 100 percent debt funded; as such, there will be no residual capital funding gap related to the procurement of the dwellings. There is also no capital funding contribution from government assumed as part of the financing package.
  • Debt funding is assumed to be secured by the NRAS dwellings themselves; therefore the new dwellings cannot be used to secure additional financing.

Other key assumptions applied were:

  • A sale rate of 80 percent has been assumed at the end of each 10-year eligibility period for both community housing sector owned and private sector owned stock185. Taking capital appreciation into consideration, it is estimated that this amount would be enough to repay all outstanding debt.
  • NRAS Round 1, where 3,500 new dwellings are expected to be available for rent during 2008–09, is assumed to be completed and therefore not included in the current remaining NRAS incentives. Remaining incentives for FY2010-FY2012 total 46,500 dwellings.
  • Under Scenario 1, large tenancy managers have been assumed to procure 20 percent of all NRAS community housing dwellings with housing owners / developers procuring the remaining 80 percent.

Results of the financial modelling for Scenario 1

NRAS Scenario 1 significantly increases the number of dwellings in the community housing sector. The table below highlights the schedule of additional dwellings procured.

Table 5.2: Additional dwellings procured under Scenario 1
NRAS procurement schedule – Scenario 1
 

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

  FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017
NRAS dwellings(CH procured) 6,204 6,204 6,204 2,497 2,497 2,497 2,497 2,497
Cumulative NRAS dwellings 6,204 12,408 18,612 21,109 23,606 26,103 28,600 31,097
Cumulative non-NRAS new dwellings 198 676 1,055 1,412 1,758 1,972 2,164 2,312
Total new dwellings 6,402 13,084 19,667 22,521 25,364 28,075 30,764 33,409

NRAS Scenario 1 is expected to add an additional 23,606 dwellings by year five (31,097 dwellings by year eight), which makes a significant impact to the number of dwellings in the community housing sector. Inclusive of non-NRAS dwellings, new dwellings in the community housing sector by year five will total 25,364 dwellings (33,409 dwellings by year eight).

However, at the beginning of year 10 (FY2019), the number of dwellings begin to drop due to the assumed 80 percent sell down rate. The chart below illustrates the impact of the new NRAS dwellings on large tenancy managers over 25 years.

Figure 5-4: Growth in large tenancy managers due to NRAS

Figure description

For housing owners / developers, there is a significant increase to community housing stock owned or managed over the first eight years totalling 2,263 dwellings per typical housing owners / developer or 24,893 nationally. Similar to the large tenancy managers, the number of dwellings begin to drop due to the assumed 80 percent sell down rate, beginning in year 10 (FY2019). The chart below illustrates the impact of new NRAS dwellings on housing owners / developers over 25 years.

Figure 5-5: Growth in housing owners/developers due to NRAS

Figure description

Overall, the following key points from the analysis of Scenario 1 emerge:

  • NRAS assumptions under Scenario 1 have the potential to increase the total number of dwellings in the community housing sector either owned or managed by large tenancy managers by 5,060 nationally, a 56 percent increase by year five.
  • Housing owners / developers have the potential to increase the total number of dwellings owned in the community housing sector by 20,064 nationally, a 377 percent increase by year five.
  • Inclusive of small and specialised housing providers as well as the NBJP funded dwellings, the number of dwellings in the community housing sector is expected to total 78,603 dwellings, a 105 percent increase by year five.
  • Assuming total incentives of $8,000 per annum per new dwelling, the cost to the Australian Government and states and territories for NRAS dwellings owned or managed by the community housing sector by year five under Scenario 1 is $142 million and $47 million respectively.
  • There is a risk of the sell down of dwellings at the end of each 10 year incentive program, which may significantly reduce the capacity of the sector to provide housing assistance.

The table below outlines the result of applying the NRAS Scenario 1 to the base case.

Table 5.3: Summary of results for NRAS Scenario 1
Lever 4 – Summary results of NRAS Scenario 1 (Total community housing sector)
 

At Year five

New dwellings

Total dwellings

percent Change

Medium tenancy manager (no change from base case) 240 12,360 2%
Large tenancy manager 5,060 14,047 56%
Housing owner / developer 20,064 25,333 377%
Totals (excl. small/specialised providers and NBJP) 25,364 51,740 66%
Total CH dwellings (incl. small/specialised providers, NBJP 1 78,603 105%
1 It has been assumed that the NBJP will increase dwellings by 20,000, 75 percent of which will be in community housing.

Scenario 2

In addition to the new NRAS dwellings procured by the community housing sector in Scenario 1, an additional 51,371 is expected to be managed by the sector increasing over eight years. The inclusion of additional dwellings to be managed under Scenario 2 makes an even more significant impact to the number of dwellings in the community housing sector.

The table below highlights the procurement schedule of Scenario 2 in the community housing sector.

Table 5.4: Growth resulting from NRAS Scenario 2
NRAS procurement schedule – Scenario 2
 

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

NRAS dwellings(CH managed) 4,672 4,672 4,672 7,471 7,471 7,471 7,471 7,471
NRAS dwellings(CH procured) 6204 6204 6204 2497 2497 2497 2497 2497
Cumulative NRAS dwellings 10,876 21,752 32,628 42,596 52,564 62,532 72,500 82,468
Cumulative non-NRAS new dwellings 198 676 1,055 1,412 1,758 1,972 2,164 2,312
Total new dwellings 11,074 22,428 33,683 44,008 54,322 64,504 74,664 84,780

Inclusive of the properties procured by the community housing sector assumed under Scenario 1, Scenario 2 adds an additional 52,564 dwellings by year five (82,468 dwellings by year eight). Adding non-NRAS dwellings, new dwellings in the community housing sector by year five totals 54,322 dwellings (84,780 dwellings by year eight).

For medium tenancy managers, there is a significant increase to community housing stock over the first eight years, totalling 427 new NRAS dwellings per typical medium tenancy manager or 25,620 nationally. Beginning in year 10 (FY2019), the number of dwellings begin to drop due to the assumed 80 percent sell down rate. The chart below illustrates the impact for medium tenancy managers of managing NRAS dwellings over 25 years.

Figure 5-6: Growth for medium tenancy managers under Scenario 2 over 25 years

Figure description

For large tenancy managers, there is an even more significant increase to the number of community housing dwellings. NRAS dwellings owned or managed over the first eight years total 2,905 dwellings per typical large tenancy manager or 31,955 nationally. Similar to the medium tenancy managers, the number of dwellings begin to drop due to the assumed 80 percent sell down rate, beginning in year 10 (FY2019). The chart below illustrates the impact of new NRAS dwellings on large tenancy managers over 25 years.

Figure 5-7: Total growth from NRAS Scenario 2 for large tenancy managers over 25 years

Figure description

Overall, the following key points from the analysis of Scenario 2 emerge

  • NRAS assumptions under Scenario 2 have the potential to increase the total number of dwellings in the community housing sector either owned or managed by medium tenancy managers by 14,700 nationally, a 121 percent increase by year five.
  • Large tenancy managers have the potential to increase the total number of dwellings in the community housing sector by 19,558 nationally, a 218 percent increase by year five.
  • As shown in Scenario 1, housing owners /developers have the potential to increase the total number of dwellings in the community housing sector that are housing owners /developer owned by 20,064 nationally, a 377 percent increase by year five.
  • If the existing small and specialised housing providers in the sector, and the projected additional dwellings generated through the NBJP are added, the number of dwellings in community housing sector is expected to total 107,561 dwellings, a 181 percent increase by year five.
  • Assuming total incentives of $8,000 per annum per new dwelling, the cost to the Australian Government and states and territories for NRAS dwellings owned or managed by the community housing sector by year five under Scenario 2 is $315 million and $105 million respectively.
  • Similar to Scenario 1, there is a risk of the sell down of dwellings at the end of each ten-year incentive program, which may significantly reduce the capacity of the sector to provide housing assistance. This risk would need to be considered as part of any long term strategy for the social housing sector.

The table below outlines the result of applying the NRAS Scenario 2 to the base case.

Table 5.5: Summary table of results of NRAS Scenario 2
 

At Year five

New dwellings

Total dwellings

percentage
Change

Medium tenancy manager 14,700 26,820 121%
Large tenancy manager 19,558 28,545 218%
Housing owner / developer (no change from Scenario1) 20,064 25,333 377%
Totals (excl.small/specialised providers and NBJP) 54,322 80,698 142%
Total CH dwellings (incl. small/specialised providers, NBJP2

107,561

181%

2 It has been assumed that NBJP will increase dwellings by 20,000, 75 percent of which will be in community housing.

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Implications

The policy lever to expand NRAS to generate growth in the community housing sector achieves the highest growth of all the policy levers analysed. Its implementation would have several implications for governments, the sector, and for tenants.

Advantages of expanding NRAS include:

  • Potentially achieving significant growth in the sector. This growth could be generated in terms of the number of properties under ownership, as well as the number of properties under management. Both components of growth will add to and improve provider cash flows over the duration of the program and in the longer term (to the extent that properties remain as affordable housing).
  • The scheme design and the level of incentive payments facilitate entry of a moderate income tenant group which can improve the cash flow position of the providers.
  • The scheme generates the formation of new alliances and partnerships between the private and not for profit sectors and stimulates private investment.

Some issues that have been raised for consideration in the implementation and future expansion of NRAS are the:

  • need to set targets for allocation of incentives to the community housing sector to ensure growth expectations are realised;
  • uncertainty regarding the actual take up of the sector of the incentives and associated capacity issues;
  • flat subsidy rates, which may not be sufficient to cover the costs of housing in high cost locations, larger dwellings (e.g. for families), or to house a significant proportion of lower income / higher need tenants;
  • need to clarify and provide certainty in relation to the application of charitable tax status to the provision of NRAS affordable housing dwellings as well as social housing, as the ambiguity is precluding charitable organisations from combining NRAS and NBJP funding due to the risk that they may lose their charitable tax status for their NBJP funded properties. This is because the ATO appears to be taking a narrow definition of charitable taxation status which must be ‘to relieve poverty’ and that the provision of social housing does not only assist those living in poverty186 and
  • need to clarify the effect of state regulatory requirements for potential NRAS applicants (Western Australian residential tenancy law requires tenancy managers to hold a real estate licence).

A particular concern that has been raised is the existence of a ‘funding gap’ for providers, between the incentives payments received under the NRAS and the revenue received from affordable rent, and the full cost of the housing. In the United States under its tax credits scheme, this funding gap is met through a range of funding mechanisms including ‘soft loans’ provided by state and local governments187. Commentators have argued that there is not a general policy for equivalent provision of funding support under NRAS, which means that providers will need to take on private debt to meet this gap. Their capacity to do so is also limited as most community housing providers have small surpluses and little assets to realise their value. There would therefore appear to be additional benefits that can be achieved through considering strategic linkages between NRAS and other available Commonwealth and state capital subsidy programs to increase the viability of projects and facilitate a greater proportion of lower income tenants in NRAS developments188.

The core concern raised with a strategy of relying on providers to fund the capital gap through leveraging private debt is that this will create tensions with providers taking on higher income earning tenants to strengthen cash flows at the expense of providing housing to those with greater needs. It is also likely to create the need for providers to ‘sell down’ housing at the end of the program, therefore reducing the quantity of stock available in the sector and requiring tenants to be re-housed. This raises a series of future risks for tenants, providers and government including reduced affordability outcomes, reputational risks and the costs of tenant relocations. A further concern has been raised that targeting incentives at asset rich organisations that can contribute their own equity (such as aged care or Indigenous organisations) has the potential to distort outcomes compared to needs and will not be sustainable in the longer term189.

Further consideration is also required regarding whether the community housing sector has the capability to manage a portfolio that is nearly three times larger than it is managing now within five years. Expert opinion provided in this project suggested that this is possible for housing owners / developers and large tenancy managers, however there would be additional capacity building requirements for smaller providers. There may also be significant opportunities for new housing providers of a sufficient scale and capacity to enter the sector, which would mitigate some risks of the existing providers not being able to increase in structure and capability within a few years, as long as this strategy is undertaken consistent with, and relative to, housing needs across the sector.

Key finding

The expansion of NRAS by 50,000 incentives would have the most significant impact on the growth of the sector of all of the policy levers modelled.

It is therefore suggested that consideration be given to implementing this policy lever, while including a strategy that targets new entrants into the community housing sector of a sufficient scale and capacity (i.e. aged care providers), and optimises the pooling of other capital grants for the community housing sector with NRAS incentives to enable a greater proportion of lower income tenants to be housed and a reduction in the likely sell down of properties after ten years.

 

Undertake some commercial activities

Overview

A further lever that can be used to increase revenues for a housing provider is to engage in some commercial activity that achieves market profits. The additional revenue that is generated from these activities is then directed to supporting its core social mission.

There are already some indications that Australian housing developers / owners are moving in the direction of undertaking some commercial activity. Brisbane Housing Company is diversifying into commercial land development and mixed use residential and commercial development with private sector developers. It also contracts out its development expertise to the housing market. The proceeds of these activities subsidise its core affordable housing mission. This strategy was explicitly determined to overcome the viability and growth constraints faced by the organisation due to limited rental returns190. Community Housing Canberra (now CHC Affordable Housing) has as part of its business model to undertake commercial development of moderate income housing, including the market sale of affordably priced properties, with development proceeds being reinvested into affordable rental housing191.

Other entities, such as City West Housing in Sydney, during the stakeholder consultations expressed interest in expanding into market rental opportunities to increase its revenue and growth prospects but pointed to taxation and government policy barriers to pursuing these strategies.

In the United Kingdom, there has been a significant increase in social housing providers redeveloping and selling property to increase their surpluses. In 2000, the sector wide surplus from asset sales was £109 million. In 2008, this rose to £577 million. A third of all housing associations reported surpluses over £1 million from asset sales in 2008192.

Implications

The experience of not for profit, socially oriented organisations undertaking market activities in Australia is not new and is currently being considered by the Henry Review of the Future of Australia’s Taxation System and the Productivity Commission review of the contribution of the not for profit sector. The key issues have concerned the impacts that commercial activities have on competitive neutrality and the overall charitable status of organisations and their associated taxation exemptions193. Currently, if an entity’s purpose is solely charitable, it can take other activities that are purely incidental to, and in advancement of, its charitable purpose, including commercial activities194.

The Henry Review of Australia’s Future Taxation System is considering the taxation regime that applies to not for profit organisations including whether commercial activities undertaken by not for profit organisations should affect their tax exempt status. The Productivity Commission is also presently enquiring into whether there are unnecessary impediments for the not for profit sector, and to examine the tax treatment of the sector and the impact of current arrangements on competitive neutrality195.

In the interests of the growth of the sector and the achievement of policy goals for the social housing sector, it would be beneficial if this tax status were retained and clarified, and the government encouraged registered providers to undertake some supporting commercial activities.

Key finding

While financial modelling of the impact of undertaking some commercial activities for market profits was not within the scope of the project, it is considered that this option has potential in terms of its ability to increase the sustainability and growth prospects for providers. It is being used by Brisbane Housing Company and is a key growth strategy in the United Kingdom.

It is therefore suggested that further consideration be given to implementation of this policy lever by encouraging providers to undertake a limited range of activities to achieve market profits, for example limited market sales of development properties, by removing the current taxation related barriers (the risk of losing charitable taxation status) and instituting regulatory oversight of these activities.

 

5.4.2 Capital options


Title transfers

Overview

Transferring title in public housing stock to community housing providers is a key policy lever being used by some states and territories to increase the scale and capacity of community housing providers to improve their viability, sustainability and growth prospects.

For the purpose of this study, financial modelling was undertaken of the impacts of transferring the title in the public housing stock that is currently managed by the medium and large tenancy managers in the base case. The analysis assumed that the owners / developers in the base case already own the title to their housing stock.

In addition to the assumptions that informed the construction of the base case (which are detailed in section 2.5 and Appendix A), a number of additional key assumptions informed the analysis of the title transfer policy lever:

  • leasehold properties are not transferred to the tenancy managers;
  • revenues and costs associated with leasehold properties are ring-fenced from financing arrangements as the assets cannot be used as security for borrowings;
  • all properties owned by the states will be transferred with minimal or no cost;
  • caveats on title transfer will not prohibit the procurement of private financing;
  • the current financial climate limits lending to shorter-term facilities196 that reduce risk for lenders. Based on preliminary market sounding a five-year refinancing facility, which repays 50 percent of its principle by the refinancing period, has been assumed; and
  • key tests for financial institutions are the loan to value ratio (LVR) and interest coverage ratio. Based on preliminary market sounding, a maximum LVR of 50 percent and a minimum income contingent repayment (ICR) of 2x have been assumed.

Results of the financial modelling for medium tenancy managers

Under the title transfer lever, a typical medium tenancy manager will be given title to 145 dwellings. The typical medium tenancy manager will still manage 57 leasehold dwellings, but will not hold title to them.

The key limitation to the amount borrowed is the extent that providers have operating surpluses to service the debt. Over 25 years, a typical medium tenancy manager has the potential to procure $14 million in financing from financial institutions ($863 million for all medium tenancy managers).

Although a medium tenancy manager is viable at current revenue levels, the operating surplus is not significant enough to achieve an LVR greater than four percent. Over five years, the debt financing modestly increases total community housing sector dwellings owned or managed by medium tenancy managers from 12,360 under the base case to 12,600 nationally, an increase of two percent. The following table highlights the impacts to assets, financing and growth capacity as a result of applying title transfer to the medium tenancy manager.

Table 5.6: Impact of title transfer on the medium tenancy manager
Impact of title transfer – Medium Tenancy Manager
 

Base Case

Title transfer

Assets
  Total under management only (typical MTM) 202 573
  Total titles transferred (typical MTM) - 145
Financing
  Total financing over 25 years (typical MTM) - $14m
  Total financing over 25 years (all MTMs) - $863m
  Loan to Value Ratio4 - 4%
Total new stock in year 5    
  Per medium tenancy manager 4 8
  Nationally 240 480
Total dwellings in community housing in year 5 12,360 12,600
Percent increase 2% 3%

3Leasehold properties are not transferred.
4LVR is based on properties transferred and owned by the housing provider only (excludes leaseholds) over 25 years, on a consolidated entity bases.

By year 25, all medium tenancy managers have the potential to procure over $863 million (nominal) in financing and increase their stock by 28 percent to 15,480 new dwellings nationally. The graph below illustrates the level of housing stock and debt outstanding over 25 years for all medium tenancy managers in the community housing sector.

Figure 5-8: Total medium tenancy manager growth from title transfer over 25 years

Figure description

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Results of the financial modelling for large tenancy managers

Under the title transfer lever, a typical large tenancy manager will be given title to 473 dwellings. The typical large tenancy manager will still manage 344 leasehold dwellings, but will not hold title to them.

Over 25 years, a typical large tenancy manager has the potential to procure $83 million in financing from financial institutions ($916 million for all large tenancy managers). The key limitation to the amount borrowed is the extent to which providers have operating surpluses to service the debt. Although a large tenancy manager is viable at current revenue levels, the operating surplus is not significant enough to achieve a loan to value ratio greater than seven percent.

Over five years, the debt financing modestly increases total community housing sector dwellings owned or managed by large tenancy managers from 9,328 under the base case to 9,614 nationally, an increase of three percent. The following table highlights the impacts to assets, financing and growth capacity as a result of applying title transfer to large tenancy managers.

Table 5.7: Impact of title transfer – Large Tenancy Manager
Impact of title transfer – Medium Tenancy Manager
 

Base Case

Title transfer

Assets
  Total under management only (typical LTM) 817 3445
  Total titles transferred (typical LTM) - 473
Financing
  Total financing over 25 years (typical LTM) - $83m
  Total financing over 25 years (all LTMs) - $916m
  Loan to Value Ratio6 - 7%
Total new stock in year 5    
  Per medium tenancy manager 31 57
  Nationally 341 627
Total dwellings in community housing in year 5 9,328 9,614
Percent increase 4% 7%

5Leasehold properties are not transferred.
6LVR is based on properties transferred and owned by the housing provider only (excludes leaseholds) over 25 years, on a consolidated entity bases.

By year 25, all large tenancy managers have the potential to procure over $916 million (nominal) in financing and increase their stock by 47 percent to 13,167 new dwellings nationally. The graph below illustrates the level of housing stock and debt outstanding over 25 years for all large tenancy managers in the community housing sector.

Figure 5-9: Large tenancy managers total housing stock and outstanding debt over 25 years

Figure description

Overall results of title transfers

The analysis suggests that transferring the title in the public housing stock that is currently managed by medium and large tenancy managers to those providers would have the following financial impacts.

  • Title transfer and the ownership of housing assets enables medium and large tenancy managers to provide security and procure financing from financial institutions.
  • Nationally medium and large tenancy managers can potentially borrow up to a combined $1.78 billion over 25 years with loan to value ratios of four percent and seven percent, respectively.
  • Title transfer, as modelled, by itself does not provide for significant growth capacity in the community housing sector. Also important is the level of cash available to service debt because without a healthy cash flow, the level of financing that the housing provider can afford is limited.
  • If the small and specialised housing providers already in the sector, as well as the additional dwellings to be procured through the NBJP were added to the analysis, the number of dwellings in community housing sector is expected to total 55,523 dwellings, a 45 percent increase by year five.

The table below outlines the results of applying title transfers to the base case.

Table 5.8: Summary of overall results of title transfers
Lever 2 – Summary of Title transfer results (Total community housing sector)
 

Over 25 years

At Year five

Debt

LVR

7

New dwellings

Total dwellings

% Change

Medium tenancy manager $863m 4% 480 12,600 4%
Large tenancy manager $916m 7% 627 9,614 7%
Housing owner / developer8 $197m 2% 1,177 6,446 21%
Totals (excl. small/specialised providers and NBJP) 2,284 28,660 6%
Total CH dwellings (incl. small/specialised providers, NBJP9)

55,523

45%

7 LVR is based on properties transferred and owned by the housing provider only (excludes leaseholds) over 25 years, on a consolidated entity bases.
8Results from base case analysis (it is assumed that the Housing owner / developers already own their housing assets).
9It has been assumed that the NBJP will increase dwellings by 20,000, 75 percent of which will be in community housing.

It is important to note that the rate of growth from this policy lever is based on a relatively small transfer of stock and the capacity of the average or typical provider to service debt. Actual growth from title transfers could be much higher, if for example, individual providers are able to achieve higher operating surpluses, or governments decide to increase the scale of stock transfers or the quantity of capital funding.

Implications

It is important to recognise that there are a range of broader implications, risks, benefits and costs of title transfers.

In general, title transfers can provide significant benefits to asset owners allowing them to access greater levels of finance that could support an expansion of services offered, particularly in relation to tenancy management functions, but more critically in relation to the supply of housing.

Title transfers enable property owners to undertake planning and sustainability measures and to respond to changes in market conditions and demand for services, providing a greater capacity for property owners to improve their responsiveness to tenants’ needs. However, notwithstanding the benefits that may accrue to property owners directly and to tenants indirectly (through the provision of improved services), an ongoing liability may continue to reside with the government if the housing provider becomes financially impaired even after titles have been transferred.

Some key advantages to title transfers are that they can:

  • position community housing providers to secure competitive private finance by offering lenders security over the assets;
  • strengthen the balance sheet of the providers and facilitate enhancement to their organisational capacity;
  • position the provider to be competitive in attracting government grants and incentives e.g. state capital grants and NRAS;
  • strengthen the independence and increase the capacity of the provider to attract third party contributions and donations;
  • facilitate property development which can increase capital gains and reduce the costs of acquiring new properties;
  • facilitate a more integrated approach to asset lifecycle management197;
  • possibly provide increased autonomy, including allowing more flexible rent setting and a greater tenant mix (depending on the nature of any conditions or caveats on the title transfer);
  • provide the ability for a greater range of providers to leverage growth using asset security, which spreads the risks of title transfers and the costs of any liabilities for asset upgrades; and
  • generate growth through value capture and reinvestment over time.

However, the realisation of the leveraging benefits of title transfer can be limited in practice by:

  • low rates of revenue and returns – rental policies, targeting and eligibility requirements can limit the ability of the provider to earn sufficient revenue to repay debt;
  • restrictive conditions placed on the title transfer, including second mortgages, caveats on title, statutory charges over the assets (interests registered on title, consent requirements for dealings, and reinvestment of sale proceeds); and
  • the quality of the housing stock and the way residual liabilities for upgrades and maintenance backlogs are to be managed in the transfer.

It is also important to recognise the costs to government of implementing title transfers, which have not been quantified in the financial analysis for this study. These include the costs of any asset condition assessments and other administrative and legal costs. The extent to which existing liabilities, asset upgrade and maintenance costs are transferred to community housing providers will also influence the costs of the program. However, generally, it is considered likely that over time, there will be a net positive result to government after savings are achieved, such as the cessation of management fees, reduced staff and administration costs, and reduced structural maintenance and replacement costs. There will however be an initial impact on state government balance sheets as assets are transferred198.

Consultation was undertaken with private financiers (from three major Australian banks) to inform the assessment of title transfers in this project. Key general observations were as follows:

  • Assets are needed as security for a loan, although they are not the most important item – the ability to repay the principal loan and meet interest repayments out of the provider’s operational cash flow is more important.
  • Security is generally required over a bundle of assets - not just those being developed as a result of the finance being provided.
  • Banks are nervous about realising security for a housing provider due to perception of removing people in need from their accommodation.
  • Banks take some comfort if revenues are supplemented by government grants though there was also some concern that this revenue may change if political drivers change.
  • Key tests for banks relate to loan to value, interest cover ratio and debt service cover ratios. Banks have been prepared to accept low interest coverage ratios if convinced that cash flows are very certain i.e. high demand for units and hence revenue certainty - and ideally a fixed price maintenance contract.
  • Generally, a housing business may only be able to leverage 10-15 percent of its asset portfolio due to the limited ability to repay debt. To the extent that recurrent cash flows improve so can the leverage ratio.
  • Providers with long term leases can still access funding though only during the initial years of the lease, i.e. ownership is not a necessity though rights to access a secure stream of rental revenues are required.
  • Borrowing is more likely where housing providers have new stock as the lifecycle costs are low and the quality of the building is high, to the extent stock is ageing this may reduce.
  • A clear government strategy is required to provide funders with the understanding that there is future business worthy of investment.

The consultations with private financiers also suggest that the global financial crisis has had an impact on the availability and terms of finance. Particularly:

  • Only short term debt is available on five year terms. This requires housing providers to take the risk of refinancing - which is significant given the small margins in their business.
  • Less funding is likely to be available as there is increased competition for finance.
  • The cost of loans is increasing due to rising interest rates.

There are also several risks and costs associated with title transfer for government. Some of these risks, and strategies for mitigating them, are summarised in the following table.

Table 5.9: Mitigation of the risks of title transfers
Risks Suggested response by government Suggested response by providers
Existing public housing properties are transferred with liabilities and in poor condition and require maintenance and upgrade Approach to managing liabilities and maintenance backlogs be carefully considered in the transfer process. The condition of transferred assets are accurately assessed and upgrades are carefully planned and agreed with the government to ensure the provider’s viability is protected.
Decline in the capital value of properties No response - low risk over the medium to long term Low risk over the medium to long term –avoid short term trading in properties
Buildings are inadequately maintained or damaged Risk mitigated by regulatory framework which monitors compliance with maintenance standards Provide input into development of regulatory standardsCompliance with regulatory standards
Erosion of government policy goals in terms of tenant mix, rent setting and service standards Risks mitigated by regulatory framework which includes relevant performance targets but allows some flexibility for providers Provide input into development of regulatory standardsCompliance with regulatory standards
Finance related and credit risks Mitigation of risk through the regulatory framework including monitoring of financial viability and solvency of providers and early / risk based interventions to prevent loss of assets etc. Building management capability for appropriate risk management.Provide input into development of regulatory standardsCompliance with regulatory standards
Loss of assets / foreclosure etc Risk mitigated through regulatory framework as above.Additional interventions or protections through a statutory charge over the assets may be necessarySome residual liability for the providers’ debts may need to be assumed by government Building management capability for appropriate risk management to prevent scenario from emergingProvide input into development of regulatory standardsCompliance with regulatory standards
Housing provider loses registration status or becomes insolvent / winds up Risk mitigated through regulatory framework as above.Use of powers to transfer assets from a deregistered provider through legislation or the regulatory framework (statutory charge over the assets)Some residual liability for the providers’ debts may need to be assumed by government Provide input into development of regulatory standardsCompliance with regulatory standards

Key findings

The modelling suggests that implementation of title transfer of public housing stock currently under management by medium and large tenancy managers would have a positive growth impact. However the scale of growth that is limited by the current average level of surpluses and the rate of return on assets that these providers are generating. A larger scale title transfer program would be required to achieve the Housing Ministers' growth target of 150,000 dwellings in the community housing sector within five years.

It is therefore suggested that consideration be given to implementing a large scale program of title transfer of public housing stock, that is greater than the stock currently under management. This should address required stock upgrades, and regulatory and contractual arrangements that minimise risks to government related to provider failure. However, it is important that the risk management arrangements avoid imposing caveats on title or other conditions that would significantly constrain the ability of housing providers to leverage private finance.

 

Lower the cost of finance

Overview

There are a number of possible policy levers for lowering the cost of finance for community housing providers. Broadly, three categories of these measures are:

  • the use of government guarantees to lower the cost of private finance;
  • the provision by government of low interest loans to community housing providers; and
  • the establishment of financial intermediaries that can offer finance to community housing providers at lower rates of interest.

In Australia, there are a small number of examples of governments providing low cost loans to providers. Community Housing Canberra has a $50 million low cost loan facility provided to it by the ACT Government. This is intended to grow the organisation by 500 affordable rental properties and 500 affordable properties for sale over 10 years. In addition, Homestart Finance, a statutory authority of the South Australian Government, offers loans to community housing providers to develop or purchase affordable housing. Loan options include: loan repayments set at a manageable amount indexed to CPI; principal and interest payments; and a line of credit with interest only payments and no fixed loan term.

While financial intermediaries have been discussed in Australia, to date they have not been progressed. There are however, several international examples of financial intermediary models, as summarised in the following table.

Table 5.10: International financial intermediary models
Country Mechanism Purpose Characteristics of Finance Relationship to Government
Netherlands Social Housing Guarantee Fund Guarantees Capital Market Loans for Housing Associations Guarantee Limit €240,000199 ‘Arms-length’. Relative financial independence of government
Switzerland Central Issuing Office of non-profit house builders Issues bonds with federal surety to facilitate long term low interest investment to non profit builders Pricing is at 1 percent below typical mortgage interest rates Established by government
Austria Housing Construction Convertible Bonds Enables long term low interest finance to non-profit affordable housing providers (finance is available across a range of tenures) Bond rate is 25 points below the German bond rate. Bond Terms of up to 15 years Legislated under the Housing Construction Supply ActBond sold through Housing Banks

Source: summary of Lawson, J and Milligan, V (2007) International trends in housing and policy responses, AHURI, Sydney unless otherwise referenced.

For the purpose of this study, financial analysis was undertaken of the end result of implementing policy lever to reduce the cost of debt. This assumed a reduction in the rate of interest of 200 basis points200. For this analysis, it was assumed that this policy lever would apply to medium and large tenancy managers after they had received the title transfers modelled under the title transfer policy lever above.

Results of the financial analysis of lowering the costs of debt

Lowering the cost of debt to seven percent increases the combined potential borrowings of the community housing sector over 25 years by approximately $655 million (nominal) to $2.63 billion. If the existing small and specialised housing providers in the sector, as well as the additional dwellings to be procured under the NBJP are added, the number of dwellings in the community housing sector is expected to total 55,682 dwellings, a 45 percent increase by year five. The table below outlines the results of lowering the costs of debt to the community housing providers in the base case.

Table 5.11: Summary of results for lowering the cost of debt
Lever 3 – Summary results of lowering the cost of debt (Total community housing sector)
 

Over 25 years

At year Five

Debt

LVR

New dwellings

Total dwellings

% Change

Medium tenancy manager $1.15b 5% 540 12,660 4%
Large tenancy manager $1.23b 8% 715 9,702 8%
Housing owner / developer $255m 2% 1,188 6,457 22%
Totals (excl. small/specialised providers and NBJP) 2,443 28,819 6%
Total CH dwellings (incl. small/specialised providers, NBJP12)

55,682

45%

LVR is based on properties transferred and owned by the housing provider only (excludes leaseholds) over 25 years, on a consolidated entity bases.
11 Results from base case analysis (it is assumed that the Housing owner / developers already own their housing assets).
12 It has been assumed that the NBJP will increase dwellings by 20,000, 75 percent of which will be in community housing.

Implications

Lowering the cost of finance via for example, government guarantees, can free-up capital and allow the property owner to focus on tenant needs. The intangible benefits outlined above in relation to title transfer would most likely manifest if the cost of finance was lowered. However, unlike title transfer, this option is a more direct avenue for property owners to access funding and negotiate with banks for more favourable terms. It is also the case that, ultimately, financial institutions are more concerned with the ability of an owner to make repayments, rather than take control of an asset in the case of default.

The financial analysis shows that the impact of lowering the cost of debt is marginal, resulting in a five-year increase of 159 new dwellings relative to the base case. In light of this result, consideration should be given to the administrative costs of any financial arrangement, which may include:

  • for government guarantees, the potential future cost of any providers failing and the government needing to meet that liability, as well as a higher level of regulation of housing providers to mitigate this risk and increase certainty that providers and projects are viable and therefore guarantees will not be called on;
  • for financial intermediaries, depending on the model chosen, there may be administrative costs associated with establishing and resourcing an entity that has capacity to sell government bonds and administer lower interest loans to providers; and
  • for both options, the cost of any additional government subsidies that could be required to make entities or projects sufficiently viable for private investors or to minimise the financial risks to government of providers failing.

The cost to government of a financial intermediary option would depend on the model chosen, the level of government involvement and the extent to which the government underwrites the profitability of the investment for private investors (given that the provision of low cost housing is unable to generate commercial rates of return on the investment). An AHURI analysis of private sector financing options undertaken in 2002 considered the costs to government of a financial intermediary option which involved state governments acting as intermediaries to sell bonds to private investors to leverage capital for new social housing dwellings. To make the investment viable for private investors, the Commonwealth Government was assumed to offer taxation rebates on the interest earned by investors on the bonds, effectively providing a subsidy to enable market rates of return. This analysis found that, for a program to raise $1 billion in new capital through bonds, the cost to the Australian Government would be $220 million in subsidies (foregone taxation revenue), which would deliver around 7,500 new dwellings201. Our analysis suggests that any additional growth generated by offering providers lower cost loans would be marginal.

Key finding

If the objective of a financial intermediary scheme is solely to lower the cost of debt, then resources could be better directed at other lower cost solutions such as achieving savings to other costs of procuring finance (through, for example, promoting networking or providing a central consultative service). However, if the central concern to be addressed is to respond to difficulties in accessing finance from the private sector then a financial intermediary may be an option that warrants further consideration.

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5.4.3 Combined assessment of all policy levers

The final step in the financial analysis is to consider the combined impact of applying the four policy levers, and to compare that to the Housing Ministers' growth target for the sector which is to achieve 150,000 dwellings over five years201a.

The four policy levers considered include:

  • increasing rents from 25 percent to 30 percent of tenants’ incomes;
  • transferring title of public housing stock currently under community housing provider management to enable procurement of financing;
  • lowering the cost of debt by 200bps; and
  • expanding NRAS by applying Scenario 2.

The financial analysis shows that by year five:

  • applying the policy levers to the base case increases new dwellings nationally by 56,223; and
  • including the existing small and specialised housing providers in the sector, as well as the additional dwellings to be provided to the sector from the NBJP, would achieve 109,522 dwellings in the community housing sector, an increase of 186 percent.

The following table consolidates the impact to operational viability and growth capacity of applying all the levers listed above to the base case.

Table 5.12: Combined results of applying all policy levers
Results of applying all policy levers (Total community housing sector)
 

Ave rent (weekly)

Over 25 years

At Year five

Debt

LVR

New dwellings

Total dwellings

% Change

Medium tenancy manager $120 $2.33b 9% 15,600 27,720 129%
Large tenancy manager $120 $2.17b 15% 20,361 29,348 227%
Housing owner / developer $136 $730m 6% 20,262 25,531 381%
Totals (excl. small/specialised providers and NBJP) 56,223 82,599 147%
Total CH dwellings (incl. small/specialised providers, NBJP14)

109,462

186%

LVR is based on total debt outstanding to total assets on a consolidated entity basis and not per project.
14 It has been assumed that the NBJP will increase dwellings by 20,000, 75 percent of which will be in community housing.

The chart below highlights the contribution of each policy lever to the base case. Note that the chart assesses the impact of the policy levers individually, however some levers are cumulative with others202. When all levers are combined, there is also a small amount of additional growth generated by the synergies between some of the levers203.

Figure 5-10: Combined results of applying the four policy levers

Figure description

The best outcome comes from the application of all levers to the base case, which increases the number of dwellings by 54,465 dwellings in five years (FY2014), resulting in a sector that has a total of 109,462 dwellings. The total community housing sector figure falls short of the Housing Ministers' target of 150,000 dwellings in five years by 40,538 dwellings.

The primary driver for the increase in community housing sector dwellings is the impact of NRAS incentives. It is noted, however, that although the incentives facilitate the increase in dwellings by 52,564 dwellings by year five, the annual cost to the Australian Government and the states and territories is estimated to be $315 million and $105 million, respectively. Additionally there is a risk of a sell down of dwellings that is expected to occur at the end of each 10 year incentive eligibility period. The risk to the sector associated with the potential sale of dwellings is a key point to consider under a long-term housing strategy.

Key findings

Only relatively low levels of growth could be achieved by most of the policy levers because of continuing low surpluses and returns on assets. The best growth result comes from the expansion of NRAS, however there is a risk of a large proportion of properties being sold after 10 years when the scheme concludes.

If all policy levers were applied, the total size of the community housing sector would be 109,462 dwellings, which falls short of the Housing Ministers' target of 150,000 dwellings in five years by 40,538 dwellings. To achieve the target, additional measures would be required for example allowing providers to undertake market profit activities, additional stock transfers and additional recurrent and capital subsidies.

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5.5 Conclusions

The growth capacity of the community housing sector is in part driven by the operational surpluses and low rates of return on assets that are outlined in the table below.

Table 5.13: Impact of the four policy levers on operational viability
Operational viability – Combined policy levers (Year 1)
 

Medium tenancy manager

Large tenancy manager

Housing owner/ developer

Rent revenue (‘000) $1,315 $5,406 $3,606
Other revenue15(‘000) $942 $5,695 $23
Expenses(‘000) $(1,517) $ (6,602) $(2,799)
Operating surplus/(deficit) (‘000) $739 $4,499 $830
Return on assets (five-year average) 1.3% 2.0% 0.8%

The above table shows that after applying all the policy levers, each typical housing provider type is operationally viable and generating varying degrees of operating surpluses. However, the return on assets for each housing provider type is below the target return of four percent.

Lifting rents to 30 percent of tenants’ incomes would achieve some growth across the sector. The higher impact on affordability for very low income tenants would, however, need to be recognised. It is therefore suggested that in establishing a national rent setting policy, consideration be given to setting a minimum benchmark of 25 percent of tenant income for very low income tenants and 30 percent of tenant incomes for low and moderate income tenants.

Return based rents offer a transparent approach to rent setting that is based on the achievement of the viability and sustainability of providers. They would also provide a stronger basis on which providers can achieve self-generated growth on top of title transfers, and other subsidies and incentives. Return based rents are not, however, affordable for the current profile of very low, low or moderate income tenants, and an additional recurrent subsidy is required to achieve them and retain the sector’s focus on lower income tenants.

It is suggested that recurrent subsidies be provided to the sector to enable providers to achieve a more sustainable rate of return on assets, such as the four percent benchmark return on assets. This subsidy would cover the difference between the additional revenue providers can generate within affordability limits and the four percent rate of return. This could be delivered through an increase in the rates of CRA. Recurrent funding of $199 million would be required to achieve a return of four percent across the sector, resulting in an additional 5,705 dwellings by year five (115,167 nationally).

With the exception of expanding NRAS, the policy levers are not of themselves catalysts to increasing operational viability and growth capacity in the sector. Combined, however, they can generate significant growth, increasing the number of dwellings above the base case by 54,465 dwellings in five years (FY2014), resulting in total dwellings of 109,462. The total community housing sector figure falls short of the Housing Ministers' target of 150,000 dwellings in five years by 40,538 dwellings.

It is considered that the growth that is generated under the first three policy levers could be readily absorbed by the sector. Whether the sector could absorb the quantity of NRAS incentives flagged by the modelling is less certain. This would require each medium tenancy manager to grow by almost 500 properties, each large tenancy manager by almost 3,000 properties, and owners / developers by just over 2,200 properties within eight years. On top of this it is also be necessary to consider the capacity requirements of the projected growth to be generated by the NBJP, and any other planned growth for these entities that is not captured in the modelling, for example planned or future stock transfer. This is significant growth for each organisation to accommodate. Evidence from the consultations and literature review suggests that the strongest capacity currently resides with owners / developers, with medium and large tenancy managers perhaps requiring more capacity building in terms of their commercial and property development expertise in order to fulfil these growth expectations. Further assessment of the infrastructure capacity of organisations, in terms of their back-office, information technology and asset management systems would also need to be undertaken in a staged way as each policy lever is implemented.

There are also opportunities to enhance the growth capacity of the sector by reducing barriers to entry of other types of not for profit organisations, particularly those that already have capacity in large scale tenancy management and property development, such as aged care and disability accommodation providers. Increasing the number of such larger providers in the sector in a focused and strategic way will achieve a multiplier effect on total stock numbers and may make the overall capacity building task less daunting.

Therefore, it is suggested that a range of policy levers to enhance the growth of the sector be considered for implementation as part of the development of a national community housing strategy, namely:

  • implementation of existing capital subsidies under the Nation Building Jobs Plan, with a dedicated proportion directed to the community housing sector (i.e. 75 percent) and the continuation and pooling of state government capital subsidies into a national investment strategy;
  • encouraging providers to undertake a limited range of activities to achieve market profits, for example limited market sales of development properties, by removing the current taxation related barriers (the risk of losing charitable taxation status) and instituting regulatory oversight of these activities;
  • a large scale program of title transfer of public housing stock, that is greater than the stock currently under management. This should include regulatory and contractual arrangements that minimise risks to government related to provider failure without caveats that constrain the ability to leverage private finance, and address stock condition and asset upgrades;
  • investing in a national industry development program which prioritises building the commercial skills and property development capability of medium and large tenancy managers to pursue growth objectives;
  • expansion of NRAS by 50,000 incentives, including a strategy that targets new entrants into the community housing sector of a sufficient scale and capacity (i.e. aged care providers), and optimises the pooling of other capital grants for the community housing sector with NRAS incentives to enable a greater proportion of lower income tenants to be housed and a reduction in the likely sell down of properties after 10 years; and
  • increasing recurrent subsidies to the sector to enable providers to achieve a more sustainable rate of return on assets such as the four percent benchmark return on assets. This subsidy would cover the difference between the additional revenue providers can generate within affordability limits and the four percent rate of return. This could be delivered through an increase in the rates of CRA.

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Figure descriptions

Figure 5.1: Growth in medium tenancy managers housing stock over 25 years

Figure 5.1 illustrates the growth in total dwellings owned or managed by all medium tenancy managers nationally over a 25-year period. Medium tenancy managers, nationally have the potential to procure a total of 240 new dwellings by year five, with total dwellings managed increasing by two percent to 12,360.  By year 25, total dwellings owned or managed by all medium tenancy managers in the community housing sector will increase to 13,980, an increase of 15 percent.

[ back to Figure 5.1 ]

Figure 5.2: Growth of large tenancy managers over 25 years

Figure 5.2 illustrates the growth in total dwellings owned or managed by all large tenancy managers nationally over a 25-year period. Large tenancy managers, nationally have the potential to procure a total of 341 new dwellings by year five with total dwellings managed increasing by four percent to 9,328.  By year 25, the total number of dwellings owned or managed by large tenancy managers in the community housing sector will increase to 11,451, an increase of 27 percent.

[ back to Figure 5.2 ]

Figure 5.3: Growth in housing owners / developers over 25 years

Figure 5.3 illustrates the growth in total dwellings owned or managed by all owners and developers nationally and debt outstanding over a 25-year period. Owners and developers have the potential to procure a total of 1,177 new dwellings by year five with the total dwellings owned increasing by 21 percent to 6,446.  On the basis of current cash flows however, nationally, total dwellings owned by housing owners / developers in the community housing sector at year 25 is 6,776, an increase of 28 percent.  The greatest growth, however, occurs in the first five years and is primarily driven by the existing capital grant funding that has been received.  By year 25, accumulative debt outstanding for housing owners and developers, nationally, is estimated at just under $50 million.

[ back to Figure 5.3 ]

Figure 5.4: Growth in large tenancy managers due to NRAS

Figure 5.4 illustrates the impact of new NRAS dwellings on the growth of stock owned or managed by large tenancy managers nationally over a 25 year period.  The following key points emerge:

  • There is a significant increase to additional community housing stock owned or managed by large tenancy managers over the first eight years totalling 6,204 nationally. 
  • Beginning in year 10 (Financial Year 2019), the number of dwellings begin to drop due to the assumed 80 percent sell down rate and then plateaus over the eight out years to 2035.

[ back to Figure 5.4 ]

Figure 5.5: Growth in housing owners/developers due to NRAS

Figure 5.5 illustrates the growth in housing owners / developers due to NRAS. For housing owners / developers, there is a significant increase to community housing stock owned or managed over the first eight years totalling 2,263 dwellings per typical housing owner / developer or 24,893 nationally.  The number of dwellings begin to drop due to the assumed 80 percent sell down rate, beginning in year 10 (FY2019) and then plateaus for 8 years to 2035.

[ back to Figure 5.5 ]

Figure 5.6: Growth for medium tenancy managers under Scenario 2 over 25 years

Figure 5.6 illustrates the impact of new NRAS dwellings on medium tenancy managers over 25 years. Over the first eight years, there is a significant increase to new community housing stock totalling 25,620 nationally.  The number of dwellings begin to drop in year 10 (Financial Year 2019) due to an assumed 80 percent sell down rate followed by stock plateaus in the 8 out years to 2035.

[ back to Figure 5.6 ]

Figure 5.7: Total growth from NRAS Scenario 2 for large tenancy managers over 25 years

Figure 5.7 illustrates the impact of NRAS dwellings on large tenancy managers over 25 years. Over the first eight years, there is a more significant increase to new community housing stock totalling 31,955 nationally.  The number of dwellings begin to drop in year 10 (Financial Year 2019) due to an assumed 80 percent sell down rate followed by stock plateaus in the 8 out years to 2035.

[ back to Figure 5.7 ]

Figure 5.8: Total medium tenancy manager growth from title transfer over 25 years

Figure 5.8 illustrates the impact of title transfer on total dwellings owned or managed by medium tenancy managers and debt outstanding over a 25 year period. Over five years, debt financing modestly increases total community housing sector dwellings owned or managed by medium tenancy managers from 12,360 under the base case, to 12,600 nationally.  By year 25, debt financing increases stock owned or managed by medium tenancy managers to 15,480 dwellings nationally.   By year 25, accumulative debt outstanding for medium tenancy managers, nationally, is estimated at approximately $200 million.

[ back to Figure 5.8 ]

Figure 5.9: Large tenancy managers total housing stock and outstanding debt over 25 years

Figure 5.9 illustrates the impact of title transfer on total dwellings owned or managed by large tenancy managers and debt outstanding over a 25 year period. Over five years, debt financing modestly increases total community housing sector dwellings owned or managed by large tenancy managers from 9,328 under the base case, to 9,614 nationally.  By year 25, debt financing increases stock owned or managed by large tenancy managers to 13,167 new dwellings nationally.   By year 25, accumulative debt outstanding for large tenancy managers, nationally, is estimated at just over $200 million.

[ back to Figure 5.9 ]

Figure 5.10: Combined results of applying the four policy levers

The number of dwellings under the base case scenario is 54,997 at year five.

If policy lever 1 - affordable rent was applied, this would increase the number of dwellings above the base case by 603 dwellings in five years resulting in a sector that has a total of 55,600 dwellings.

If policy lever 2 - title transfer was applied, this would increase the number of dwellings above the base case by 526 dwellings in five years resulting in a sector that has a total of 55,523 dwellings.

If policy lever 3 - lower the cost of debt was applied, this would increase the number of dwellings above the base case by 685 dwellings in five years resulting in a sector that has a total of 55,682 dwellings.

If policy lever 4 – NRAS scenario 1 and 2 was applied, this would increase the number of dwellings above the base case by 52,564 dwellings in five years resulting in a sector that has a total of 107,561 dwellings.

[ back to Figure 5.10 ]

 

 

  1. CHFA (2007) 2005-2006 Community Housing Mapping Project: Report on Findings, pp.iv.
  2. Hall, J and Berry, M (2009) Operating deficits and community housing: policy options for reversing the trend, AHURI.
  3. Bisset, H and Milligan, V (2004) Risk Management in Community Housing: managing the challenges posed by growth in the provision of affordable housing, AHURI, p.7.
  4. Data from this analysis has been compiled on a weighted average basis, therefore although there may be some housing providers that are not operationally viable, on the whole, the data received indicates operational viability.
  5. The operating margin is an indicator of operating performance and measures how much a company makes after operating costs for each dollar of revenue. Also known as ‘operating profit margin’ or ‘net profit margin’.
  6. It should be noted that the number of dwellings that each type of provider has at the beginning of the financial analysis has been based on FY2009 (year 0) figures, as provided in the ‘cash inflow’ table in section B.2.2. This has an impact particularly for the growth of housing owners / developers because of the capital investment received by providers in FY2009 and FY2010.
  7. Advice to the project team from Anthony Hardy, Victorian Housing Registrar, 4 August 2009.
  8. No additional capital grants beyond current grants have been assumed.
  9. Financing terms and assumptions are provided in Appendix B.
  10. As advised by the Victorian Department of Human Services, Housing Registrar.
  11. The rate of sell-down has been assumed at 80 percent as a reasonable response where the project is 100 percent debt funded. This is on the basis of100 percent debt funding and equity gains in the value of the asset. This has been agreed with FaHCSIA.
  12. CHFA (2009). ATO’s position on housing as an allowable charitable activity. Unpublished document provided by CHFA to the project team on 15 July 2009.
  13. Gilmour, T and Milligan, V. (2008) “Stimulating Institutional Investments in Affordable Housing in Australia: Insights from the US”, Paper to the Third Australasian Housing Researchers Conference, Melbourne, pp.17-18.
  14. Milligan, V. Gurran, N. Lawson, J. Phibbs, P. and Phillips, R (2009), Innovation in Affordable Housing in Australia: Bringing Policy and Practice for Not for Profit Housing Organisations together, AHURI.
  15. Comments provided to the project team by Milligan, V, Assoc. Professor, University of NSW, 21 July 2009.
  16. See Milligan, V. Gurran, N. Lawson, J. Phibbs, P. and Phillips, R (2009), Innovation in Affordable Housing in Australia: Bringing Policy and Practice for Not for Profit Housing Organisations together, AHURI. p. 179 and (2005) Evaluation of Brisbane Housing Company.
  17. Milligan, V et al (2009) p. 56.
  18. UK Tenant Services Authority (2009) 2008 Global Accounts of Housing Associations: Landlords Financial Health, p.57.
  19. Currently not for profit organisations can receive income tax, fringe benefits tax and GST exemptions, gift / donation exemptions, and various state and territory tax exemptions.
  20. Australian Government (2008) Australia’s Future Taxation System: Consultation Paper, Canberra, p.163.
  21. Productivity Commission (2009) Contribution of the Not for Profit Sector Issues Paper, Canberra.
  22. Depending on the relationships of the housing provider and their financial institution, in certain cases, longer-term facilities may be available.
  23. An integrated approach to asset lifecycle management includes better matching of housing management and procurement with corporate directions and planning processes. This includes managing and reconfiguring the housing portfolio in response to changing client needs and investment opportunities through a combination of sale and acquisition or redevelopment, disposing of poorly performing and/or unsuitable stock where appropriate.
  24. These observations are based on previous work undertaken to analyse the costs and benefits of title transfers for a state housing authority.
  25. Ministry of Housing Spatial Planning and the Environment, http://www.vrom.nl/pagina.html?id=41880, accessed 10 July 2009.
  26. It is acknowledged that there are a variety of financial arrangements that may result in lowering the cost of debt including government debt guarantees, creation of financial intermediaries, adjustment to financing terms, additional security, etc. Each mechanism may have an associated cost, whether a real cost or opportunity cost, however, given the spectrum of financial arrangements, this analysis primarily seeks to illustrate the impact of a lower cost of debt to the growth capacity of the community housing sector.
  27. Berry, M and Hall, J. (2002) New Approaches to Expanding the Supply of Affordable Housing in Australia, AHURI, p.viii.
    201a. A Progress report to the Council of Australian Governments from Commonwealth, State and Territory Housing Ministers – Implementing the National Housing Reforms, November 2009 published by the Victorian Government Department of Human Services on behalf of the Housing Ministers Conference available at www.coag.gov.au p.26
  28. For example, lowering the cost of debt is applied on top of title transfers (lever 3 is applied on top of lever 2) and for lever 4, NRAS Scenario 2 is applied on top of Scenario 1.
  29. The total additional growth above the base case achieved through applying all the policy levers is greater than the sum of the result of applying each policy lever. This is because if the affordable rent lever is applied as part of a package of levers, it would then increase the growth that can be generated from the other policy levers (as they are otherwise calculated on providers’ current rent structures).

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6. Optimal models for community housing 

This section provides some qualitative observations drawn from the guiding principles, literature review, consultations and the financial analysis on the attributes or characteristics of optimal models for community housing providers.

It is intended to highlight some of the elements that are being used, or could be used, to support firstly, the viability and sustainability of community housing providers, and then secondly, to support their growth aspirations. The section then considers the current capacity needs across the sector in order to achieve a wider uptake of these optimal business model characteristics. Lastly, it suggests a range of possible strategies that can be adopted at the provider and government levels to support the building of capacity across the sector.

6.1 Attributes of optimal business models for providers

Some key features of the business models of organisations that are currently operationally viable and can generate small surpluses that allow for investment in growth include:

  • a tenant mix that maximises rental revenue while achieving the organisation’s social mission;
  • a rent setting policy that maximises revenue to the extent possible while maintaining affordability for tenants;
  • a minimum quantity of assets that generates enough revenue to achieve economies of scale in tenancy management functions and supports organisational capacity;
  • adequate provision for responsible maintenance and replacement of assets over their lifecycle;
  • efficient cost structures, that are consistent with cost benchmarks and cost caps set in regulation;
  • effective commercial governance and decision making; and
  • organisational capacity to support efficient and effective operations.

Additional features of organisations that can generate additional surpluses, leverage private finance and growth include:

  • ownership and control of assets;
  • a minimum sized development program that justifies an in-house property 7development capability;
  • capacity to design and build housing that is fit for purpose and sustainable;
  • a rent policy that achieves an average return based rent (noting that such rents are unlikely to be affordable for low or moderate income tenants);
  • pursuing a limited range of activities that achieve market profits; or
  • sufficient and stable recurrent and/or capital funding support from government.

These business model features are summarised in the following figure.

Figure 6-1: Attributes of optimal business models for viability, sustainability and growth

Figure description

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6.2 Capacity building requirements

Organisational capacity in the community housing sector is varied and depends on a range of factors that include (but are not limited to):

  • an organisation’s legal identity and structure;
  • the mission and size of organisations;
  • regulation and relationship with government;
  • tax status;
  • funding arrangements and strategies to achieve growth (if this is an aim of the organisation);
  • project development structures; and
  • existing capacity and partnership arrangements.

This section analyses the current capacity building requirements across the sector based on previous research and the stakeholder consultations. It takes a particular focus on the aspects of capacity that have not been covered previously in the report, such as legal and corporate structures and the human dimensions of organisational capacity related to governance, management, staffing and networking.

There has been investment provided to the sector by the Australian and state and territory governments to help to build these dimensions of capacity of the sector. Some examples of such programs are included in the following table.

Table 6.1: Examples of capacity building initiatives for the community housing sector

Government Capacity building initiatives
Australian Government In September 2008, the Australian Government announced approximately $1.7 million over two years to fund products, activities, resources, and tools through the NRAS Capacity Building Strategy. The Strategy aims to increase the capacity of affordable housing providers and other interested parties to participate in the National Rental Affordability Scheme (NRAS), and other Government housing initiatives. The Community Housing Federation of Australia (CHFA) has been funded by the Government to provide a key role in the Capacity Building Strategy, with the establishment of a Capacity Building Clearinghouse. Through the Clearinghouse community and affordable housing providers, other interested parties, and NRAS participants will have access to a range of tools, resources and information to assist them in building their capacity. A discussion forum will also be attached to the Clearinghouse.
New South Wales The NSW Federation of Housing Associations is the peak industry body for housing associations in NSW. It offers a range of accredited vocation training opportunities and other short courses through its Centre for Social Training to help support and build the capacity of community housing organisations and community housing workers. Examples of the type of training provided include the accredited Certificate IV and Diploma in Social Housing, housing worker induction training such as ‘Manage and Maintain Tenancy Agreements and Services’ and ‘Social Housing – The Big Picture:  Work effectively in Social Housing’. The Federation also provides direct support to individual member organisations, their boards and management to help build their capacity. This advice and support ranges from free advice provided through their Housing Management Hotline, to consultancies on strategic planning, organisational reviews, tenant participation and intensive work with organisations to achieve their particular goals.204
Housing NSW also provides funding to other resourcing agencies such as the Association to Resource Co-operative Housing and Churches Community Housing.
Housing NSW also has work underway to develop an Industry Development Framework, runs the Property Development Training and Mentoring Program and has a Property Transfer Program Capacity Assessment project.
Victoria The Community Housing Federation of Victoria (CHVF) is the peak body for community housing organisations in Victoria and is funded by the Victorian Government. CHVF represents the views of its members to government and other relevant bodies, as well as providing advice, resources and training to the Victorian community housing sector.205 CHVF provides a range of resources and training programs to help build capacity of the sector including an overview/ introduction to the community housing sector to new community housing workers and board members, workplace skills such as presentation and management skills, cross-cultural awareness, conflict and change management skills to name a few. CHVF also operates the Partnership Clearinghouse which provides information on partnering opportunities within the sector.
South Australia The Community Housing Council of South Australia, Inc. (CHCSA) is the peak body for community housing organisations in South Australia. The State Government of South Australia provides funding to CHCSA. CHCSA provides education and training to the general public (Public Information Sessions) and to community housing workers such as the three part training course ‘Introduction to Community Housing’206.
Queensland On 16 May 2008, the Minister for Housing released the directions paper “Strengthening Social Housing – A strategy to build capacity of not-for-profit housing providers in Queensland”, which supports the continued development and strengthening of not-for-profit housing providers operating as part of Queensland’s One Social Housing System.
As a result, the Not For Profit Business Development and Innovation Unit was established within the Department of Communities in January 2009. Objectives of the unit include:
  • support improved integration and coordination of service delivery across the social housing system to improve outcomes for clients;
  • achieve effective communication and collaboration between organisations that are part of the social housing system;
  • facilitate access to relevant training and professional development opportunities for employees and governing bodies within the social housing system;
  • encourage innovation and continuous quality improvement by not-for-profit housing providers achieving high quality client services; and
  • increase the capability of not-for-profit housing providers to become major providers of social housing.
Western Australia The Community Housing Coalition of Western Australia is the state’s peak body representing community housing providers throughout Western Australia. The Coalition offers the Certificate IV in Social Housing similar to other state-based peak bodies, along with tailored training to assist support and build the capacity of community housing providers in Western Australia.

Generally, some significant increases in the capacity of community housing providers have occurred over the past decade, particularly for those organisations which are pursuing growth objectives. This has included changes to the legal structures of organisations towards corporate entities, utilising people with financial and commercial skills within corporate governance and management, and building the skills of the workforce and the capacity for networking and partnership.

However, despite these existing investments and improvements in some parts of the sector, a number of further capacity building needs have been highlighted in the consultations undertaken for this project, and are also supported in other recent studies.

6.2.1 Corporate governance

A particular capacity requirement for organisations that aspire to increase their scale and growth is to invest in new skills and systems to operate more commercially. This includes their ability to plan strategically, respond to greater risk exposure, maximise their rental revenue consistently with their social mission, improve their cost structure, access borrowings and meet their financial obligations, and enter into partnerships and joint ventures with government, other providers and the private sector.

Housing owners / developers will also require expertise in property development and partnering with larger developers and major banks. To cover this cost, they must reach a critical size and also must plan for continuous growth. Currently, many existing growth providers, as well as those aspiring to grow, have funding plans that indicate short term, though not long term, growth.

Governance structures and approaches at the Board and Management levels varies widely between community housing organisations and is usually dependant on these overarching corporate governance arrangements described above. There has been significant scaling up of governance and professional capacity at the board level among growth providers in recent years with many larger, growth orientated providers attracting candidates with appropriate skills in business, legal, financial and housing/property sectors. The skills required by the board in these cases are usually defined constitutionally or in strategic documentation approved by the board207.

A common feature of boards across the community housing sector regardless of size and function of an organisation is that most board positions or directorships are voluntary, with some organisations offering a small amount of compensation. An additional feature of many boards of not-for-profit organisations is the growing ethos of social entrepreneurship to meet the challenges posed by changing social, political and business climate. Social entrepreneurship requires a different (but complimentary) set of skills along with an understanding of ‘good governance’ and what that translates into in practice208.

However, for many other community housing organisations – especially those that are member based with a representative board (tenant participation), there is a perceived risk as to whether board members and the board collectively have the appropriate mix of business, financial, risk, legal and housing/property development expertise209.

6.2.2 Risk management

Good risk management is a challenge faced by many community housing organisations. The implications of risk is linked not only to the scale and complexity of a community housing organisation, but also to funding streams (government versus independent not-for-profit community housing organisations). In a report by Bisset and Milligan (2004)210, it was noted that good risk management in particular will become increasingly important for growth providers as they transform in role, scale and complexity of business. A culture of risk management along with social entrepreneurship is required. Risk should be monitored and mitigated continually, ideally by an Audit Committee.

In addition, an investment in new skills and systems to operate more commercially in responding to greater risk exposure, fluctuations in rental revenue, cost structures, borrowings and financial obligations will be required to best use public resources and to ultimately minimise threats to the homes of tenants.

While some of the larger providers and owner / developers are developing capacity to manage financial and commercial risk, this is patchy across the sector and additional effort would be necessary to bring a greater number of providers up to the capacity required in order to absorb significant growth funding or stock transfers.

6.2.3 Workforce and infrastructure

In terms of organisational capacity, most stakeholders thought it critical to build and strengthen the skills of staff and the infrastructure of organisations to operate at a larger scale.

There was general consensus among stakeholders that workforce development issues were of high priority and there were significant gaps in expertise in areas such as financial management, governance and procurement, as well as property development and standard tenancy management. Another major issue that community housing workers face is a lack of defined career pathways and skill development opportunities. This is coupled with remuneration levels that may not attract and retain highly qualified and skilled expertise. Consequently, attracting and retaining new staff poses a challenge for many providers (there was some acknowledgement that the sector’s workforce is ageing).

While there are some stand alone and ad hoc short courses and vocational training on offer to various government and non-government employees (such as the Certificate IV in Social Housing offered through Registered Training Organisations), there was acknowledgement among stakeholders that there are limited opportunities for higher education, graduate recruitment and other training that focus specifically on the community housing sector to develop a strong skill base to meet future demands. In addition, there is not a unified coordinated approach to capacity building in the sector that focuses on workforce and training needs of staff employed by community housing organisations.

Building resource capacity for many community housing providers, particularly smaller providers is of high importance and essential to building overall capacity. Many community housing providers raised the point of restrictive government policies concerning rent structures and targeting that do not give providers adequate control over their rental income streams to manage viability, build capacity and consequently enable growth and foster innovation. Stakeholders strongly felt that restrictive rent structures, coupled with little or no equity in their housing stock to leverage and grow income streams, severely limits their potential to build adequate resource capacity.

An impact of less than optimal resource capacity is the difficulty many providers face in resourcing organisational infrastructure such as IT systems etc, if a shared service model or option is unavailable, as well as maintaining and upgrading housing stock and so on. Many stakeholders noted the impact of the regulatory environment in maintaining and growing internal and external income streams and thought that a focus more on outcomes rather than internal processes, as well as reducing barriers such as the ability to operate across jurisdictions, would be more beneficial.

Another important factor raised in the consultations was the ‘risky’ decisions that organisations faced to invest in additional workforce or infrastructure capacity in the anticipation that they may, at some time in the future, be successful in obtaining capital funding for growth. Many providers pointed to the need for timeliness and certainty in government decision making about investment in the sector, and how it impacts commercial decision making and operations – particularly if providers are focussing on building the capacity of their organisations and growth in a more commercial environment.

6.2.4 Networking

Traditionally, most approaches to capacity building in the community housing sector have focussed on organisational capacity at the individual housing organisation level as described above. Organisational capacity is often seen as a set of attributes that community housing providers possess, such as a strategic plan, competent staff and governance policies, which can be enhanced through professionalisation, staff training and development and regulation211. However, organisational capacity includes not only the ability of the provider to meet its goals, but its capacity to leverage the skills and resources of other organisations through networking212.

In Australia, there is a move toward network models of capacity building and governance through development of industry generated, alternative service-orientated and networked models such as PowerHousing Australia, who have a strong focus on partnerships and leveraging of the partnership model to generate income and growth for its members213.

However, some stakeholders raised concerns during the consultations that not all parts of the sector had the same level of representation or voice in terms of government policy making processes or access to government grants and other assistance. Many providers felt that the political environment favoured ‘growth’ providers over smaller niche providers who provide more specialised services to particular target groups. Many smaller providers also felt that they have limited political leveraging capacity.

Networking capacity was canvassed by many providers and was seen as an important component in building capacity to achieve greater viability and sustainability. Developing suitable partnership models – particularly with the private sector- was frequently raised. A more collaborative, rather than competitive approach, was sought that facilitates connectedness and common purpose, diversity and innovation as many providers felt that there was some degree of competition between other housing providers and between public sector housing providers.

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6.3 Strategies for capacity building

There are a range of strategies and actions that community housing providers and governments can pursue to promote and expand the adoption of elements of optimal business models. Some of these have been modelled and discussed in previous sections of this report, including rental and eligibility policies, title transfers, lowering the cost of debt and expansion of NRAS. These strategies, along with others that are detailed further in the following section, are summarised in the following table.

Table 6.2: Strategies for achieving attributes of optimal business models

Business model feature Possible provider strategies Possible government strategies
Strategies for viability and sustainability
A tenant mix that maximises rental revenue while achieving the organisation’s social mission Tenant profile includes moderate income tenants Tenant mix targets / guidelines in national regulatory framework
Removal or harmonisation of state/territory government requirements
Continuing availability / certainty of charitable taxation status
A rent setting policy that maximises revenue to the extent possible while maintaining affordability for tenants Charging rents up to 30 percent of income Charging tenants 100 percent of CRA Rent setting guidelines in national regulatory framework
Removal or harmonisation of state/territory government requirements
Generate enough revenue to support viability and cover the cost of debt Adopt supporting eligibility and rental policies (as above)
Achieve critical mass through amalgamation and strategic alliances with other providers
Viability requirements in national regulatory framework
Title transfers
Reducing the cost of debt (guarantees and financial intermediaries)
Ownership and control of assets   Title transfers
Minimisation and removal of caveats and policy restrictions on the use of assets
Adequate provision for responsible maintenance and replacement of assets over their lifecycle Best practice asset management
Adherence to national standards
Asset management standards in national regulatory framework
Efficient cost structures Participation in cost benchmarking
Amalgamation or strategic partnerships/alliances
Adherence to national standards
Cost benchmarking informing national regulatory standards
Effective commercial governance and decision making Corporate structures
Skills based boards
Strategic business planning
Robust risk and performance management
Tenant participation
Governance requirements in national regulatory framework
Organisational capacity to support efficient and effective operations Achieving critical mass to support investment in organisational capacity
Investing in organisational capacity, including commercial and financial skills and property development
Establishment and support of Industry Development Council to develop and implement a national capacity building and workforce strategy
Providing certainty in policy and funding arrangements to support investment
Strategies for growth
A rent policy that achieves an average return based rent Charging market rents in high cost locations Subsidy of gap between affordable and return based rent for very low, low and moderate income tenants
Leveraging private finance Building organisational capacity to assess and manage the risks of private finance Transferring title to housing stock
Setting leveraging targets as part of the regulatory framework
Implementing strategies to lower the cost of debt or facilitate access to debt (government guarantees and financial intermediaries)
Pursuing activities that achieve market profits Developing organisational capability for market profit activity Ensuring maintenance of charitable, tax – free status for all activities
Risk management provisions in national regulatory framework
Recurrent and capital subsidies Maximising viability and growth within tenant affordability constraints Capital grants – fixed yield, open yield, debt equity models
Recurrent subsidy for new supply
Expansion of NRAS

In addition to these strategies to build the capacity of existing providers in the sector, it would also be beneficial to seek to expand the number of new providers. One strategy would be to direct community housing funding to existing aged care providers that already have a growth capability. Another would be to utilise the policy levers of restructuring of public housing authorities into smaller entities, or public housing stock transfers to new entities, to facilitate the entry of new players into the sector. This would in turn magnify the contribution that can be made to housing supply through providers’ self-generated growth.

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6.4 Conclusions

An analysis of optimal business models and capacity building needs across the sector suggests that most capacity currently resides within the larger owner / developers that are pursuing growth objectives. The relatively strong financial position of the large tenancy managers would also suggest that they may have the resources to invest in expanding their property development, commercial and risk management capabilities in the short term. A strategy to facilitate the entry of new providers into the community housing sector would also positively contribute to growth objectives.

Overall however, it is difficult to currently gauge with accuracy the capacity needs of the sector, and further work is required on an overall strategy for the community housing sector which includes an industry development plan that would seek to match current and future investment to core growth priorities. A range of capacity building strategies have been outlined in this section and would be available to support viability, sustainability and growth of the sector. It is suggested that many of these be considered as actions for inclusion in a national community housing strategy and its associated industry development plan.

 

Figure descriptions

Figure 6.1: Attributes of optimal business models for viability, sustainability and growth

Figure 6-1 illustrates the attributes of optimal business models for viability, sustainability and growth. 

Attributes of optimal business models that achieve growth include:

  • Capital or recurrent funding support from government
  • Activities that achieve market profits
  • Leveraging private finance
  • Return based rents
  • Ownership and control of assets
  • Capability for effective property development

Attributes of optimal business models that achieve viability and sustainability include:

  • Organisational capacity to support efficient and effective operations
  • Effective commercial governance and decision making
  • Ability to capture economies of scale and efficient cost structures
  • Adequate provision for asset maintenance and replacement over the lifecycle
  • Optimal size for the provider’s mission and purpose that achieves efficiencies
  • Rent setting maximises revenue within affordability benchmarks
  • Tenant mix balances social and commercial objectives.

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[ back to Figure 6.1 ]

  1. NSW Federation of Housing Associations, Inc. website, < http://www.communityhousing.org.au/index.html>, last accessed July 2009.
  2. Community Housing Federation of Victoria website, < http://www.chfv.org.au>, last accessed July 2009.
  3. Community Housing Council of South Australia website, < http://www.chcsa.org.au>, last accessed July 2009.
  4. Milligan, V. Gurran, N. Lawson, J. Phibbs, P. and Phillips, R (2009), Innovation in Affordable Housing in Australia: Bringing Policy and Practice for Not for Profit Housing Organisations together, AHURI.
  5. Ibid
  6. Ibid
  7. Bisset, H. and Milligan, V. (2004) Risk Management in Community Housing: Managing the Challenges Posed by Growth in Delivering Affordable Housing, AHURI.
  8. Gilmour, T. (2009) Network Power: Building the Capacity of the Nonprofit Housing Sector. ENHR 2009 Prague Conference, ‘Changing Housing Markets: Integration and Segmentation’.
  9. Ibid.
  10. Ibid.

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7. Directions for change 

The key finding of the analysis of the viability, sustainability and growth prospects of the community housing sector is that, with some changes in policy settings and further enhancements to its capacity, the sector can be a viable, sustainable and effective contributor to the social housing sector’s objectives to meet the needs of low and moderate income tenants who have difficulty obtaining housing in the private market.

Given the high demands for low cost housing, and shortfall in supply, the additional growth that the community housing sector can generate on top of government investment - while limited - will increase the availability of housing choices for low income people. Increasing the capacity of medium and large tenancy managers to take on growth strategies, and bringing new players into the sector, should be a focus to build the sector’s overall contribution to meeting the nation’s supply requirements for low cost housing.

A further finding is that, to maximise the benefits of reform, expansion of the community housing sector should be taken in alongside fundamental reform of the social housing system. It is proposed that significant national reform to the public housing system be agreed and implemented in parallel with a national community housing strategy. This should have as its core purpose the replacement of large, bureaucratic housing authorities with smaller, dynamic regional housing associations which operate at arm’s length from government, and deliver services on an equal footing with the community housing sector.

This section details these key directions for change. It advocates for strengthening the vision for the social housing system recently agreed by the Council of Australian Governments (COAG), and sets out the critical components of the vision for the social housing system, a community housing strategy and associated investment and industry development plans.

7.1 Future vision for the social housing system

The future vision for the social housing sector should be that it offers low income people a range of housing choices that are safe, affordable, accessible and of a decent standard.

The NAHA, signed by COAG in 2008, establishes an aspirational objective and six outcomes for social and affordable housing reform which reflect the policy intent of governments across Australia. The aspirational objective is “that all Australians have access to safe, affordable and accessible housing that contributes to social and economic participation”. The outcomes are that:

  • people who are homeless or at risk of homelessness achieve sustainable housing and social inclusion;
  • people are able to rent housing that meets their needs;
  • people can purchase affordable housing;
  • people have access to housing through an efficient and responsive housing market;
  • Indigenous people have the same housing opportunities (in relation to homelessness services, housing rental, housing purchase and access to housing through an efficient and responsive housing market) as other Australians; and
  • Indigenous people have improved housing amenity and reducing overcrowding, particularly in remote areas and discrete communities214.

These aspects of the agreement remain relevant and appropriate as a platform for reform to the social housing sector in future. It is in the strength and detail of the strategies and actions, and the pace of reform, that adjustments can be made to make the social housing system more efficient and effective in meeting these objectives and outcomes.

It is proposed that the critical element of the re-design of the system should be to break down the boundaries between public and community housing, so that all types of social housing are funded, regulated and delivered on an equal footing. This will incentivise and support the delivery of the most efficient and effective housing services for low income people that can be achieved within the financial resources available to governments, the sector and tenants.

There are existing national commitments that go some way to achieving this reform direction. The NAHA includes the policy action to establish “a nationally consistent approach to social housing to create a more transparent, accountable and efficient sector, including common costing and financial management reporting, practices and methodologies”215. In addition, the Social Housing Initiative of the NBJP included a national commitment to several reform directions that are relevant in this context:

  • integration of public and community housing waiting lists;
  • improved tenancy management and maintenance benchmarks for social housing;
  • increased transparency through the establishment of consistent and comparable accounting and reporting standards across jurisdictions that allow clear and objective assessments of performance that meet public accountability requirements;
  • introduction of a national regulatory and registration system for not-for-profit housing providers to enhance the sector’s capacity to operate across jurisdictions; and
  • social housing providers to be subject to independent prudential supervision to protect public investment in the sector.

These existing commitments envisage that the supervision and performance monitoring of the social housing system will be brought under a common framework. However, it is recommended that this reform direction be taken further so that integrated strategic and operational policy settings and funding arrangements are established for the public and community housing systems. This includes:

  • measuring and addressing housing need through strategic planning of housing supply across the social housing sector;
  • re-structuring state and territory public housing systems from large monoliths, into a number of smaller, focused and more effective regional housing authorities that can operate alongside community housing providers of a similar scale. This would require a management and property development capacity to be established within each regional entity;
  • re-designing investment and funding arrangements so that resources are allocated according to housing need, effectiveness of service provision and capacity building priorities; and
  • establishing regulatory and prudential supervisory arrangements that apply equally to community and public housing entities and focus on the delivery of outcomes for low income tenants and the best use of public resources.

Policy ideas generated from international experience also suggest that it is timely to re-think and re-design the policy and investment framework supporting the sector to ensure that the capacity of the sector is maximised and the desired additional growth is generated to a meaningful scale216. This includes clearly articulating the role and extent of ongoing subsidies for housing, and determining the most efficient and effective ways of providing those subsidies into the sector through an integrated strategic review of all current Commonwealth, state and territory investment in the sector.

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7.2 National strategy for the community housing sector

Within the overall vision for social housing, a national strategy is required to guide the future reform directions for the community housing sector. The approach should be one of partnership between the industry and government. It should include:

  • the vision that articulates:
    • the role of the community housing sector as a viable and sustainable provider of low cost housing - an equal player and valued contributor within the social housing system;
    • the sector’s core social mission – for example, to provide housing to people on low incomes and with housing and other needs which can not be satisfactorily met in the private rental market;
  • common definitions of the types (or tiers) of community housing providers;
  • desired outcomes and goals for the sector to achieve, including: affordability, security of tenure, quality of housing stock and tenancy management, tenant participation, and community development;
  • targets for the expected level of viability and growth for each category of provider, based on an understanding of housing demand pressures, expectations regarding rent and eligibility policies, and an assessment of available funding or other government support mechanisms;
  • respective roles of the Australian Government, the state and territory governments, and the community housing sector;
  • clear policy and program settings including funding programs, taxation incentives, rules for charitable taxation status, and rental assistance;
  • priority strategies and actions; and
  • monitoring and evaluation mechanisms for measuring progress over time.

7.2.1 Regulatory framework

The regulatory framework plays an essential role in achieving the vision and the strategy for the social housing sector. It is, along with funding programs, the major government lever for stimulating and achieving change in practice across the non-government sector. Regulation does however, impose compliance and administrative costs and can be burdensome, inefficient and create perverse incentives. It is therefore essential that the framework is developed consistently with national regulatory guidelines and policy and minimises intervention to those matters that are essential for protecting and achieving the public interest.

The overarching objectives of the regulatory system should be to:

  • improve outcomes for tenants, including protecting tenants rights and setting minimum standards for the quality of service;
  • increase confidence of public and private investors in the viability and the sustainability of the social housing sector;
  • apply consistent performance standards across the social housing sector;
  • allow for innovation or entrepreneurialism;
  • minimise compliance costs and regulatory burden for industry; and
  • ensure that institutional arrangements minimise duplication between the functions of various regulatory bodies.

A key finding of this study is that the diversity across the sector warrants a more targeted, risk based approach to regulation. This should include tiers of regulation for different types of providers based on their core functions. The level of regulation could increase through the regulatory tiers as in the following table.

Table 7.1: Suggested focus of sector regulation

Small tenancy managers Minimum performance standards (e.g. tenant rights, quality of service, asset management, probity)
Performance monitoring / reporting
Regulator powers of enforcement and intervention
Medium and large tenancy managers Minimum performance standards (e.g. tenant rights, quality of service, asset management, probity)
Minimum governance requirements
Minimum viability benchmarks
Performance monitoring / reporting
Regulator powers of enforcement and intervention
Owners/ developers Minimum performance standards (e.g. tenant rights, quality of service, asset management, probity)
Minimum governance requirements
Minimum viability and growth benchmarks
Risk management standards for development projects
Performance monitoring / reporting
Regulator powers of enforcement and intervention

A number of implementation issues for the regulatory system will need to be resolved as part of the separate project to determine the national regulatory framework, including:

  • structure of the regulatory system, e.g. legislative arrangements, single national regulator versus jurisdictional regulators;
  • mode of regulation, e.g. industry accreditation, registration, level of regulatory intervention;
  • lowering barriers to entry for other types of not for profit providers, such as aged and disability housing providers, that are already regulated under different regimes;
  • ensuring risks associated with the title transfer of public housing stock are consistently and appropriately managed;
  • agreeing on the continuing role of current state and territory requirements, if any;
  • funding arrangements for the operation of the regulatory system;
  • treatment of cross-border activities; and
  • transitional arrangements.

The current thinking for the national regulatory framework217 is to put forward two options for consideration by Australian Housing Ministers. Both draft options apply only to the community housing sector, as opposed to having a broader coverage across community and public housing.

Option A is to: introduce a national regulatory and registration system that involves the enactment of model legislation by all jurisdictions (to ensure the same requirements apply in each jurisdiction); appointment of a Registrar in each jurisdiction (the Commonwealth would regulate providers that are nominated by a National Council of Housing Registrars, and the States would regulate all other providers operating in their jurisdictions); and harmonisation of data collection and evidence analysis by the registrars.

Option B is to: establish a ‘split system’ with the Australian Government regulating specified types of providers and the states and territories regulating other providers under their existing arrangements. Providers subject to Commonwealth regulation could include all multi-jurisdictional providers, only large multi-jurisdictional providers, and /or state based growth providers218.

Both these proposed options involve state registrars regulating or administering part of the regulatory system to different extents - one would be under a consistent national regime and another under their existing state or territory regimes. Establishment of a single national regulator for the entire system is an option that is more closely aligned with reforms towards the overall vision for the social housing system, which involve both public housing and community housing operating on an equal footing. This is because it would offer more certainty that the oversight of both public and community housing is being done independently from the state public housing authorities. This is made more important if the outcomes of the regulatory system influence decisions about government investment in the sector.

Alternatively, if it were preferred by COAG that state based registrars administer a nationally consistent regulatory framework under Option A, it would be appropriate to put in place measures to ensure that these state and territory regulatory bodies are independent and operate at arms-length from state and territory public housing authorities, particularly if in the short to medium term, the new regional housing associations (that were formerly the public housing authorities) are government owned and controlled entities.

Concerns regarding the scale of the regulatory task and the diversity of the sector could be addressed through the design of the regulatory framework and the involvement of the sector in that process. For example, codes of practice for particular issues and types of providers could be developed by industry, and ultimately made by the Australian Government on the recommendation of the regulator. This would provide some flexibility in matters that are essential to achieving optimal business models and may need some variation to reflect local circumstances, such as tenant mix, asset management standards and governance requirements. This approach would also offer government certainty that the costs of meeting minimum performance standards are acceptable and can be met.

7.2.2 Investment plan

This analysis has demonstrated that the overall viability of the community housing sector is fragile and the level of returns currently being generated by even the highest performing providers are inadequate to fuel growth at a scale that would meet current government expectations.

The consultations reinforced a consensus across governments, the sector and social housing experts that providing housing to low income people is inherently a social good that cannot earn commercial returns. Most parties recognise that this task warrants government subsidy. It is the depth and scale of that subsidy, and its most efficient and effective form of delivery, that is less well understood and agreed.

Current investment and support in the Australian sector is fragmented between governments, has developed opportunistically over time, and blends a range of delivery methods to support both housing demand (e.g. rental assistance) and supply (capital and recurrent subsidies to providers). There is a need to ensure that this investment reflects current government policy and aspirations, that the balance between demand and supply supports is based on a more sophisticated understanding of housing needs, and that the right incentives are in place to maximise the quality and performance of the system.

It is therefore proposed that a new investment plan be developed as part of the community housing strategy, and progressively implemented to support the vision for the social housing system. This should begin with mapping all existing investment into the system and housing need (which is considered at the national, state and local levels). This should be multi-jurisdictional and whole of government in focus. It should include funding that is both short term and longer term. The framework would then identify the best mix of investment levers to deliver on the objectives and outcomes of the NAHA, including:

  • capital funding, including any additional capital funding programs at the Commonwealth, state and territory levels;
  • recurrent funding, such as existing state and territory recurrent funding programs;
  • rental assistance for tenants, including the structure, rates and delivery modes of CRA;
  • taxation incentives, including the scope and operation of charitable taxation status, the expansion of NRAS, and taxation and rates subsidies at the state, territory and local government levels;
  • any government guarantees and loan facilities;
  • planning system incentives, including a national approach to inclusionary zoning and density bonuses to expand affordable housing supply;
  • provision of government assets, including a national program of title transfer of public housing stock and surplus government land; and
  • capacity building funding to peak representative organisations and individual housing providers.

Setting the subsidies for social housing, in terms of their quantum and design, must be based on an explicit and common understanding of the extent to which providers are expected to achieve affordability outcomes for tenants through their own operational levers, such as rental and eligibility policies. This must include a clear understanding of the overall impacts that public subsidy decisions will have on the capacity of the sector to house low income people and the resultant impact on the overall supply of low cost housing for those most in need.

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7.3 Industry development

Recent research evidence that the community housing sector is increasing in capacity219 was supported by the consultations undertaken for this project. However most of this change has occurred within larger sized providers and owners/developers. Given the fragility of the current viability and sustainability of providers, and the scale of the growth task, it is suggested that further capacity building is required across the industry.

Existing community housing associations could be strengthened, perhaps through funding a high level, national industry council to undertake strategic planning, coordination and capacity building functions. Its immediate task could be to recommend a national industry development plan, that forms part of the community housing strategy, that could address:

  • profiling of workforce requirements and skill needs across the sector;
  • initiatives to build training and skill development across the sector, including facilitating the creation of undergraduate tertiary qualifications and ongoing professional learning and development;
  • targeted and prioritised allocation of capacity building funds to bring providers up to the national minimum performance standards and to maximise growth objectives for the sector; and
  • initiatives to improve career paths, including integrated workforce planning between the community housing and public housing sectors.

Funding for industry development should be pooled and determined collaboratively between all Australian governments and industry as part of the investment plan for the community housing sector. This will assist to ensure all available funds are marshalled and allocated in the most efficient and effective way.

Membership of the National Council could be agreed by the appropriate national decision making body and should include representatives of the Commonwealth and the states and territories as well as industry. The approval of the industry development plan should be made by Australian Housing Ministers, so that all governments can ensure that their capacity building needs and priorities are being met.

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7.4 Recommended actions

Sections 5, 6 and 7 of this report analysed a range of policy levers that could be applied to improve viability and sustainability of community housing providers and to maximise the growth of the sector. Consistent with the findings of that analysis, a series of actions are recommended for inclusion in the overall strategy for the community housing sector.

To improve the viability and sustainability of the sector the following actions are recommended:

  • include in the national regulatory framework national rent setting guidelines to maximise the collection of revenue within the affordability limits for low to moderate income earners – this should include: collecting 100 percent of CRA; setting a minimum benchmark of 25 percent of tenant income for very low income tenants and 30 percent of tenant incomes for low and moderate income tenants, as well as other rent setting approaches that achieve higher rates of rental where this is within affordability limits;
  • establish guidelines for identifying the optimal tenant mix which meets the provider’s social mission as well as local housing demands, while encouraging providers to take on a greater number of tenants at the higher income level of each income band, and a small proportion of moderate income tenants; and
  • regulate the performance of medium and large social housing providers against financial and commercial performance standards, including cost and other performance benchmarks that encourage providers to adopt an optimal business model which achieves organisational efficiency and maximises their viability and sustainability given their mission, location, and tenant mix.

To achieve the growth target of a sector comprising 150,000 dwellings in five years, a mix of policy levers are recommended. These are presented in order of the likely additional cost to government (from lowest to highest cost) and include:

  • implementation of existing capital subsidies under the NBJP, with a dedicated proportion directed to the community housing sector (i.e. 75 percent) and the continuation and pooling of state government capital subsidies into a national investment strategy;
  • encouraging providers to undertake a limited range of activities to achieve market profits, for example limited market sales of development properties, by removing the current taxation related barriers (the risk of losing charitable taxation status) and instituting regulatory oversight of these activities;
  • a large scale program of title transfer of public housing stock, that is greater than the stock currently under management. This should include use of title transfers to increase the number of new providers in the sector, and regulatory and contractual arrangements that minimise risks to government related to provider failure without the imposition of caveats on title that constrain the ability to leverage private finance, and address stock condition and asset upgrades;
  • investing in a national industry development program which prioritises building the commercial skills and property development capability of medium and large tenancy managers to pursue growth objectives;
  • expansion of NRAS by 50,000 incentives; including a strategy that targets new entrants into the community housing sector of a sufficient scale and capacity (i.e. aged care providers), and optimises the pooling of other capital grants for the community housing sector with NRAS incentives to enable a greater proportion of lower income tenants to be housed and a reduction in the likely sell down of properties after 10 years; and
  • increasing recurrent subsidies to the sector to enable providers to achieve a more sustainable rate of return on assets such as the four percent benchmark return on assets. This subsidy would cover the difference between the additional revenue providers can generate within affordability limits and the four percent rate of return. This could be delivered through an increase in the rates of CRA.
  1. Council of Australian Governments (2008). National Affordable Housing Agreement, Schedule F to the Intergovernmental Agreement on Federal Financial Relations, clauses 6 and 7.
  2. Ibid, clause 20(f).
  3. See also Milligan, V. Gurran, N. Lawson, J. Phibbs, P. and Phillips, R (2009), Innovation in Affordable Housing in Australia: Bringing Policy and Practice for Not for Profit Housing Organisations together, AHURI, p.151.
  4. The COAG Not for Profit Sector Sub-Group has commissioned a report by ARTD Consultations that re-scopes previous proposals for a national regulatory system. This is reflected in ARTD Consultants (2009) National Regulatory System for Community Housing Providers: re-scoping the approach, Final Draft Report, 9 June 2009.
  5. Ibid.
  6. See Milligan, V. Gurran, N. Lawson, J. Phibbs, P. and Phillips, R (2009), Innovation in Affordable Housing in Australia: Bringing Policy and Practice for Not for Profit Housing Organisations together, AHURI and Gilmour, T. (2009) Network Power: Building the Capacity of the Nonprofit Housing Sector. ENHR 2009 Prague Conference, ‘Changing Housing Markets: Integration and Segmentation’.

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8. Implementation 

8.1 Roles and responsibilities

Within the new social housing system, the Australian Government would take on a stronger more proactive policy and priority setting role. It would lead the development of the national strategy, in partnership with the states and territories and the industry. As the main funder of social housing in Australia, the Commonwealth would also act as a coordinator-general for future investment into the sector.

The Commonwealth Government would also assume a new role in regulating the sector, through establishing a new national regulatory body that would assume responsibilities as agreed as part of the development of the national regulatory system.

The states and territories would continue to take a strong role in the redesign of the social housing system through COAG and Housing Ministers. They would also continue in a strong funding role to support sector viability and growth. This would include direct investments in the forms of grants and shared ownership, provision of surplus land and the use of planning mechanisms such as inclusionary zoning and density bonuses. The roles of states and territories in the regulation of the sector will depend on the approach agreed through the national regulatory system, which could include the continuation of state based registration and quality assurance roles.

Implicit in the vision for the social housing sector is however, that gradually over time, state and territory governments would reduce their roles and responsibilities in relation to social housing service delivery, as these are devolved to the non-government sector.

8.2 Timing

COAG and Australian Housing Ministers are considering the detailed implementation of the NAHA reforms to social housing in the second half of 2009. This study has been commissioned to provide strategic advice on the future viability of the community housing sector in order to assist with one part of the full range of considerations that are on the table. It would appear to be an opportune time to revisit some of the strategies and actions in the NAHA and commitments under the NBJP and invigorate and strengthen the reform agenda consistent with the directions outlined in section 8.

A possible timetable for progressing these reform directions is:

  • agreement to a future vision for the social housing sector by October 2009;
  • appointment of a Social Housing Industry Council by November 2009; and
  • development of a draft Community Housing Strategy, along with its associated investment and industry development plans by June 2010.

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Attachment A: Financial modelling of viability, sustainability and growth 

A.1 Introduction

A financial assessment of viability and growth as part of providing advice on strategic directions, policies and industry development initiatives to achieve a viable and sustainable community housing sector in Australia was undertaken in 2009. The purpose of the financial analysis is to determine if the current community housing sector can achieve both financial viability and growth capacity and the impact of applying various policy levers.

The options considered in the assessment are examined against the key objectives of:

  • achieving financial viability of community housing providers (e.g. not requiring additional operating subsidies); and
  • increasing the growth capacity if the community housing sector to achieve a target of 150,000 dwellings within five years in order to provide accommodation for people in housing need.

A.2 Overview of the approach to the base case and policy levers

The financial analysis involved the development of a financial model to assess the nominal cash inflow and outflow to determine operational viability and growth capacity of medium tenancy managers (MTM), large tenancy managers (LTM) and housing owners / developers (HOD) as defined in the table below.

Housing providers assessed
Type Description
Medium tenancy manager A medium tenancy manager is defined as a housing provider that manages a portfolio of between 50 and 499 tenancies. The Tenancy Manager’s portfolio may include high need tenants, such as those with severe and profound disabilities. The provider does not own or have control over its assets, and primarily has property and tenancy management functions.
Large tenancy manager A large tenancy manager is defined as a housing provider that manages a portfolio greater than 500 tenancies. The Tenancy Manager’s portfolio may include high need tenants, such as those with severe and profound disabilities. The provider does not own or have control over its assets, and primarily has property and tenancy management functions.
Housing Owner / Developer A housing owner / developer owns a significant portion of its housing assets and has a land and development focus. The housing provider can use the assets to leverage private capital and has the means to generate its own growth in housing stock through development as well as open market acquisitions.
*Core data and information for each provider type has been provided by State Housing Authorities in NSW, Victoria and South Australia.

The following table provides an estimate of the size of the mainstream community housing sector by total dwellings.

Breakdown of the CH sector
Housing provider type
Small/specialised1 Medium Tenancy Manager2 Large Tenancy Manager3 Housing Owner/Developer4 Total5
11,863 12,134 9,082 5,440 38,519

1Calculation based on Hall J and Berry M, (2009) Operating Deficits in Community Housing Policy Options for reversing the trend, AHURI. No growth has been assumed for these providers.
2Calculation based on AIHW, (2009), Community Housing 2007-08: CSHA National Data Report
3 It has been assumed that data provided by Housing NSW encapsulates the full compliment of properties managed by large tenancy managers.
4Milligan, V. Gurran, N. Lawson, J. Phibbs, P. and Phillips, R (2009), Innovation in Affordable Housing in Australia: Bringing Policy and Practice for Not for Profit Housing Organisations together, AHURI
5 AIHW, (2009), Community Housing 2007-08: CSHA National Data Report.

For each of the housing provider types, the financial model:

  • estimates the annual net cash flow position;
  • identifies any funding shortfalls or requirements;
  • estimates the potential level of borrowing;
  • estimates the number of dwellings that can be procured by year five and over 25 years; and
  • facilitates the application of four key levers to improve viability and growth.

The diagram below provides an illustration of our approach in assessing financial viability and growth capacity of the three housing provider types.

The financial model is based on actual FY2008 data provided by State Housing Authorities in New South Wales, Victoria and South Australia. The model also uses key inputs such as financing terms, rent and other revenue, operating costs, government grants and subsidies, capital costs, indexation/escalation, community housing dwellings and projects (NRAS/NBJP), as advised by members of the Project Reference Group and a number of financial assumptions, which are detailed in Appendix B.  This base case data along with policy levers including rent policy, title transfer, lowering the cost of debt and a current and expanded NRAS scheme will provide a financial model that will be able to extract aforementioned information.

Figure description

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Base case

The base case reflects the current operating model for three types of housing providers and their existing portfolio of assets. The purpose for the analysis of the base case is to understand the financial viability and growth capacity of each housing provider type if there is no change to the current policy environment.

Policy levers

In addition to the base case, the analysis also includes the application of four key policy levers to the base case of each housing provider type in order to assess the impact to financial viability and growth capacity for each housing provider type and the community housing sector nationally. The following table outlines the four key policy levers that have been selected through consultations with both FaHCSIA and the Project Reference Group:

Summary of key policy levers
Policy lever Key parameter
Rent policy Cost-based rent – Housing providers set rents at a weekly rental charge rate which enables them to recover their costs and break even (excluding costs of growth).
Affordability-based rent – Housing providers set rents at a weekly rental charge of 30 percent of tenants’ income.

Market-based rent – Housing providers set rents to a weekly rental charge of 74.9 percent of market rent (using a national average market rent).

Return-based rent – Housing providers set rents at a weekly rental charge rate that achieves a return on assets (return) of 4.0 percent 6.

Title transfer

Title to existing publicly owned housing stock under community housing sector management is transferred to both medium and large tenancy managers. It is assumed that the housing owner / developer already has title to its housing assets.

The title transfer of properties to housing providers has been assumed to enhance the balance sheet of the housing providers and allow for a degree of financing. In practice, benefits of title transfer will be dependant on the caveats included with the title transfer. Therefore, for the purpose of this analysis, it is assumed that there will be minimal caveats, which will allow for a greater degree of leverage and asset management sophistication.

Lowering of the cost of debt Depending on the financing arrangements negotiated by the community housing sector, the cost of debt could be lowered beyond the cost of debt associated with a BBB rated entity. Mechanisms for the reduction may include:
  • government guarantees; and/or
  • the establishment of a financial intermediary to lend to providers at discounted rates.
To illustrate the impact of such arrangements, the analysis assumes a 200 basis-point reduction of the cost of debt.
Current and expanded NRAS scheme

The provision of current NRAS incentives plus an expansion of the current NRAS program to provide incentives for an additional 50,000 dwellings in years 5 – 10 (total 100,000 dwellings). Two scenarios7 assessed are as follows:

Scenario 1 – Scenario 1 assumes that 40 percent of the current remaining NRAS incentives will be awarded to the community housing sector for the procurement of new dwellings up to 30 June 2012. This scenario also assumes an expanded NRAS scheme with an additional 50,000 incentives beginning 1 July 2012 where 25 percent of the new incentives are awarded to the community housing sector for the procurement of new dwellings over five years to 30 June 2017. All projects under the current NRAS scheme and the expanded NRAS scheme are assumed to be fully funded by debt.

Scenario 2 – In addition to the procurement of new dwellings by the community housing sector as outlined under Scenario 1, a further 30 percent of the dwellings procured by the private sector under the current NRAS scheme are managed by medium and large tenancy managers (split evenly between them). Under the assumption of an expanded NRAS scheme, the remaining 75 percent of incentives are awarded to the private sector. These properties are also assumed to be managed by medium and large tenancy managers.

Under both Scenarios, a sale rate of 80 percent has been assumed at the end of the 10-year of the scheme’s operation.

6 Based on overseas benchmark targeting a 4.0 percent return.

7Scenarios have been defined based on advice from FaHCSIA.

Analysis and outputs

Analysis and outputs are based on data for each housing provider type received from State Housing Authorities (SHAs) in NSW, Victoria and South Australia. The data for each housing provider type is consolidated using a weighted average approach by tenancies, which then forms the base case of a typical housing provider. Following the initial assessment of each typical housing provider under the base case, policy levers are applied in turn to each base case and the results assessed individually. The final step applies all levers concurrently to the base case to provide a consolidated result.

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A.2.1 Limitations of the approach

Data

The data provided to the investigation is a consolidation of financial, operating and asset figures of housing providers in each state. As such, the individual circumstances of each housing provider (e.g. location, tenant mix, operating costs, etc.) forms part of an average figure, and cannot be quantitatively addressed.

There are also instances where information for a particular revenue or cost category has not been individually identified due to either SHA data limitations or unavailability. In these cases the revenue or cost is included in another category and does not affect the overall financial result.

All data is used as received and has not been benchmarked, adjusted, or audited for accuracy.

The typical housing provider

The typical housing provider derived from SHA provided data is a proxy for all housing providers operating in the various policy environments of NSW, Victoria and South Australia. As such, the typical provider of each housing provider type may not represent individual housing providers in each state.

A.2.2 Assumptions underpinning the analysis

The implementation of the financial modelling approach discussed above requires fundamental assumptions that underpin the analysis. The following table highlights the overarching assumptions of the analysis.

Key assumptions
General
1 The analysis focuses on long-stay community housing providers.
2 Community housing data provided by NSW, Victoria and South Australia is illustrative of national data.
3 Growth results for each housing provider type provide an indication of the growth of the whole sector.
4 Cash inflows from businesses other than community housing are excluded from the analysis.
5 Any leasehold related revenues and costs are constant and do not increase with the number of dwellings.
6 The policy environment under the base case will continue indefinitely in an “as-is” state.
7 All housing provider types will commit 80 percent of positive net cash flow to procure additional dwellings. The remaining 20 percent will be allocated to a restricted cash fund to be used at the discretion of the housing provider.
8 Housing providers will own all new dwellings procured using positive net cash flow.
9 Community housing providers not in scope of the base case are assumed not to procure new dwellings or generate additional growth.
10 Growth due to the transfer of additional public housing stock to the community housing sector (beyond the publicly owned stock that is already under the providers’ management) has not been included.
11 Data received from the State Housing Authorities is accurate and does not require additional adjustments.
12 All community housing sector housing providers are assumed to have charitable tax (PBI) status and access to GST concessions.
13 Future capital grants above those already committed are not included in the analysis.
14 The number of housing providers does not increase.

A detailed list of assumptions for the housing provider types are provided in Appendix B.

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A.3 Base case results

A.3.1 Overview of the sample sector

The base case includes data on 55 community housing providers and approximately 20,090 tenancies. The analysis sample represents 52 percent of the 38,519 total tenancies nationally in the community housing sector. The table below details the number of providers represented in each State and the total number of tenancies under each housing provider type.

Housing providers types in scope
Provider type Number of providers/tenancies represented by data collected from SHAs
Medium tenancy manager New South Wales - 24 providers
Victoria - 3 providers
South Australia - 9 providers
Total: 36 providers (60 nationally8), 7,144 tenancies (12,134 nationally9)
National representation of all medium tenancy managers by tenancies: 59 percent
Large tenancy manager New South Wales - 11 providers
Victoria - 0 providers
South Australia - 0 providers
Total – 11 providers (11 nationally8), 9,082 tenancies (9,082 nationally9)
National representation of all large tenancy managers by tenancies: 100 percent
Housing Owner / Developer New South Wales - 0 providers
Victoria - 8 providers
South Australia - 0 providers
Total – 8 providers (11 nationally8), 3,864 tenancies (5,440 nationally9)
National representation of all housing owners / developers by tenancies: 71 percent

8Based on average tenancies under management divided by total tenancies nationally.
9 AIHW, 2009, Community Housing: Commonwealth State Housing Agreement National Data Report

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A.3.2 Operational viability and growth capacity

Operational viability is achieved when a housing provider is generating sufficient revenues to cover any operating costs it may incur221. An operating surplus or deficit is the key driver behind the level of cash flow and as a result, directly affects growth capacity. The following sections discuss the operational viability and growth capacity of each housing provider type under the base case.

Medium tenancy managers (MTMs)

A typical MTM in the analysis is a consolidation of MTMs in NSW, Victoria and South Australia, and is therefore subject to the policy environment in each State. Housing providers in NSW manage 67 percent of all tenancies, followed by South Australia managing 23 percent and Victoria managing 10 percent.

Key policies that impact the financial results are discussed in the points below:

  • The South Australian community housing sector does not currently collect 100 percent of CRA received by the tenant, rather varying levels of CRA are collected by the SHA as part of the income based rent.
  • NSW data includes leasing subsidies that are provided to its tenancy managers for managing dwellings that are leased from the private sector. The majority of the leasehold properties are leased by CHPs from private landlords and all maintenance remains the responsibility of the landlord. Housing NSW reimburses the CHPs for any shortfalls between the lease payments they make to the landlord and the rental income they receive from tenants, as the latter is capped at the median market rent.
  • In all cases, Housing NSW also pays the CHPs a management fee for all the management services that they provide and a support fee where external support services are procured for and on behalf of the tenants.

The following table outlines the weekly operating revenues and costs per tenancy of a typical MTM.

Revenues and costs for a Medium Tenancy Manager (weekly per tenancy)
Revenues  
Rent revenue $100
Other revenue  
Interest, water charges, damages recovered, bad debts recovered, donations etc. $5
Leasing subsidies and fees $47
Commonwealth rent assistance10 $25
Sub-total $177
Costs  
Operating costs  
Maintenance (including lifecycle costs) $(20)
Salaries and administration $(24)
Tenancy management $(11)
Property development -
Rates $(10)
Insurance $(3)
Bad debts $(1)
Leasing and related costs $(70)
Sub-total $(140)
Operating surplus (deficit) $38
Tenancies (Est. FY2010) 202

10 NSW rental revenue provided did not include CRA, therefore, CRA for NSW has been estimated using the Single no Children category as defined by Centrelink.

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A typical MTM generates an operating surplus of $38 per tenancy and averages 202 tenancies under management. A key contributor to the surplus are lease subsidies provided to community housing providers in NSW to subsidise them for costs incurred by leasing dwellings at market rent from the private sector.

Leasehold stock averages 28 percent of all stock under a typical MTM or 57 dwellings and lease subsidies average $36 per week on a per tenancy basis ($1,849/annum). The subsidy is estimated to cost the State $22.4million per annum for all MTMs in the sector. It is important to emphasise, however, that the lease subsidy is not a viability subsidy but rather an affordability subsidy – without it, the provider could not provide the same level of housing assistance.

Revenue from the Commonwealth Rent Assistance (CRA) to the community housing sector is approximately $25 per tenancy per week, noting that in South Australia the community housing sector does not collect 100 percent of CRA that is received by the tenant (CRA forms part of the tenant’s total income and only 25 percent is collected). Tenancy management costs are $11 per week or $118,000 per annum for the entire portfolio. Assuming an average of 200 tenancies under management per tenancy manager222, a MTM would require 1 full time employee (FTE).

The following table highlights the operating cash flow of a typical MTM at a portfolio level.

Operations: Medium Tenancy Manager
  

Weekly/ tenancy

All tenancies (‘000)

Year 1

Year 2

Year 3

Year 4

Year 5

NPV – 25yrs

Revenues

             
Rent revenue $100 $1,025 $1,066 $1,109 $1,153 $1,199 $16,247
Other revenue $78 $810 $835 $861 $887 $915 $11,777
Expenses $(140) $(1,467) $(1,515) $(1,564) $(1,615) $(1,667) $(21,609)
Operating surplus/(deficit) $38 $368 $386 $405 $426 $447 $6,415
     Assets
Year 1 Year 2 Year 3 Year 4 Year 5 Year 25
Tenancies  202 203 204 205 206 233
Assets managed (market value; ‘000) $54,992 $55,953 $56,953 $57,992 $59,073 $92,553
Assets owned (market value; ‘000) - $272 $558 $859 $1,175 $16,169
Return on assets (all assets11) 0.66% 0.68% 0.69% 0.70% 0.72% 0.96%
Restricted cash fund (cumulative; ‘000) $74 $151 $233 $318 $408 $3,561
11 It is acknowledged that the housing provider does not own the assets, however, ROA is a measure of operational efficiency regardless of ownership.

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A typical MTM generates an operating surplus of $368,000 in year 1 and has an operating margin223 of 20 percent. Although operationally viable, the five-year average return on assets (ROA) of 0.7 percent suggests low organic growth (e.g. growth funded by core operations excluding capital grants and financing). Without additional funding, a typical MTM has the potential to procure an additional four dwellings by year five.

MTMs procuring new dwellings with their own positive net cash flow are assumed to own the dwellings. New dwellings begin building the typical MTMs balance sheet and result in an asset value of $1.175million in year five and $16.169million by year 25. The restricted cash fund of a typical MTM totals $3.561million (nominal) over 25 years and can be used at the discretion of the housing provider including maintenance or procurement of additional dwellings.

The table below highlights new dwellings and total dwellings on a national scale.

Housing stock at year 5 (all Medium Tenancy Managers)
 

New dwellings

Total dwellings

% Change

Medium Tenancy Managers

240

12,360

2%

Nationally, MTMs have the potential to procure 240 new dwellings by year five. Total dwellings owned or managed by MTMs at year five increase to 12,360, an increase of two percent. The following chart illustrates the growth in total dwellings owned or managed by all MTMs nationally over a 25-year period.

Figure description

By year 25, total dwellings owned or managed by all MTMs in the community housing sector increase to 13,980, an increase of 15 percent.

Large tenancy managers (LTMs)

LTMs in the analysis are all operating in NSW, therefore the results are primarily influenced by NSW’s policy environment. In particular, they include leasing subsidies to its tenancy managers for managing dwellings that are leased from the private sector, as previously discussed under the ‘medium tenancy manager’ section, above.

The following table outlines the weekly operating revenues and costs per tenancy of a typical LTM:

Revenues and costs for a Large Tenancy Manager (weekly per tenancy)
Revenues  
Rent revenue $100
Other revenue  
Interest, water charges, damages recovered, bad debts recovered, donations etc. 12
Leasing subsidies and fees 65
Commonwealth rent assistance12 38
Sub-total $214
Costs  
Operating costs  
Maintenance (including lifecycle costs) $(20)
Salaries and administration $(26)
Tenancy management -
Property development -
Rates $(13)
Insurance $(4)
Bad debts $(1)
Leasing and related costs $(85)
Sub-total $(150)
Operating surplus (deficit) $65
Tenancies (Est. FY2010) 817

12 NSW rental revenue provided did not include CRA, therefore, CRA for NSW has been estimated using the Single no Children category as defined by Centrelink.

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A typical LTM generates an operating surplus of $65 per tenancy and averages 817 tenancies under management. As with a typical MTM, a key contributor in offsetting operating costs are lease subsidies provided to community housing providers in NSW to subsidise them for costs incurred by leasing dwellings at market rent from the private sector.

Leasehold stock averages 42 percent of all stock under a typical LTM or 343 dwellings and lease subsidies average $48 per week on a per tenancy basis ($2,482 per annum). The subsidy is estimated to cost the State $22.3million per annum for all LTM in the sector. F.

Tenancy management cost was not provided for a typical LTM, however, tenancy manager costs may be included in the ‘Salary and admin’ category. Relative to a typical MTM, this suggests a 26 percent savings for the combined salaries and admin plus tenancy management costs.

The following table highlights the operating cash flow of a typical LTM at a portfolio level.

Operations: Large Tenancy Manager
   

Weekly/ tenancy

All tenancies (‘000)

Year 1

Year 2

Year 3

Year 4

Year 5

NPV – 25yrs

Revenues

             

Rent revenue

$100

$4,150

$4,332

$4,527

$4,730

$4,943

$68,630

Other revenue

$115

$4,839

$4,997

$5,164

$5,337

$5,515

$71,929

Expenses

$(150)

$(6,367)

$(6,582)

$(6,808)

$(7,042)

$(7,283)

$(95,219)

Operating surplus/(deficit)

$65

$2,622

$2,747

$2,883

$3,026

$3,175

$45,339

       

Assets

Year 1

Year 2

Year 3

Year 4

Year 5

Year 25

Tenancies   817 824 832 840 848 1,041
Assets managed (market value; $’000) $192,414 $196,710 $201,179 $205,827 $210,660 $360,346
Assets owned (market value; $’000) - $1,902 $4,185 $6,587 $9,115 $116,695
Return on assets (all assets13) 1.34% 1.34% 1.35% 1.35% 1.35% 1.41%
Restricted cash fund (cumulative; ‘000) $524 $1,075 $1,653 $2,260 $2,896 $25,036
13 It is acknowledged that the housing provider does not own the assets, however, ROA is a measure of operational efficiency regardless of ownership.

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A typical LTM is operationally viable and generates an operating surplus of $2.6m in year 1 and has an operating margin of 29 percent. A typical LTM has a five-year average ROA of 1.4 percent which suggests moderate organic growth; consequently, a typical LTM has the potential to procure an additional 31 dwellings by year five without additional funding.

Similar to MTMs, it is assumed that LTMs procuring new dwellings with their own positive net cash flow are assumed to own the dwellings. New dwellings begin building the typical LTMs balance sheet and result in an asset value of $9million in year five and $117million by year 25. The restricted cash fund of a typical MTM totals $25million (nominal) over 25 years and can be used at the discretion of the housing provider including maintenance or procurement of additional dwellings.

The table below highlights new dwellings and total dwellings on a national scale.

Housing stock at year 5 (all Large Tenancy Managers)
 

New dwellings

Total dwellings

% Change

Large Tenancy Managers

341

9,328

4%

Nationally, LTMs have the potential to procure 341 new dwellings by year five. Total dwellings owned or managed by all LTMs in the community housing sector increases to 9,328, an increase of four percent by year five. The following chart illustrates the growth in total dwellings owned or managed by all LTMs nationally over a 25-year period.

Figure description

By year 25, total dwellings under LTMs in the community housing sector increase to 11,451, an increase of 27 percent.

Housing owner / developers (HODs)

All HOD data used in the analysis has been provided by Victoria and is therefore subject to the Victorian policy and operating environment. HODs in Victoria have significantly different organisational structures and objectives and they are currently gearing for growth. The following points highlight the key limitations to the direct comparison of typical HODs to typical tenancy managers:

  • HODs are currently in a steep growth phase and are augmenting their organisational structure and capacity for growth by hiring highly skilled staff such as those in property development and financing managers. As a consequence of higher costs, HODs are characterised by relatively lower operating surpluses.
  • Many HODs may also experience lower operating surpluses due to incurring higher operating costs associated with asset management strategies, which includes improving the condition of public housing stock transferred to the HOD224.
  • There is significant difference in the policy environment in Victoria that has been created specifically for asset-owning and developing organisations with a mandate to achieve growth and leverage, particularly when compared to tenancy managers in other States.
  • HODs in Victoria do not receive any operating subsidies that tenancy managers may receive for managing publically owned housing stock.
  • HODs may have income from other businesses, such as those from transitional housing and development activities, which are not included in the analysis.

The following table outlines the weekly operating revenues and costs per tenancy of a typical HOD.

Revenues and costs for a housing owner / developer (weekly per tenancy)

Revenues

 
Rent revenue $114
Other revenue  
Interest, water charges, damages recovered, bad debts recovered, donations etc. $1
Leasing subsidies and fees -
Commonwealth rent assistance (included in rent)
Sub-total $115
Costs  
Operating costs  
Maintenance (including lifecycle costs) $(14)
Salaries and administration $(41)
Tenancy management $(16)
Property development -
Rates $(18)
Insurance $(12)
Bad debts $(3)
Leasing and related costs -
Sub-total $(104)
Operating surplus (deficit) $11
Tenancies (Est. FY2010) 501

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Given the revenue and cost profile in the table above, a typical HOD generates an operating surplus of $11 per tenancy and averages 501 tenancies owned and under management. Relative to typical MTMs and LTMs, a typical HOD appears to have the lowest overall costs. However, there are limitations in comparing HODs to the tenancy managers as there may be significant differences in the cost base across these categories such as the lack of leasehold related costs.

Limitations in data availability have resulted in not being able to isolate ‘Property development’ costs from the other categories. In order to derive costs associated with property development, it is assumed that ‘Salaries and admin’ plus ‘Tenancy management’ cost per tenancy to be the weighted average of medium and large tenancy managers of $30 plus an additional $5 for increased overheads. The remaining $22 per tenancy per week ($573,000 per annum) is assumed to be property development related costs for the typical developer (e.g. consultant fees, in-house skills, legal costs, contingencies, etc.). The result re-enforces the current situation where HODs are augmenting the capabilities to manage future growth.

The following table highlights the operating cash flow of a typical HOD at a portfolio level.

Operations: Housing Owner / developer
   

Weekly/ tenancy

All tenancies (‘000)

Year 1

Year 2

Year 3

Year 4

Year 5

NPV – 25yrs

Revenues              
Rent revenue $114 $2,901 $3,182 $3,417 $3,653 $3,893 $50,833
Other revenue $1 $22 $24 $26 $27 $29 $355
Expenses $(104) $(2,702) $(2,950) $(3,153) $(3,353) $(3,557) $(45,160)
Operating surplus/(deficit) $11 $221 $256 $290 $326 $365 $6,029
       

Assets

Year 1

Year 2

Year 3

Year 4

Year 5

Year 25

Tenancies  501 531 551 569 586 616
Assets managed14 (market value; $’000) - - - - - -
Assets owned (market value; $’000) $100,552 $106,781 $114,817 $122,699 $130,667 $244,395
Loan to Value Ratio (LVR) 1.2% 1.1% 1.0% 0.8% 0.7% 1.8%
Return on assets (all assets) 0.22% 0.24% 0.25% 0.26% 0.27% 0.56%
Restricted cash fund (cumulative; ‘000) $111 $190 $272 $354 $422 $3,638

14 All housing assets are assumed to be owned by the Housing owner / developer.

The increased cost incurred due to the capacity-building phase that the Victorian HODs are currently in results in a relatively low operating surplus of $221million in year 1 and an operating margin of just 8 percent for a typical HOD. Although operationally viable, the five-year average return on assets (ROA) of 0.3 percent suggests low organic growth. It is important to note, however, that there is potential for the ROA to increase as the HODs reach a more mature phase where revenues and costs are better matched.

A typical HOD has the potential to procure an additional 107 dwellings between year 0 (FY2009) and year five (FY2014). This growth is directly attributable to existing capital grants225 and, to a lesser extent, private financing. The restricted cash fund of a typical HOD totals at $3.6million (nominal) over 25 years and can be used at the discretion of the housing provider including maintenance or procurement of additional dwellings.

The table below highlights new dwellings and total dwellings on a national scale.

Housing stock at year 5 (all housing owners / developers)
 

New dwellings

Total dwellings

% Change

Housing Owner/Developers

1,177

6,446

21%

Nationally, HODs have the potential to procure 1,177 new dwellings by year five. Total dwellings owned by all HODs in the community housing sector increases to 6,446, an increase of 21 percent by year five. The following chart illustrates the growth in total dwellings owned and total debt outstanding of all HODs nationally over a 25-year period.

Figure description

Nationally, total dwellings owned by HODs in the community housing sector at year 25 is 6,776, an increase of 28 percent. The greatest growth, however, occurs in the first five years and is primarily driven by current capital grant funding received.

Total financing226 is expected total $197million over 25 years resulting an average LVR of two percent - well below the target of 15 percent - 25 percent227. It is noted, however, that much of the current HOD matching has been achieved through land, cash and philanthropic donations, which has not been included in the analysis. Further, assuming the HODs reach a more mature phase where revenues and costs are better matched, there is potential for an increase in cash available to service debt, which would enable an increase in borrowings.

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A.3.3 Base case conclusions

The following key points regarding the financial viability and growth capacity of the three housing provider types emerge:

  • Viability – On average228, all typical housing provider types in scope are operationally viable and generating varying levels of operating surpluses. However, their cash flow does not generate sufficient cash surpluses for increasing growth capacity.
  • Growth under medium tenancy managers – The portfolio of a typical medium tenancy managers (MTMs) includes approximately 28 percent under a leasehold arrangement with the private sector. Although the subsidies are a cost to the SHA, without these subsidies, the tenancy managers would not be able to utilise private sector properties and therefore not be able to provide the same level of housing capacity. Nationally, MTMs have the potential to procure 240 new dwellings by year five with total dwellings managed by MTMs increasing to 12,360, an increase of two percent.
  • Growth under large tenancy managers – The portfolio of a typical large tenancy managers includes approximately 42 percent under a leasehold arrangement with the private sector. Although the subsidies are a cost to the SHA, without these subsidies, the tenancy managers would not be able to utilise private sector properties and therefore not be able to provide the same level of housing capacity. Nationally, LTMs have the potential to procure 341 new dwellings by year five with total dwellings managed by LTMs increase to 9,328, an increase of four percent.
  • Growth under housing owners / developers – All housing owner / developer data has been provided by Victoria and is therefore reflective of the current operating environment that State. Housing owner / developers in Victoria are currently in a capacity building phase, resulting in a typical housing owner / developer experiencing relatively low operating surpluses and consequently a low ROA suggesting limited organic growth. There is potential, however, for the ROA to increase as the housing owners / developers reach a more mature phase where revenues and costs are better matched. Growth in the short to medium term is facilitated by capital grants currently provided to the housing owners / developers. Nationally, housing owners / developers have the potential to procure 1,177 new dwellings by year five with total dwellings owned by HODs increasing to 6,446, an increase of 21 percent.
  • Optimal size - There is no clear minimum size for viability of these provider types. However the modelling suggests there may be some cost efficiencies for large tenancy managers (relative to medium tenancy managers). There are also other benefits of scale including the ability to employ skilled staff and/or procure expertise to support the organisation’s growth objectives.

The table below highlights the growth in housing stock under the base case by year five.

Base Case – Growth in housing stock (Total community housing sector)
 

At Year five

New dwellings

Total dwellings

% Change

Medium tenancy manager

240

12,360

2%

Large tenancy manager

341

9,328

4%

Housing owner / developer

1,177

6,446

21%

Totals (excl. small/specialised providers and NBJP)

1,758

28,134

4%

Total CH dwellings (incl. small/specialised providers, NBJP15)

54,997

44%

15 It has been assumed that the Nation Building and Jobs Plan (NBJP) will increase dwellings by 20,000, 75 percent of which will be in community housing.

The following key points emerge:

  • The results of the base case indicate a modest growth in housing stock of 1,758 new dwellings by year five.
  • Inclusive of small and specialised housing provider as well as the NBJP, the number of dwellings in community housing sector is expected to total 54,997 dwellings, a 44 percent increase by year five.
  • The base case does not achieve significant growth capacity in the community housing sector and falls short of the 150,000 dwelling target set by Housing Ministers by 95,003 dwellings.

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A.4 Policy lever results

A.4.1 Lever 1 – Rent policy

Lever 1 involves application of rental policies that are set at a cost-base rent, affordable income-based rent, affordable market-based rent and at a return-based rent. It is noted that since the base case analysis shows that all typical housing providers are operationally viable and generating operating surpluses, applying a cost-based rental policy to the base case is not required as it would reduce rental revenue to cover costs only.

For the purpose of this analysis, community housing sector tenants were stratified into three categories; very low, low and moderate income tenants based on Housing NSW defined thresholds and ABS household income data. The following table outlines the current tenant mix for the base case across the three providers.

Current tenant mix
 

Medium tenancy manager

Large tenancy manager

Owner / Developer

Tenancies by income group16

Average tenant mix17

Average tenant mix17

Average tenant mix17

Very low income households

86

43%

376

46%

175

36%

Low income households

67

33%

245

30%

203

42%

Moderate income households

48

24%

196

24%

106

22%

Weighted average rent

$100

$100

$11418

Rent as a percentage of income

25%

25%

25%

16 Income levels have not been controlled for household size.

17 This tenant mix was derived through a combination of Victorian provided tenant mix data and ABS data.

18 Rent includes CRA (Victoria data only).

In addition to the base case assumptions, the application of Lever 1 assumes the following key assumptions:

  • the tenant mix is constant;
  • increased to rents are evenly distributed across the tenant types;
  • current rent as a percentage of income is 25 percent;
  • any rental charge above 30 percent is not considered affordable;
  • the analysis of rent as a proportion of income excluded any CRA payment received by the tenant, therefore, if a tenant is eligible for CRA and the provider captures part or all of that payment, the full rent paid by the tenant may exceed 25 or 30 percent;
  • market-based rent is 74.9 percent of the weighted average median rent of NSW, Victoria and South Australia; and
  • return-based rent is targeted at a ROA of four percent.

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Medium tenancy manager

The following table highlights the impacts to operational viability, growth capacity and affordability for tenants as a result of applying each rent policy to the MTM base case.

Rent setting option results – Medium Tenancy Manager
 

Base Case

Affordable Income-based rent

Affordable Market- based rent

Return-based rent

Operating viability

Rent revenue

       

Very low income households

$67

$80

$161

$190

Low income households

$106

$128

$255

$302

Moderate income households

$150

$179

$359

$425

Weighted average rent

$100

$120

$239

$283

Other revenue

$78

$88

$90

$90

Expenses

$(140)

$(140)

$(140)

$(140)

Operating surplus/(deficit)

$38

$68

$189

$233

Growth capacity

Cumulative new stock in year 5

       

Per medium tenancy manager

4

8

23

29

Nationally

240

480

1,380

1,740

Total stock for all MTMs in year 5

12,360

12,600

13,500

13,860

Percent increase

2%

4%

11%

14%

Return on Assets (5-year average)

0.7%

1.2%

3.3%

4.0%

Affordability

Rent as a percentage of income

25%

30%

60%

71%

Affordable rent

Yes

Yes

No

No

Less than 74.9% of mkt. rent

Yes

Yes

Yes

No

An Affordable Income-Based Rent increases the average rental charge to tenants by $20, to $120 per week and results in an increase in operating surplus to $68, whilst maintaining rent as a percentage of income at 30 percent. This rent policy also achieves a 1.2 percent ROA and a four percent increase in total dwellings. This results in a total of 480 new dwellings for all MTMs or 12,720 in total MTM community housing sector dwellings by year five.

Affordable Market-Based Rent and Return-Based Rent achieve relatively greater growth capacity, however, the rent charged to the typical tenants is not affordable with rent as a percentage of income at 60 percent and 71 percent, respectively.

The table below outlines the funding requirement in order to achieve a target ROA of four percent whilst maintaining rent as a percentage of income at 30 percent.

Additional funding requirement – Medium Tenancy Manager
 

Affordable Income-based rent

Return-based rent

Gap

Rent revenue

$120

$283

$163

Other revenue

$88

$90

$2

Expenses

$(140)

$(140)

-

Operating surplus/(deficit)

$68

$233

$165

Additional annual funding per housing provider required to achieve a 4.0% return

$1.8m

Total additional annual funding required to achieve a 4.0% return for the sector

$106m

The following key points emerge:

  • An Affordable Income-Based Rent policy, where rent as a percentage of income is increased from 25 percent to 30 percent across all income groups, does not provide the catalyst for significant growth capacity.
  • Market-based and return-based rents are not affordable for typical very low, low or moderate income tenants of MTMs.
  • To achieve an ROA of four percent and increase growth capacity equal to a Return-Based Rent by year five, annual recurrent funding of $106million is required for all MTMs in the community housing sector.

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Large tenancy managers

The following table highlights the impacts to operational viability, growth capacity and affordability for tenants as a result of applying each rent policy to the LTM base case.

Rent setting option results - Large Tenancy Manager
 

Base Case

Affordable Income-based rent

Affordable Market- based rent

Return-based rent

Operating viability

Rent revenue

       

Very low income households

$70

$84

$177

$157

Low income households

$105

$126

$264

$234

Moderate income households

$150

$180

$378

$335

Weighted average rent

$100

$120

$251

$223

Other revenue

$115

$130

$133

$133

Expenses

$(150)

$(150)

$(150)

$(150)

Operating surplus/(deficit)

$65

$100

$234

$205

Growth capacity

Cumulative new stock in year 5

       

Per medium tenancy manager

31

49

120

105

Nationally

341

539

1,320

1,155

Total stock for all MTMs in year 5

9,328

9,526

10,307

10,142

Percent increase

4%

6%

15%

13%

Return on Assets (5-year average)

1.4%

2.0%

4.5%

4.0%

Affordability

Rent as a percentage of income

25%

30%

63%

56%

Affordable rent

Yes

Yes

No

No

Less than 74.9% of mkt. rent

Yes

Yes

Yes

Yes

An Affordable Income-Based Rent increases the average rental charge to tenants by $20 to $120 per week and results in an increase in operating surplus to $100, whilst maintaining rent as a percentage of income at 30 percent. This rent policy also achieves a two percent ROA and a 6 percent increase in total dwellings. This results in a total of 539 new dwellings for all LTMs, or 9,526 in total LTM community housing sector dwellings by year five.

Affordable Market-Based Rent and Return-Based Rent achieve relatively greater growth capacity, however, the rent charged to the typical tenants are not affordable with rent as a percentage of income at 63 percent and 56 percent, respectively.

The table below outlines the funding requirement in order to achieve a target ROA of four percent whilst maintaining rent as a percentage of income at 30 percent.

Additional funding requirement - Large Tenancy Manager
 

Affordable Income-based rent

Return-based rent

Gap

Rent revenue

$120

$223

$103

Other revenue

$130

$133

$3

Expenses

$(150)

$(150)

-

Operating surplus/(deficit)

$100

$205

$106

Additional annual funding per housing provider required to achieve a 4.0% return

$4.5m

Total additional annual funding required to achieve a 4.0% return for the sector

$50m

The following key points emerge:

  • An Affordable Income-Based Rent policy, where rent as a percentage of income is increased from rent from 25 percent to 30 percent across all income groups, does not provide the catalyst for significant growth capacity.
  • Market-based and return-based rents are not affordable for typical very low, low or moderate income tenants of LTMs.
  • To achieve an ROA of four percent and increase growth capacity equal to a Return-Based Rent by year five, annual recurrent funding of $50million is required for all LTMs in the community housing sector.

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Housing owner / developers

The following table highlights the impacts to operations viability, growth capacity and affordability for tenants as a result of applying each rent policy to the HOD base case.

Rent setting option results - Housing Owner/Developer
 

Base Case

Affordable Income-based rent

Affordable Market- based rent

Return-based rent

Operating viability

Rent revenue

       

Very low income households

$81

$97

$146

$199

Low income households

$114

$137

$207

$281

Moderate income households

$166

$199

$301

$408

Weighted average rent

$114

$136

$205

$279

Other revenue19

$1

$1

$1

$1

Expenses

$(104)

$(104)

$(104)

$(104)

Operating surplus/(deficit)

$11

$33

$103

$176

Growth capacity

Cumulative new stock in year 5

       

Per medium tenancy manager

107

122

172

235

Nationally

1,177

1,342

1,892

2,585

Total stock for all MTMs in year 5

6,446

6,611

7,161

7,854

Percent increase

21%

24%

35%

48%

Return on Assets (5-year average)

0.3%

0.8%

2.4%

4.0%

Affordability

Rent as a percentage of income

25%

30%

45%

61%

Affordable rent

Yes

Yes

No

No

Less than 74.9% of mkt. rent

Yes

Yes

Yes

No

19 Victorian rental data includes CRA.

An Affordable Income-Based Rent increases the average rental charge to tenants by $22 to $136 per week and results in an increase in operating surplus to $33, whilst maintaining rent as a percentage of income at 30 percent. This rent policy also achieves a one percent ROA and a 24 percent increase in total dwellings totalling 1,342 new dwellings for all HODs or 6,611 in total HOD community housing sector dwellings by year five. As discussed in section A.3 under the HOD base case, the primary driver behind short to medium term growth is capital grants currently provided to HODs. Without the grants, the ROA of one percent suggests that a typical HOD cannot generate significant growth without additional funding.

Affordable Market-Based Rent and Return-Based Rent achieve relatively greater growth capacity, however, the rents charged to the typical tenants are not affordable, with rent as a percentage of income at 45 percent and 61 percent, respectively.

The table below outlines the funding requirement in order to achieve a target ROA of four percent whilst maintaining rent as a percentage of income at 30 percent.

Additional funding requirement - Housing Owner/Developer
 

Affordable Income-based rent

Return-based rent

Gap

Rent revenue

$136

$279

$143

Other revenue

$1

$1

-

Expenses

$(104)

$(104)

-

Operating surplus/(deficit)

$33

$176

$143

Additional annual funding per housing provider required to achieve a 4.0% return

$4.0m

Total additional annual funding required to achieve a 4.0% return for the sector

$44m

The following key points emerge:

  • An Affordable Income-Based Rent policy where rent as a percentage of income is increased from rent from 25 percent to 30 percent across all income groups does not provide the catalyst for significant growth capacity.
  • Market-based and return-based rents are not affordable for typical very low, low or moderate income tenants of HODs.
  • To achieve an ROA of four percent and increase growth capacity equal to a Return-Based Rent by year five, annual recurrent funding of $44million is required for all HODs in the community housing sector.

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Summary of Lever 1 results

Lever 1 examines the impact of four rent-setting policies. The following key points from the analysis emerge:

  • Rent under the base case already results in an operating surplus for the three housing provider types, therefore, the current rent setting policy for a typical housing provider has exceeded a cost-based rent.
  • A return-based rent set to achieve a four percent return and a market-based rent both provide an increase in growth capacity, however these rent setting policies also result in rents above the 30 percent of income affordability threshold for all tenant income categories including very low, low or moderate tenants.
  • Although an affordable rental based on a maximum of 30 percent of tenant income increases operating surpluses across all housing provider types, it does not provide the catalyst for significant growth capacity.

The table below outlines the results of applying an affordable rent policy to the base case.

Lever 1 – Summary of affordable rent results (Total community housing sector)
 

Ave rent (weekly)

At Year five

New dwellings

Total dwellings

% Change

Medium tenancy manager

$120

480

12,600

4%

Large tenancy manager

$120

539

9,526

6%

Housing owner / developer

$136

1,342

6,611

24%

Totals

(excl. small/specialised providers and NBJP)

2,361

28,737

6%

Total CH dwellings

(incl. small/specialised providers, NBJP20

55,600

45%

20 It has been assumed that the Nation Building and Jobs Plan (NBJP) will increase dwellings by 20,000, 75 percent of which will be in community housing.

21 The results do not include the impact of additional funding to achieve a ROA of four percent.

Inclusive of small and specialised housing providers as well as the NBJP, the number of dwellings in community housing sector is expected to total 55,600 dwellings, a 45 percent increase by year five.

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A.4.2 Lever 2 – Title transfer

Lever 2 involves the transfer of title to public housing stock currently managed by tenancy managers to MTMs and LTMs as defined in section 2.1.1.

In addition to the base case assumptions provided in section A.2.2, the application of Lever 2 assumes the following key assumptions:

  • leasehold properties are not transferred to the tenancy managers;
  • all properties owned by the States will be transferred with minimal or no cost;
  • caveats on title transfer will not prohibit the procurement of private financing;
  • revenues and costs associated with leasehold properties are ring-fenced from financing arrangements as the assets cannot be used as security for borrowings;
  • the current financial climate limits lending to shorter-term facilities229 that reduce risk for lenders. Based on preliminary market sounding a 5-year refinancing facility, which repays 50 percent of its principle by the refinancing period, has been assumed; and
  • key tests for financial institutions are the loan to value ratio (LVR) and interest coverage ratio. Based on preliminary market sounding, a maximum LVR of 50 percent and a minimum ICR of 2x have been assumed.

Medium tenancy providers

The following table highlights the impacts to assets, financing and growth capacity as a result of applying title transfer to the MTM base case.

Impact of title transfer – Medium Tenancy Manager
 

Base Case

Title transfer

Assets

Total under management only (typical MTM)

202

5722

Total titles transferred (typical MTM)

-

145

Financing

   

Total financing over 25 years (typical MTM)

-

$14m

Total financing over 25 years (all MTMs)

-

$863m

Loan to Value Ratio23

-

4%

Total new stock in year 5

   

Per medium tenancy manager

4

8

Nationally

240

480

Total dwellings in community housing in year 5

12,360

12,600

Percent increase

2%

4%

22 Leasehold properties are not transferred.

23 LVR is based on properties transferred and owned by the housing provider only (excludes leaseholds) over 25 years, on a consolidated entity bases.

Under the title transfer lever, a typical MTM will be given title to 145 dwellings. The typical MTM will still manage 57 leasehold dwellings, but will not hold title to them.

Over 25 years, a typical MTM has the potential to procure $14million in financing from financial institutions ($863million for all MTMs). The key limitation to the amount borrowed being the extent that providers have operating surpluses to service the debt. Although a MTM is viable at current revenue levels, the operating surplus is not significant enough to achieve an LVR greater than four percent.

Over five years, the debt financing modestly increases total community housing sector dwellings owned or managed by MTMs from 12,360 under the base case to 12,600 nationally, an increase of two percent.

The graph below illustrates the level of housing stock and debt outstanding over 25 years for all MTMs in the community housing sector.

Figure description

By year 25, all MTMs have the potential to procure over $863million (nominal) in financing and increase their stock by 28 percent to 15,480 new dwellings nationally.

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Large tenancy managers

The following table highlights the impacts to assets, financing and growth capacity as a result of applying title transfer to the LTM base case.

Impact of title transfer – Large Tenancy Manager
 

Base Case

Title transfer

Assets

Total under management only (typical LTM)

817

34424

Total titles transferred (typical LTM)

-

473

Financing

   

Total financing over 25 years (typical LTM)

-

$83m

Total financing over 25 years (all LTMs)

-

$916m

Loan to Value Ratio25

-

7%

Total new stock in year 5

   

Per large tenancy manager

31

57

Nationally

341

627

Total dwellings in community housing in year 5

9,328

9,614

Percent increase

4%

7%

24 Leasehold properties are not transferred.

25 LVR is based on properties transferred and owned by the housing provider only (excludes leaseholds) over 25 years, on a consolidated entity bases.

Under the title transfer lever, a typical LTM will be given title to 473 dwellings. The typical LTM will still manage 344 leasehold dwellings, but will not hold title to them.

Over 25 years, a typical LTM has the potential to procure $83million in financing from financial institutions ($916million for all LTMs). The key limitation to the amount borrowed being the extent that providers have operating surpluses to service the debt. Although a LTM is viable at current revenue levels, the operating surplus is not significant enough to achieve an LVR greater than 7 percent.

Over five years, the debt financing modestly increases total community housing sector dwellings owned or managed by LTMs from 9,328 under the base case to 9,614 nationally, an increase of three percent.

The graph below illustrates the level of housing stock and debt outstanding over 25 years for all LTM in the community housing sector.

Figure description

By year 25, all LTMs have the potential to procure over $916million (nominal) in financing and increase their stock by 47 percent to 13,167 new dwellings nationally.

Summary of Lever 2 results

Lever 2 examines the impact of title transfer of public housing stock currently managed by MTMs and LTMs. The table below outlines the results of applying Lever 2 to the base case.

Lever 2 – Summary of Title transfer results (Total community housing sector)
 

Over 25 years

At Year five

Debt

LVR26

New dwellings

Total dwellings

% Change

Medium tenancy manager

$863m

4%

480

12,600

4%

Large tenancy manager

$916m

7%

627

9,614

7%

Housing owner / developer27

$197m

2%

1,177

6,446

21%

Totals (excl. small/specialised providers and NBJP)

2,284

28,660

6%

Total CH dwellings (incl. small/specialised providers, NBJP28)

55,523

45%

26 LVR is based on properties transferred and owned by the housing provider only (excludes leaseholds) over 25 years, on a consolidated entity bases.

27 Results from base case analysis (it is assumed that the Housing owner / developers already own their housing assets).

28 It has been assumed that the Nation Building and Jobs Plan (NBJP) will increase dwellings by 20,000, 75 percent of which will be in community housing.

The following key points from the analysis emerge:

  • Title transfer and the ownership of housing assets enables MTMs and LTMs to provide security and procure financing from financial institutions.
  • Nationally MTMs and LTMs can potentially borrow up to a combined $1.78billion over 25 years with loan to value ratios of four percent and 7 percent, respectively.
  • The lower operating surplus of HODs attributed to the current capacity building in Victoria results in a relatively lower LVR due to limited cash available to service debt.
  • Title transfer by itself does not provide for significant growth capacity in the community housing sector. Also important is the level of cash available to service debt because without a healthy cash flow, the level of financing that the housing provider can afford to service is limited.
  • Inclusive of small and specialised housing providers as well as the NBJP, the number of dwellings in the community housing sector is expected to total 55,523 dwellings, a 45 percent increase by year five.
  • It is important to note that the ability to procure financing is not the only result associated with title transfer. Other key benefits and risks are discussed in section 0 of this report.

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A.4.3 Lever 3 – Lowering the cost of debt

The analysis of Lever 3 analyses the impact of lowering the cost of debt by 200bps230 on the growth capacity of the community housing sector. The table below outlines the results of applying Lever 3 to the base case.

Lever 3 - Summary results of lowering the cost of debt (Total community housing sector)
 

Over 25 years

At Year five

Debt

LVR29

New dwellings

Total dwellings

% Change

Medium tenancy manager

$1.15b

5%

540

12,660

4%

Large tenancy manager

$1.23b

8%

715

9,702

8%

Housing owner / developer30

$255m

2%

1,188

6,457

22%

Totals (excl. small/specialised providers and NBJP)

2,443

28,819

6%

Total CH dwellings (incl. small/specialised providers, NBJP31)

55,682

45%

29 LVR is based on properties transferred and owned by the housing provider only (excludes leaseholds) over 25 years, on a consolidated entity bases.

30 Results from base case analysis (it is assumed that the Housing owner / developers already own their housing assets).

31 It has been assumed that the Nation Building and Jobs Plan (NBJP) will increase dwellings by 20,000, 75% of which will be in community housing.

The following key points from the analysis emerge:
  • Lever 3 is predicated upon the assumptions under Lever 2, where title is transferred to the both medium and large tenancy managers.
  • Lowering the cost of debt to 7.0 percent increases the combined potential borrowings of the community housing sector over 25 years by approximately $655million (nominal) to $2.63billion.
  • Inclusive of small and specialised housing provider as well as the NBJP, the number of dwellings in community housing sector is expected to total 55,682 dwellings, a 45 percent increase by year five.

The analysis shows that the impact of lowering the cost of debt is marginal, resulting in a five-year increase of 159 new dwellings relative to the rate before adjustment. In light of this result, consideration should be given to the administrative costs of any financial arrangement, which may include:

  • for government guarantees, a higher level of regulation of housing providers to increase certainty that providers and projects are viable and therefore guarantees will not be called on;
  • for financial intermediaries, depending on the model chosen, there may be administrative costs associated with establishing and resourcing an entity that has capacity to sell government bonds and administer lower interest loans to providers; and
  • for both options, the cost of any additional government subsidies that could be required to make entities or projects sufficiently viable to minimise the financial risks to government of providers failing.

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A.4.4 Lever 4 - Inclusion of the current and expanded NRAS scheme

Lever 4 analyses the impact to the growth capacity of the community housing sector from the inclusion of not only the current NRAS incentives but also an expansion of the NRAS program of an additional 50,000 incentives. Two scenarios were analysed as follows:
  • Scenario 1 – Scenario 1 assumes that 40 percent of the current remaining NRAS incentives will be awarded to the community housing sector for the procurement of new dwellings up to 30 June 2012. This scenario also assumes an expanded NRAS scheme with an additional 50,000 incentives beginning 1 July 2012 where 25 percent of the new incentives are awarded to the community housing sector for the procurement of new dwellings over five years to 30 June 2017. The total procurement schedule spans eight years.
  • Scenario 2 – In addition to the procurement of new dwellings by the community housing sector as outlined under Scenario 1, a further 30 percent of the dwellings procured by the private sector under the current NRAS scheme are managed by MTMs and LTMs (split evenly between them). Under the assumption of an expanded NRAS scheme, the remaining 75 percent of incentives are awarded to the private sector but also managed by MTMs and LTMs.

In addition to the base case assumptions provided in section A.2.2, the application of Lever 4 assumes the following key assumptions:

  • All dwellings procured by the community housing sector will be 100 percent debt funded, as such, there will be no capital funding gap related to the procurement of the dwellings.
  • Under Scenario 1, LTMs have been assumed to procure 20 percent of all NRAS incentive related community housing dwellings with HODs procuring the remaining 80 percent.
  • Debt funding is assumed to be secured by the NRAS dwellings themselves; therefore the new dwellings cannot be used to secure additional financing.
  • NRAS projects are cash flow neutral to the community housing providers, where it is assumed that all revenues cover both operational and financing costs and achieve a break even position, resulting in no net cash flow surpluses or deficits.
  • A sale rate of 80 percent has been assumed at the end of each 10-year eligibility period for both community housing sector owned and private sector owned stock. Taking capital appreciation into consideration, it is estimated that this amount would be enough to repay all outstanding debt.
  • NRAS Round 1, where 3,500 new dwellings are expected to be available for rent during 2008 – 2009, is assumed to be completed and therefore not included in the current remaining NRAS incentives. Remaining incentives for FY2010-FY2012 total 46,500.

Scenario 1

The table below highlights the overall procurement schedule of the community housing sector under NRAS Scenario 1.

NRAS procurement schedule - Scenario 1
 

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

 

FY2010

FY2011

FY2012

FY2013

FY2014

FY2015

FY2016

FY2017

NRAS dwellings

(CH procured)

6,204 6,204 6,204 2,497 2,497 2,497 2,497 2,497

Cumulative NRAS dwellings

6,204 12,408 18,612 21,109 23,606 26,103 28,600 31,097

Cumulative non-NRAS new dwellings

198 676 1,055 1,412 1,758 1,972 2,164 2,312

Total new dwellings

6,402 13,084 19,667 22,521 25,364 28,075 30,764 33,409

NRAS Scenario 1 is expected to add an additional 23,606 dwellings by year five (31,097 dwellings by year eight), which makes a significant impact to the number of dwellings in the community housing sector. Inclusive of non-NRAS dwellings, new dwellings in the community housing sector by year five will total 25,364 (33,409 dwellings by year eight).

The chart below illustrates the impact of the new NRAS dwellings on LTMs over 25 years.

Figure description

The following key points emerge:

  • There is a significant increase to community housing stock owned or managed by a LTM over the first eight years totalling 564 new NRAS dwellings per typical LTM or 6,204 nationally.
  • Beginning in year 10 (FY2019), the number of dwellings begin to drop due to the assumed 80 percent sell down rate.

The chart below illustrates the impact of new NRAS dwellings on HODs over 25 years.

Figure description

The following key points emerge:

  • There is a significant increase to community housing stock owned or managed by a HOD over the first eight years totalling 2,263 dwellings per typical HOD or 24,893 nationally.
  • Similarly to the LTMs, the number of dwellings begins to drop due to the assumed 80 percent sell down rate, beginning in year 10 (FY2019).
The table below outlines the result of applying Lever 4, Scenario 1 to the base case.
Lever 4 - Summary results of NRAS Scenario 1 (Total community housing sector)
 

At Year five

New dwellings

Total dwellings

% Change

Medium tenancy manager (no change from base case)

240

12,360

2%

Large tenancy manager

5,060

14,047

56%

Housing owner / developer

20,064

25,333

377%

Totals (excl. small/specialised providers and NBJP)

25,364

51,740

66%

Total CH dwellings (incl. small/specialised providers, NBJP32)

78,603

105%

32 It has been assumed that the Nation Building and Jobs Plan (NBJP) will increase dwellings by 20,000, 75% of which will be in community housing.

The following key points from the analysis of Scenario 1 emerge:
  • NRAS assumptions under Scenario 1 have the potential to increase the total number of dwellings in the community housing sector either owned or managed by LTMs by 5,060 nationally, a 56 percent increase by year five.
  • HODs have the potential to increase the total number of dwellings owned in the community housing sector by 20,064 nationally, a 377 percent increase by year five.
  • Inclusive of small and specialised housing provider as well as the NBJP, the number of dwellings in community housing sector is expected to total 78,603 dwellings, a 105 percent increase by year five.
  • Assuming total incentives of $8,000 per annum per new dwellings, the cost to the Commonwealth and State Governments for NRAS dwellings owned or managed by the community housing sector by year five under Scenario 1 is $142million and $47million, respectively.
  • There is a risk of a sell down of dwellings that is expected to occur at the end of each 10-year incentive eligibility period, which may significantly reduce the capacity of the community housing sector to provide housing assistance.

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Scenario 2

The table below highlights the procurement schedule of Scenario 2 in the community housing sector.

NRAS procurement schedule – Scenario 2
 

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

 

FY2010

FY2011

FY2012

FY2013

FY2014

FY2015

FY2016

FY2017

NRAS dwellings

(CH managed)

4,672 4,672 4,672 7,471 7,471 7,471 7,471 7,471

NRAS dwellings

(CH procured)

6204 6204 6204 2497 2497 2497 2497 2497

Cumulative NRAS dwellings

10,876 21,752 32,628 42,596 52,564 62,532 72,500 82,468

Cumulative non-NRAS new dwellings

198 676 1,055 1,412 1,758 1,972 2,164 2,312

Total new dwellings

11,074 22,428 33,683 44,008 54,322 64,504 74,664 84,780

Scenario 2 builds on the procurement schedule under Scenario 1, and therefore adds an additional 52,564 dwellings by year five (82,468 by year eight). Adding non-NRAS dwellings, new dwellings in the community housing sector by year five is totals 54,322 by year five (84,780 by year eight). Relative to Scenario 1, the inclusion of additional dwellings to be managed under Scenario 2 makes an even more significant impact to the number of dwellings in the community housing sector.

The chart below illustrates the impact of the NRAS dwellings for management on MTMs over 25 years.

Figure description

The following key points emerge:

  • There is a significant increase to community housing stock managed by a MTM over the first eight years, totalling 427 new NRAS dwellings per typical MTM or 25,620 nationally.
  • Beginning in year 10 (FY2019), the number of dwellings begin to drop due to the assumed 80 percent sell down rate.

The next chart below illustrates the impact of new NRAS dwellings on LTMs over 25 years.

Figure description

The following key points emerge:

  • The addition of NRAS dwellings to manage to new NRAS dwellings procured under Scenario 1 results in an even more significant increase to the number of community housing dwellings. NRAS dwellings owned or managed by LTMs over the first eight years total 2,905 dwellings per typical LTM or 31,955 nationally.
  • Similarly to the MTMs, the number of dwellings begin to drop due to the assumed 80 percent sell down rate, beginning in year 10 (FY2019).

The table below outlines the result of applying Lever 4, Scenario 2 to the base case.

Lever 4 - Summary results of NRAS Scenario 2 (Total community housing sector)
 

At Year five

New dwellings

Total dwellings

% Change

Medium tenancy manager

14,700

26,820

121%

Large tenancy manager

19,558

28,545

218%

Housing owner / developer (no change from Scenario 1)

20,064

25,333

377%

Totals (excl. small/specialised providers and NBJP)

54,322

80,698

142%

Total CH dwellings (incl. small/specialised providers, NBJP33)

107,561

181%

33 It has been assumed that the Nation Building and Jobs Plan (NBJP) will increase dwellings by 20,000, 75 percent of which will be in community housing.

The following key points from the analysis of Scenario 2 emerge:

  • NRAS assumptions under Scenario 2 have the potential to increase the total number of dwellings in the community housing sector either owned or managed by medium tenancy managers by 14,700 nationally, a 121 percent increase by year five.
  • Large tenancy managers have the potential to increase the total number of dwellings in the community housing sector by 19,558 nationally, a 218 percent increase by year five.
  • As shown in Scenario 1, housing owners / developers have the potential to increase the total number of dwellings in the community housing sector that are housing owners / developers owned by 20,064 nationally, a 377 percent increase by year five.
  • Inclusive of small and specialised housing provider as well as the NBJP, the number of dwellings in community housing sector is expected to total 107,561 dwellings, a 181 percent increase by year five.
  • Assuming total incentives of $8,000 per annum per new dwelling, the cost to the Commonwealth and State Governments for NRAS dwellings owned or managed by the community housing sector by year five under Scenario 2 is $315million and $105million, respectively.
  • Similar to Scenario 1, there is a risk of a sell down of dwellings at the end of each 10-year incentive eligibility period, which may significantly reduce the capacity of the community housing sector to provide housing assistance. The risk to the sector associated with the potential sale of dwellings is a key point to consider under a long-term housing strategy.

Further consideration should be given to whether the community housing sector has the capability to upscale their operations within the next five years to be able to manage a portfolio that is nearly three times larger than it is now. As noted in the PRG meeting on 14 July 2009, there may be significant opportunities for new entrants of sufficient capacity to enter the sector. This would mitigate some of the risks associated with current providers not being able to increase in structure and capability within the next few years.

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A.4.5 Application of all policy levers to the base case

In addition to assessing the impact of applying each of the key policy levers individually to the base case, the impact of applying all levers concurrently was assessed. The application of all four key levers includes:

  • Lever 1 – increasing rent to 30 percent of income;
  • Lever 2 – transferring title of public housing stock currently under community housing provider management;
  • Lever 3 – lowering the cost of debt by 200bps; and
  • Lever 4 – expanding NRAS by application of Scenario 2.

The following table consolidates the impact to operational viability and growth capacity of applying all the levers listed above to the base case.

Results of applying all policy levers (Total community housing sector)
 

Ave rent (weekly)

Over 25 years

At Year five

Debt

LVR34

New dwellings

Total dwellings

% Change

Medium tenancy manager

$120

$2.33b

9%

15,600

27,720

129%

Large tenancy manager

$120

$2.17b

15%

20,361

29,348

227%

Housing owner / developer

$136

$730m

6%

20,262

25,531

381%

Totals (excl. small/specialised providers and NBJP)

56,223

82,599

147%

Total CH dwellings (incl. small/specialised providers, NBJP35)

109,462

186%

34 LVR is based on total debt outstanding to total assets on a consolidated entity basis and not per project.

35 It has been assumed that the Nation Building and Jobs Plan (NBJP) will increase dwellings by 20,000, 75% of which will be in community housing.

The following key points emerge:

  • Applying the policy levers to the base case increases new dwellings nationally by 56,223.
  • Including small and specialised housing providers as well as the additional dwellings from the NBJP, results in total community housing sector dwellings of 109,522, an increase of 186 percent by year five.
  • Total community housing dwelling falls short of the target of 150,000 dwellings across the sector over five years by 40,478 dwellings.

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A.5 Conclusion

With the exception of Lever 4 (NRAS), Lever 1 (affordable income-based rent), Lever 2 (title transfer) and Lever 3 (lowering the cost of debt) are not by themselves catalysts to increasing operational viability and growth capacity in the sector. Combined, however, they can generate significant growth whilst increasing the cost and risks to the Government and community housing sector.

The chart below highlights the contribution of each policy lever to the base case. Note that the chart assesses the impact of the policy levers individually, however some levers are cumulative with others231. When all levers are combined, there is also a small amount of additional growth generated by the synergies between some of the levers232.

Figure description

The best outcome comes from the application of all levers to the base case, which increases the number of dwellings above the base case by 54,465 dwellings in five years (FY2014), resulting in a sector that has a total of 109,462 dwellings. This figure falls short of Housing Ministers target of 150,000 dwellings in the sector within five years by 40,538 dwellings.

The primary driver for the increase in community housing sector dwellings is the impact of NRAS incentives. It is noted, however, that although the incentives facilitate the increase in dwellings by 52,564 dwellings by year five, the annual cost to the Australian Government and the states and territories is estimated to be $315million and $105million, respectively. Additionally there is a risk of a sell down of dwellings that is expected to occur at the end of each 10-year incentive eligibility period. The risk to the sector associated with the potential sale of dwellings is a key point to consider under a long-term housing strategy.

In addition to NRAS,
the growth capacity of the community housing sector presented above is in part driven by the operational surpluses outlined in the table below.

Operational viability - Combined policy levers (Year 1)
 

Medium tenancy manager

Large tenancy manager

Housing owner/ developer

Rent revenue (‘000)

$1,315

$5,406

$3,606

Other revenue(‘000)

$942

$5,695

$23

Expenses(‘000)

$(1,517)

$(6,602)

$(2,799)

Operating surplus/(deficit) (‘000)

$739

$4,499

$830

Return on assets (five-year average)

1.3%

2.0%

0.8%

The above chart shows that each typical housing provider type is operationally viable and generating varying degrees of operating surpluses. Using a combined policy lever scenario for Year 1, the chart shows: Medium tenancy managers will experience an operating surplus of $730,000 and five-year average return on assets of 1.3%; Large tenancy managers will experience an operating surplus of $4,499,000 and five-year average return on assets of 2.0%; and Housing owner / developers will experience an operating surplus of $830,000 and five-year average return on assets of 0.8%. However, the ROA for each housing provider type is below the target return of four percent. Recurrent funding of $199 million is required to achieve a return of four percent across the sector, resulting in an additional 5,705 dwellings by year five (115,167 nationally).

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Figure descriptions


Base case data set diagram

This is a financial model based on actual FY2008 data provided by State Housing Authorities in New South Wales, Victoria and South Australia.  The model also uses key inputs such as financing terms, rent and other revenue, operating costs, government grants and subsidies, capital costs, indexation/escalation, community housing dwellings and projects (NRAS/NBJP), as advised by members of the Project Reference Group and a number of financial assumptions, which are detailed in Appendices A and B. This base case data along with policy levers including rent policy, title transfer, lowering the cost of debt and a current and expanded NRAS scheme will provide a financial model that will be able to extract aforementioned information. 

[ back to Figure A.1 ]


Total Medium Tenancy Manager housing stock over 25 years

This figure illustrates the growth in total dwellings owned or managed by all medium tenancy managers nationally over a 25-year period. Medium tenancy managers, nationally have the potential to procure a total of 240 new dwellings by year five, with total dwellings managed increasing by two percent to 12,360.  By year 25, total dwellings owned or managed by all medium tenancy managers in the community housing sector will increase to 13,980, an increase of 15 percent.

[ back to Figure A.2 ]


Large Tenancy Manager housing stock over 25 years

This figure illustrates the growth in total dwellings owned or managed by all large tenancy managers nationally over a 25-year period. Large tenancy managers, nationally have the potential to procure a total of 341 new dwellings by year five with total dwellings managed increasing by four percent to 9,328.  By year 25, the total number of dwellings owned or managed by large tenancy managers in the community housing sector will increase to 11,451, an increase of 27 percent.

[ back to Figure A.3 ]


Housing stock and debt outstanding over 25 years

This figure illustrates the growth in total dwellings owned or managed by all owners and developers nationally over a 25-year period. Owners and developers have the potential to procure a total of 1,177 new dwellings by year five with the total dwellings owned increasing by 21 percent to 6,446.  On the basis of current cash flows, nationally, total dwellings owned by housing owners / developers in the community housing sector at year 25 is 6,776, an increase of 28 percent.  The greatest growth occurs in the first five years and is primarily driven by the existing capital grant funding that has been received. By year 25, accumulative debt outstanding for housing owners and developers, nationally, is estimated at just under $50 million.

[ back to Figure A.4 ]


Total MTM dwellings and debt outstanding over 25 years

This figure illustrates the growth in total dwellings owned or managed by medium tenancy managers from title transfers over a 25-year period. Over five years, debt financing modestly increases total community housing sector dwellings owned or managed by medium tenancy managers from 12,360 under the base case, to 12,600 nationally.  By year 25, debt financing increases stock owned or managed by medium tenancy managers to 15,480 dwellings nationally. By year 25, accumulative debt outstanding for medium tenancy managers, nationally is estimated at approximately $200 million.

[ back to Figure A.5 ]


Total LTM dwellings and debt outstanding over 25 year

This figure illustrates the growth in total dwellings owned or managed by large tenancy managers from title transfers over a 25-year period. Over five years, debt financing modestly increases total community housing sector dwellings owned or managed by large tenancy managers from 9,328 under the base case, to 9,614 nationally. By year 25, debt financing increases stock owned or managed by large tenancy managers to 13,167 dwellings nationally. By year 25, accumulative debt outstanding for large tenancy managers, nationally, is estimated at just over $200 million.

[ back to Figure A.6 ]


Large tenancy manager housing stock over 25 years

Figure 5.4 illustrates the impact of new NRAS dwellings on the growth of stock owned or managed by large tenancy managers nationally over a 25 year period.  The following key points emerge:

  • There is a significant increase to additional community housing stock owned or managed by large tenancy managers over the first eight years totalling 6,204 nationally. 
  • Beginning in year 10 (Financial Year 2019), the number of dwellings begin to drop due to the assumed 80 percent sell down rate and then plateaus over the eight out years to 2035.
[ back to Figure A.7 ]


Housing Owner / Developer

This figure illustrates the growth in housing owners / developers due to NRAS. For housing owners / developers, there is a significant increase to community housing stock owned or managed over the first eight years totalling 2,263 dwellings per typical housing owner / developer or 24,893 nationally.  The number of dwellings begin to drop due to the assumed 80 percent sell down rate, beginning in year 10 (FY2019) and then plateaus for 8 years to 2035.

[ back to Figure A.8 ]


Medium Tenancy Manager housing stock over 25 years

This figure illustrates the impact of new NRAS dwellings on medium tenancy managers over 25 years. Over the first eight years, there is a significant increase to new community housing stock totalling 25,620 nationally.  The number of dwellings begin to drop in year 10 (Financial Year 2019) due to an assumed 80 percent sell down rate followed by stock plateaus in the 8 out years to 2035.

[ back to Figure A.9 ]


Large tenancy manager stock over 25 years

This figure illustrates the impact of new NRAS dwellings on large tenancy managers over 25 years. Over the first eight years, there is a more significant increase to new community housing stock totalling 31,955 nationally.  The number of dwellings begin to drop in year 10 (Financial Year 2019) due to an assumed 80 percent sell down rate followed by stock plateaus in the 8 out years to 2035.

[ back to Figure A.10 ]


Comparison total dwellings under the Base Case, each option lever and combination of levers

The following figure provides an illustrative summary of the financial modelling results, highlighting the contribution of each policy lever to the base case.

The number of dwellings under the base case scenario is 54,997 at year five.

If policy lever 1 - affordable rent was applied, this would increase the number of dwellings above the base case by 603 dwellings in five years resulting in a sector that has a total of 55,600 dwellings.

If policy lever 2 - title transfer was applied, this would increase the number of dwellings above the base case by 526 dwellings in five years resulting in a sector that has a total of 55,523 dwellings.

If policy lever 3 - lower the cost of debt was applied, this would increase the number of dwellings above the base case by 685 dwellings in five years resulting in a sector that has a total of 55,682 dwellings.

If policy lever 4 – NRAS scenario 1 and 2 was applied, this would increase the number of dwellings above the base case by 52,564 dwellings in five years resulting in a sector that has a total of 107,561 dwellings.

If combining the application of all policy levers to the base case, this would increase the number of dwellings above the base case by 54,465 in five years, resulting in a sector that has a total of 109,462 dwellings and therefore producing the best outcome.

[ back to Figure A.11 ]
  1. Operating cash flow is the cash before investing and financing.
  2. The number of tenancies managed per tenancy manager ranges from 150 to 350 depending on jurisdiction. For the purpose of this analysis, a benchmark of 200 tenancies per tenancy manager was used.
  3. The operating margin is an indicator of operating performance and measures how much a company makes after operating costs for each dollar of revenue. Also known as ‘operating profit margin’ or ‘net profit margin’.
  4. The project team has been advised by the Victorian Department of Human Services that the matching of capital grants by an organisation has been reduced from 25 percent to 15 percent as a consequence of consideration given to the condition of stock transferred (July 2009).
  5. No additional capital grants beyond current grants have been assumed.
  6. Financing terms and assumptions are provided in Appendix B.
  7. As advised by the Victorian Department of Human Services, Housing Registrar.
  8. Data from this analysis has been compiled on a weighted average basis, therefore although there may be some housing providers that are not operationally viable, on the whole, the data received indicates operational viability.
  9. Depending on the relationships of the housing provider and their financial institution, in certain cases, longer-term facilities may be available.
  10. It is acknowledged that there are a variety of financial arrangements that may result in lowering the cost of debt, such as government debt guarantees, creation of financial intermediaries, adjustment to financing terms, additional security, etc. Each mechanism may have an associated cost, whether a real cost or opportunity cost, however, given the spectrum of financial arrangements, this analysis primarily seeks to illustrate the impact of a lower cost of debt to the growth capacity of the community housing sector.
  11. For example, lowering the cost of debt is applied on top of title transfers (lever 3 is applied on top of lever 2) and for lever 4, NRAS Scenario 2 is applied on top of Scenario 1.
  12. The total additional growth above the base case achieved through applying all the policy levers is greater than the sum of the result of applying each policy lever. This is because if the affordable rent lever is applied as part of a package of levers, it would then increase the growth that can be generated from the other policy levers (as they are otherwise calculated on providers’ current rent structures).

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Attachment B: Financial modelling assumptions 

This section provides a summary of the key assumptions that have been adopted in the financial analysis. The general assumptions have defined the scope of the financial analysis and the financial assumptions have been used in defining the revenues and costs associated with the Project.

B.1 General assumptions

Below is a list of general assumptions applicable to the financial analysis.

  • The analysis focuses on long-stay community housing providers.
  • Community housing data provided by NSW, Victoria and South Australia is illustrative of national data.
  • Growth results for each housing provider type provide an indication of the growth of the whole sector.
  • Cash inflows from businesses other then community housing are excluded from the analysis.
  • Any leasehold related revenues and costs are constant and do not increase with the number of dwellings.
  • The policy environment under the base case will continue indefinitely in an “as-is” state and does not consider any future changes.
  • All housing provider types will commit 80 percent of positive net cash flow to procure additional dwellings. The remaining 20 percent will be allocated to a restricted cash fund to be used at the discretion of the housing provider.
  • Housing providers will own all new dwellings procured using positive net cash flow.
  • Community housing providers not in scope of the base case are assumed not to procure new dwellings or generate additional growth.
  • Growth due to the transfer of additional public housing stock to the community housing sector (beyond the publicly owned stock that is already under the providers’ management) has not been included.
  • Data received from the State Housing Authorities is accurate and does not require additional adjustments.
  • All community housing sector housing providers are assumed to have PBI status and access to GST concessions.
  • Future capital grants above those already committed are not included in the analysis.
  • The number of housing providers does not increase.
  • The tenant mix of the typical providers is constant.
  • Any increases to rents are evenly distributed across the tenant types.
  • Current rent is assumed to be 25 percent of tenancy income.
  • Any rental charge above 30 percent of tenant income is not considered affordable.

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B.2 Financial modelling assumptions

B.2.1 General modelling

  • The term of analysis is assumed to be 25 years from 1 July 2009 to 30 June 2034.
  • All financial inputs received are real at 30 June 2008 and have been escalated to 1 July 2009.
  • The discount rate used for net present value (NPV) calculations is based on the estimated cost of debt at 9.0 percent nominal.
  • The Consumer Price Index (CPI) is estimated to be 2.5 percent per annum which is the average of the Reserve Bank of Australia’s annual inflation target of between 2.0 and 3.0 percent.
  • No costs associated with implementation have been included in the analysis.
  • The number of dwellings that each type of provider has at the beginning of the financial analysis has been based on FY2009 (year 0) figures, as provided in the ‘cash inflow’ table below in section B.2.2.

B.2.2 Cash inflows

Community housing sector cash inflows as at 30 June 2008 has been provided by the State Housing Authorities in Victoria, NSW and South Australia. The table below outlines the consolidated weighted average cash inflows for each housing provider type.

Data provided by State Housing Authorities in NSW, Vic and SA - Cash inflow
 

MTM

LTM

HOD

General

     

Total tenancies1

202

817

483

Vacancy rate

2.1%

1.7%

2.0%

Cash inflow

     

Average rent per tenancy (weekly)

$96

$96

$110

Recurrent Government grants (per tenancy)

$2,397

$3,306

-

Capital grants (per tenancy)

-

-

$53,579

Annual percentage of stock sold

-

-

0.19%

Other cash inflow

     

Interest (per tenancy)

$87

$396

$44

Water, damage, bad debts, donations, etc

$175

$197

$-

1 Dwelling figures are from FY2009 (Year 0).

  • ‘Recurrent Government Grant’ includes lease subsidies paid by the State Government to the community housing provider in order to subsidise the difference in rent paid by the community housing provider to private sector landlords and the revenue received from tenants, which is capped at the median market rent.
  • Data for the weekly rental charge per week received from NSW does not include Commonwealth Rent Assistance (CRA) revenue. Weekly CRA contribution for NSW has been estimated based on the Centrelink household category of ‘Single, No Children’. The weekly rates are provided in the table below.
 

Max CRA

Min Rent

Max Rent

CRA rates $55.60 $49.40 $123.54
  • CRA is calculated based on the weighted average rental of NSW, Vic and SA under each housing provider type.
  • Market rent used under ‘Lever 1 – Rent policy’ has been sourced from the NSW Rent and Sale Report, December 2008, Rent Report Victoria, March 2008 and Real Estate Institute of South Australia, March 2009. The median and affordable rental figures are provided in the table below.
 

NSW

Vic

SA

Median weekly rent (FY 2009) $336 $274 $290
Afforadable rent (74.9% of market rent) $251 $205 $217
  • A weighted average of the tenancies in each State under each housing provider type was applied to the median market rent for each State. The result is provided in the table below.
 

MTM

LTM

HOD

Market rent

 $319  $336  $274

Discounted market rent

$239

$251

$205

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B.2.3 Operating expenditure

  • Community housing sector operating expenditure as at 30 June 2008 has been provided by State Housing Authorities in NSW, Vic and SA. The table below outlines the consolidated weighted average operating expenditure for each housing provider type on a per tenancy per annum basis.
Data provided by each State Housing Authority – Operating expenditure
 

MTM

LTM

HOD

Cash outflow

     

Administration and salary

$1,221 $1,326 $2,064
Maintenance and lifecycle related $1,018 $1,008 $706
Tenancy management $569 - $794
Land/property development - - -
Rates $504 $662 $919
Insurance $148 $204 $619
Bad debts $39 $65 $134
Leasehold rent and associated costs $3,552 $4,301 -
  • Maintenance liability has not been included in the analysis due to uncertainty about the level of existing maintenance liability and the rate that the maintenance liability is to be discharged.
  • All operating expenditure is assumed to escalate at 3.0 percent nominal.

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B.2.4 Capital expenditure

  • All housing provider types will commit 80 percent of positive net cash flow to procure additional dwellings.
  • The table below provides the capital costs of development/construction, acquisition and assumptions on the development strategy of each housing provider type.
Data provided by each State Housing Authority – Capital costs
 

MTM

LTM

HOD

Costs for development and construction

     

Building

-

-

$105,000

Land

-

-

$125,000

Costs for acquisitions

     

Building

$130,000

$130,000

$130,000

Land

$125,000

$125,000

$125,000

Procurement strategy

     

Development

   

36%

Acquisition

100%

100%

64%

  • Due to data availability, acquisition costs for New South Wales and South Australia are assumed to be equal to Victorian acquisition costs.
  • Procurement of new dwellings from acquisition incurs an 11 percent cost premium over procurement from development/construction.
  • Lifecycle maintenance costs are included under ‘Maintenance and lifecycle related’ costs in section B.2.3, Operating expenditure, above. This approach to lifecycle maintenance costs smooths cash outflows over time and also offsets depreciation over the analysis period.
  • Land is expected to escalate at four percent nominal.
  • Capital costs are expected to escalate at CPI.

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B.2.5 National Rental Affordability Scheme

The following points describes the two NRAS scenarios that were analysed:

  • Scenario 1 – Scenario 1 assumes that 40 percent of the current remaining NRAS incentives will be awarded to the community housing sector for the procurement of new dwellings up to 30 June 2012. This scenario also assumes an expanded NRAS scheme with an additional 50,000 incentives beginning 1 July 2012 where 25 percent of the new incentives are awarded to the community housing sector for the procurement of new dwellings over five years to 30 June 2017. The total procurement schedule spans eight years.
  • Scenario 2 – In addition to the procurement of new dwellings by the community housing sector as outlined under Scenario 1, a further 30 percent of the dwellings procured by the private sector under the current NRAS scheme are managed by medium and large tenancy managers (split evenly between them). Under the assumption of an expanded NRAS scheme, the remaining 75 percent of incentives are awarded to the private sector but also managed by medium and large tenancy managers.

It is recognised that there are a range of NRAS funding arrangements available to housing providers that can be influenced by their relationships with financial institutions, participation in Government funding programs, contributions by local government, partnership opportunities with the private sector, equity contributions, etc. Therefore, it was necessary to make broad assumptions based on the following:

  • An NRAS project will not be awarded an incentive if it is net cash flow negative. Therefore, it can be assumed that the project is at least break-even on a net cash flow basis (cash flow after operations, capital expenditure and financing).
  • Debt funding is assumed to be secured by the NRAS dwellings themselves; therefore the new dwellings cannot be used to secure additional financing.
  • NRAS projects are cash flow neutral to the community housing providers, where it is assumed that all revenues cover both operational and financing costs and achieve a break even position, resulting in no net cash flow surpluses or deficits.

Other NRAS assumptions include:

  • A sale rate of 80 percent has been assumed at the end of each ten-year eligibility period for both community housing sector owned and private sector owned stock. Taking capital appreciation into consideration, it is estimated that this amount would be enough to repay all outstanding debt.
  • NRAS Round 1, where 3,500 new dwellings are expected to be available for rent during 2008 – 2009, is assumed to be completed and therefore not included in the current remaining NRAS incentives. Remaining incentives for FY2010-FY2012 total 46,500.
  • Under Scenario 1, large tenancy managers have been assumed to procure 20 percent of all NRAS incentive related community housing dwellings with housing owners / developers procuring the remaining 80 percent.

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B.2.6 Title transfer and financing

  • Only properties owned by the community housing provider can be used as security to procure financing from the financial markets.
  • Revenues and costs associated with leasehold properties are ring-fenced from financing arrangements as the assets cannot be used as security for borrowings.
  • Private sector leasehold properties are not transferred to the tenancy managers.
  • All properties owned by the States will be transferred with minimal or no cost.
  • Caveats on title transfer will not prohibit the procurement of private financing.
  • Credit ratings of the community housing providers are assumed to be at least Bbb (investment grade).
  • Financing will be procured via five-year refinancing facilities.
  • Long-term borrowing costs have been based on the 25-year S1 Australian Dollar Swap rate (S1-ADS), which at the time of this report is 6.5 percent, plus a debt margin of 250 basis points.
  • Loans will have a maximum loan to value ratio of 50 percent of the market value of the real asset base.
  • A proportion of the principal to have been repaid at the time of refinancing of approximately 50 percent.
  • An interest coverage ratio233 of 2x will determine debt serviceability.
  1. ICR = CF Available for Debt Service / Current interest expense in the period.

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Attachment C: Key themes from the stakeholder consultations 

NO. CONSULTATION THEME
(A) Principles and Values for a viable and sustainable community housing sector
A1 The balance between social and commercial functions. The notion of a commercial focus of providers needs to be better balanced with the social responsibilities of community housing – for example, using the phrase ‘not for dividend’.
A2 More clarity regarding funding streams including ‘grant funding’ and ‘other sources of income’.
A3 Greater recognition of the diversity in the sector to include niche or specialised providers as well as growth providers.
A4 Clarification of scope of tenant participation.
A5 Clarification regarding the range of products and services the community housing sector could provide.
A6 Greater emphasis on the role of tenant support as a key aspect of community housing provision.
A7 Separation of the concepts of sector and provider viability.
A8 Recognition of the need for non-discrimination in housing allocation policies (particularly for people with disabilities).
A9 Quality outcomes should be unbundled for services and buildings. For buildings, universal design should be included.
A10 Importance of the stability and maintenance of tenancies.
A11 Clarification on what it means to be a ‘moderate to low income household’.
(B) Strengths of the sector
B1 Diversity of the sector – in terms of location, type, size, target groups (specialisation), experience, clients etc.
B2 Capacity to leverage and generate other income from CRA, private finance, charitable contributions and to become a social investment option for investors, as well as the use of ‘sweat equity’ through the contribution of volunteers.
B3 Ability to adapt and respond in a timely manner to tenants with a wide range of needs (for example; mental illness, homelessness, unemployment etc).
B4 Strong connection to local communities where they operate (opportunities for greater local collaboration and partnerships).
B5 Provide an alternative to public housing (less stigma, more options, a more personalised service).
B6 Charitable tax status of providers.
B7 Provides an opportunity for active tenant participation.
B8 Specialist expertise and innovation.
B9 Facilitation of good tenancy outcomes - provides an “enabling’ environment rather than a ‘disabling’ one.
B10 Often seen as providing more than just a house. It was considered by many to provide a ‘one stop shop’ to tenants offering linkages and referrals to other essential community services.
B11 For Indigenous community housing providers, it was strongly thought that they offered a more culturally sensitive service with strong links to the local community.
(C) Challenges and barriers to viability and growth
C1 Lack of predictability in terms of long-term strategy (policy setting) and funding.
C2 Lack of title to assets – this was a high priority issue for the sector in NSW, ACT, NT and WA.
C3 Tenant target group and rent structures – large proportion of high need / low-income target group unviable without appropriate subsidies. The issue is linked to shared waiting lists with public housing.
C4 Level of control and policies of state governments and the impact of certain policies on the sector - this was a high priority issue in all states and territories.
C5 Barriers to operating across jurisdictions - lack of consistent national regulation.
C6 Degree of organisational capacity – in terms of current skills and expertise of staff and boards and the ability to attract highly qualified and experienced staff to the sector. Professional / specialist skills required for growth, cost of staff with required expertise is prohibitive for small providers.
C7 Lack of an appropriate undergraduate housing qualification at the tertiary level, limited points of entry into the sector raised in NSW and QLD.
C8 Small organisations have less efficiency and leveraging capacity.
C9 Local town planning / government barriers – raised in Victoria and WA.
C10 Cost of finance and lack of confidence in the sector by private financiers. Difficulty in accessing private finance at a reasonable cost given the current global economic crisis, which is exacerbated by a lack of intimate understanding of the sector by financing institutions and a lack of a secure financial track record for many providers.
C11 Lack of expertise within government – raised in Tas, WA.
C12 Charitable tax status may places restrictions on the ability of providers to modify rent setting.
C13 There is a perceived ‘risk adverse’ culture within the sector particularly in relation to debt.
(D) Viable / sustainable business models (preconditions)
D1 A mixed business model including a mixed asset base and tenant target groups to enhance revenues and provide a range of housing products.
D2 Direct asset ownership to enable stock replacement and rejuvenation and the leveraging against assets for growth.
D3 Attaining a critical mass / size.
D4 Achieving and re-investing surpluses.
D5 A commercial focus that includes skill-based boards.
D6 A values-based business model that does not lose focus on high needs tenants.
D7 A flexible model for tenant support utilising both internal (separately funded) support and external referrals and partnerships.
D8 Certainty of capital funding, CRA and charitable tax status.
D9 Strong risk management.
D10 Strong focus on partnerships.
D11 Reduction in overly burdensome regulation.
(E) Proposal for change
E1 Clear long-term vision, targets and strategy for the sector (national peak organisations, Tas, NT, QLD, South Australia).
E2 Promotion of sector to banking industry (Victoria, WA, NSW, QLD).
E3 Workforce development – tertiary qualification (NSW, Victoria, QLD).
E4 Guaranteed / secure growth funding (Victoria, WA, QLD, South Australia).
E5 Title transfers (National Peaks, ACT, WA, NSW, South Australia).
E6 Allowing wider tenant mix (National peaks, Qld, NSW, South Australia).
E7 Amalgamation, group structures, shared services for small providers (ACT, Tas).
E8 Consistent national regulatory framework – reduce ‘micro-management’ (national peak organisations, Victoria, WA, South Australia).
E9 Reform and certainty to subsidy arrangements (national peak organisations, WA).
E10 Support for capacity building – additional funding or no / low interest loans (Tas, Victoria, WA, NSW, QLD, South Australia).
E11 National / consistent rent setting (national peak organisations, Tas, NT).
E12 Clarify / expand charitable taxation status (national peak organisations, WA, Qld).
E13 Better partnerships and linkages with mainstream services (ACT, Tas, WA, NT, NSW).

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Attachment D: Glossary of key terms 

ABS
Australian Bureau of Statistics


ACSA
Aged and Community Services Australia


AHURI
Australian Housing and Urban Research Institute
AIHW
Australian Institute of Health and Welfare


BPS
Basis point


CHP
Community housing provider


COAG
Council of Australian Governments


CRA
Commonwealth Rent Assistance


CSHA
Commonwealth State Housing Agreements


FaHCSIA
Department of Families, Housing, Community Services and Indigenous Affairs


HODs
Housing owners / developers


ICR
Interest coverage ratio


ILU
Independent Living Units


LGA
LocalGovernment Authority


LTMs
Large tenancy managers


LVR
Loan to value ratio


MTMs
Medium tenancy managers


NAHA
National Affordable Housing Agreement


NBJP
Nation Building Jobs Plan


NRAS
National Rental Affordability Scheme


ROA
Return on assets

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Content Updated: 27 August 2013