The opportunity of unlisted wholesale residential property funds in enhancing affordable housing ...

94 Pages·2015·1.44 MB·English

by  Graeme Newell

The opportunity of

unlisted wholesale

residential property

funds in enhancing
affordable housing
supply
authored by
Graeme Newell, Chyi Lin Lee and Valerie Kupke

at
Western Sydney University
University of South Australia

October 2015

AHURI Final Report No. 249
ISSN: 1834-7223
ISBN: 978-1-925334-00-5
Authors Newell, Graeme Western Sydney University
Lee, Chyi Lin Western Sydney University
Kupke, Valerie University of South Australia
The opportunity of unlisted wholesale residential property
Title
funds in enhancing affordable housing supply
ISBN 978-1-925334-00-5
Format PDF
Unlisted wholesale residential property fund, affordable
Key words housing, institutional investors, socially responsible investment,
performance analysis.
Editor Anne Badenhorst AHURI Limited
Australian Housing and Urban Research Institute Limited
Publisher
Melbourne, Australia
Series AHURI Final Report; no. 249
ISSN 1834-7223
Newell, G., Lee, C.L. and Kupke, V. (2015) The opportunity of
unlisted wholesale residential property funds in enhancing
affordable housing supply, AHURI Final Report No.249.
Preferred citation Melbourne: Australian Housing and Urban Research Institute
Limited. Available from:
<http://www.ahuri.edu.au/publications/projects/p72031>.
[Add the date that you accessed this report: DD MM YYYY].

i
ACKNOWLEDGEMENTS
This material was produced with funding from the Australian Government and the
Australian state and territory governments. AHURI Limited gratefully acknowledges
the financial and other support it has received from these governments, without which
this work would not have been possible.
AHURI comprises a network of university Research Centres across Australia.
Research Centre contributions, both financial and in-kind, have made the completion
of this report possible.
The authors would like to acknowledge the feedback from the stakeholders; it has
been fully included in this Final Report and has added considerably to the richness,
depth and focus of this AHURI report.

DISCLAIMER
AHURI Limited is an independent, non-political body which has supported this project
as part of its program of research into housing and urban development, which it hopes
will be of value to policy-makers, researchers, industry and communities. The opinions
in this publication reflect the views of the authors and do not necessarily reflect those
of AHURI Limited, its Board or its funding organisations. No responsibility is accepted
by AHURI Limited or its Board or its funders for the accuracy or omission of any
statement, opinion, advice or information in this publication.

AHURI FINAL REPORT SERIES
AHURI Final Reports is a refereed series presenting the results of original research to
a diverse readership of policy-makers, researchers and practitioners.

PEER REVIEW STATEMENT
An objective assessment of all reports published in the AHURI Final Report Series by
carefully selected experts in the field ensures that material of the highest quality is
published. The AHURI Final Report Series employs a double-blind peer review of the
full Final Report where anonymity is strictly observed between authors and referees.
ii
CONTENTS
LIST OF TABLES ..................................................................................................... VI
LIST OF FIGURES ..................................................................................................VIII
ACRONYMS ............................................................................................................. IX
EXECUTIVE SUMMARY ............................................................................................ 1
1 INTRODUCTION ............................................................................................... 4
1.1 Background ........................................................................................................ 4
1.2 Objectives of the study ....................................................................................... 6
1.3 Methodology of the study ................................................................................... 6
1.4 Report structure ................................................................................................. 7
2 RESEARCH BACKGROUND AND SUMMARY OF PREVIOUS WORK ........... 9
2.1 The issues of investing in the private rental residential sector ............................ 9
2.2 The stature of institutional investment in residential property in Australia ......... 10
2.3 The desirable features of an effective residential investment vehicle ............... 12
2.4 The performance of residential property investment ......................................... 13
2.5 Summary ......................................................................................................... 14
3 STRATEGIC POSITIONING OF A RESIDENTIAL INVESTMENT VEHICLE .. 16
3.1 An effective residential investment vehicle ....................................................... 16
3.1.1 The residential investment vehicle is managed by an experienced fund
manager ................................................................................................. 16
3.1.2 The residential investment vehicle contains a diversified portfolio by
location ................................................................................................... 17
3.1.3 It should deliver stable income returns .................................................... 17
3.1.4 Low debt level ......................................................................................... 18
3.1.5 Liquidity by listing on a stock exchange is not a critical success factor .... 20
3.1.6 Large scale of investment ....................................................................... 20
3.1.7 Low level of volatility is required .............................................................. 20
3.1.8 Reputable property managers ................................................................. 22
3.2 Other strategic issues ...................................................................................... 22
3.2.1 The availability of large rental portfolios .................................................. 22
3.2.2 Returns from low-end residential properties (e.g. social housing) may not
match the expected returns of investors .................................................. 23
3.3 Summary ......................................................................................................... 23
4 THE SIGNIFICANCE OF UNLISTED WHOLESALE PROPERTY FUNDS ...... 25
4.1 Unlisted wholesale property funds.................................................................... 25
4.2 The performance of unlisted wholesale property funds .................................... 28
4.3 Overseas unlisted residential property funds .................................................... 30
4.4 Summary ......................................................................................................... 33
5 PERFORMANCE OF RESIDENTIAL PROPERTY IN INVESTOR
PORTFOLIOS.................................................................................................. 34
5.1 Long-term returns and risks ............................................................................. 34
5.2 Income returns ................................................................................................. 37
iii
5.3 Diversification benefits ..................................................................................... 38
5.4 Sub-period analysis ......................................................................................... 39
5.5 The construction of an efficient and diversified housing portfolio ...................... 41
5.5.1 Strategic asset allocation ........................................................................ 41
5.5.2 Housing portfolio construction ................................................................. 42
5.6 Summary ......................................................................................................... 43
6 STRUCTURE OF AN UNLISTED WHOLESALE RESIDENTIAL PROPERTY
FUND ............................................................................................................... 45
6.1 Unlisted wholesale residential property fund .................................................... 45
6.1.1 The fund ................................................................................................. 46
6.1.2 Investment objective ............................................................................... 46
6.1.3 Responsible entity ................................................................................... 46
6.1.4 Fund manager ........................................................................................ 46
6.1.5 Sponsor .................................................................................................. 47
6.1.6 Property management ............................................................................ 48
6.1.7 Housing portfolio ..................................................................................... 48
6.1.8 Unit holders ............................................................................................. 49
6.1.9 Alignment of interest ............................................................................... 49
6.1.10 Closed-ended versus open-ended fund .................................................. 50
6.1.11 Gearing ................................................................................................... 50
6.1.12 International property investment ............................................................ 50
6.2 Assessment of the proposed unlisted wholesale residential property fund
structure ........................................................................................................... 50
6.2.1 Limitations of direct residential property investment ................................ 50
6.2.2 The desirable features of an effective residential investment vehicle ...... 51
6.2.3 Conclusion .............................................................................................. 52
6.3 The performance of the unlisted wholesale residential property fund ............... 53
6.4 Proposed unlisted wholesale affordable housing fund ...................................... 58
6.5 Assessment of the proposed unlisted wholesale affordable housing fund
structure ........................................................................................................... 61
6.5.1 Limitations of direct residential property investment ................................ 61
6.5.2 The desirable features of an effective investment vehicle ....................... 62
6.5.3 Conclusion .............................................................................................. 62
6.6 The performance of unlisted wholesale affordable housing fund ...................... 63
6.6.1 Case 1 .................................................................................................... 64
6.6.2 Case 2 .................................................................................................... 66
6.7 Enabling strategies for future delivery .............................................................. 69
6.8 Summary ......................................................................................................... 70
7 CONCLUSION AND POLICY IMPLICATIONS ................................................ 72
7.1 Summary of research findings .......................................................................... 72
7.1.1 Unlisted wholesale property fund as an effective residential investment
vehicle .................................................................................................... 72
iv
7.1.2 Australian residential property is an effective investment asset class ...... 72
7.1.3 The proposed unlisted wholesale residential property fund ..................... 72
7.1.4 The proposed unlisted wholesale affordable housing fund ...................... 72
7.1.5 The role of an unlisted wholesale residential property fund in a mixed-
asset portfolio ......................................................................................... 73
7.1.6 The role of an unlisted wholesale affordable housing fund in a mixed-asset
portfolio ................................................................................................... 73
7.1.7 Key enabling strategies for future delivery .............................................. 73
7.2 Policy implications ............................................................................................ 74
7.2.1 Reshaping the policy setting on taxation to encourage the development of
the unlisted wholesale affordable housing fund ....................................... 74
7.2.2 Strategies to promote the unlisted wholesale affordable housing fund .... 74
7.2.3 Ongoing support from the housing industry in benchmarking the
performance for residential property, particularly affordable housing....... 74
7.2.4 Long-term institutional investment is required across the full spectrum of
residential property including affordable housing .................................... 75
7.3 Key challenges................................................................................................. 75
7.4 Summary ......................................................................................................... 76
REFERENCES ......................................................................................................... 78
v
LIST OF TABLES
Table 1: Research questions and methodology ........................................................... 7
Table 2: Top 10 Australian property fund managers, June 2014 ............................... 17
Table 3: Gearing levels of unlisted property funds, June 2014 .................................. 19
Table 4: Examples of unlisted wholesale funds and unlisted retail funds ................... 19
Table 5: A-REIT volatility levels*, February 2015 ...................................................... 21
Table 6: Key desirable features of REITs, UWFs and URFs ..................................... 24
Table 7: Major unlisted wholesale property funds ...................................................... 27
Table 8: Unlisted wholesale property funds used by UniSuper, June 2014 ............... 28
Table 9: The performance of unlisted wholesale property funds, February 2015 ....... 29
Table 10: Leading international unlisted residential property fund manager profiles in
Euro(€)* ............................................................................................................. 31
Table 11: Leading international unlisted residential property fund manager profiles,
US/global in Euro(€)* ......................................................................................... 32
Table 12: Residential profiles and unlisted property funds in Euro(€) ........................ 33
Table 13: Asset class performance analysis, 2014:Q4 .............................................. 35
Table 14: Asset class performance analysis, 1986:Q3–2014:Q4 ............................... 35
Table 15: Income returns of residential property ....................................................... 37
Table 16: Correlation matrix for major asset classes ................................................. 38
Table 17: Correlation matrix for 8 Australian residential property markets ................. 39
Table 18: Asset class performance analysis, 1986:Q3–1999:Q4 ............................... 40
Table 19: Asset class performance analysis, 2000:Q1–2014:Q4 ............................... 41
Table 20: Profile of all private dwellings of the eight capital cities, 2011 .................... 42
Table 21: Portfolio optimisation, 1986–2009.............................................................. 43
Table 22: Key features of unlisted wholesale residential property fund...................... 52
Table 23: The unlisted wholesale residential property fund, allocation ...................... 54
Table 24: The performance of unlisted wholesale residential property fund and various
housing markets ................................................................................................. 54
Table 25: The performance of unlisted wholesale residential property fund and various
asset classes ..................................................................................................... 55
Table 26: Asset allocation of various types of superannuation funds, June 2013 ...... 56
Table 27: Asset allocation constraints ....................................................................... 56
Table 28: Unlisted wholesale residential property fund versus unlisted wholesale
affordable housing fund ...................................................................................... 61
Table 29: Key features of unlisted wholesale affordable housing fund ...................... 62
Table 30: Rates of return on affordable housing and private rental dwellings ............ 64
Table 31: The performance of unlisted wholesale affordable housing fund with
adjustment rate of 0.42 and major assets ........................................................... 64
vi
Table 32: Asset allocation constraints ....................................................................... 65
Table 33: The performance of unlisted wholesale affordable housing fund with
adjustment rate of 0.60 and major assets ........................................................... 67
Table 34: The portfolio return and risk with at least 1% allocation in unlisted wholesale
affordable housing fund with an adjustment of 0.60 ........................................... 68

vii
LIST OF FIGURES
Figure 1: Snapshot of previous related AHURI studies regarding the Australian private
rental market ........................................................................................................ 6
Figure 2: Gearing levels in Australian unlisted and listed property funds ................... 19
Figure 3: Rolling 12-month returns from listed and unlisted Australian property funds
.......................................................................................................................... 22
Figure 4: Australian property investment vehicles, 2000–14, AUM by sector ............ 26
Figure 5: The performance of Australian unlisted wholesale funds, 2009–14 ............ 29
Figure 6: Unlisted wholesale property funds by geographical allocation .................... 30
Figure 7: Annual total returns of major housing markets (1986–2014)....................... 36
Figure 8: Annual total returns of major assets (1986–2014) ...................................... 37
Figure 9: Yearly income returns, 1986–2014 ............................................................. 38
Figure 10: The structure of an unlisted wholesale residential property fund .............. 45
Figure 11: Efficient frontiers for unlisted wholesale residential property fund and major
assets ................................................................................................................ 57
Figure 12: Asset allocation diagram for major assets (scenario 1) ............................. 57
Figure 13: Asset allocation diagram for major assets and unlisted residential property
(scenario 2) ........................................................................................................ 58
Figure 14: The structure of an unlisted wholesale affordable housing fund ............... 59
Figure 15: Efficient frontiers of unlisted wholesale affordable housing (a=0.42) fund
and major assets ................................................................................................ 65
Figure 16: Asset allocation diagram of affordable housing (a=0.42) and major assets
.......................................................................................................................... 66
Figure 17: Efficient frontiers of affordable housing (a=0.60) and major assets .......... 67
Figure 18: Asset allocation diagram of affordable housing (a=0.60) and major assets
.......................................................................................................................... 68

viii
ACRONYMS
ABS Australian Bureau of Statistics
ACSSR Australian Centre for Corporate Social Responsibility
AHURI Australian Housing and Urban Research Institute Limited
AIHW Australian Institute of Health and Welfare
APRA Australian Prudential Regulation Authority
A-REITs Australian Real Estate Investment Trusts
ASIC Australian Securities and Investments Commission
AUM Assets under Management
ASX Australian Securities Exchange
CHP Community Housing Provider
COAG Council of Australian Governments
CSR Corporate Social Responsibility
DPF Direct Private Fund
DPS Direct Property Syndicate
DHA Defence Housing Australia
ESG Environmental Social Governance
GFC Global Financial Crisis
IPD Investment Property Databank
IPF Investment Property Forum
MPT Modern Portfolio Theory
NAHA National Affordable Housing Agreement
NHSC National Housing Supply Council
NRAS National Rental Affordability Scheme
PCA Property Council of Australia
PICs Property Investment Companies
PIR Property Investment Research
PSW Property Securities Fund (Wholesale)
RBA Reserve Bank of Australia
REIA Real Estate Institute of Australia
REITs Real Estate Investment Trusts
SRI Socially Responsible Investment
SWOT Strengths, weaknesses, opportunities and threats
UK United Kingdom
URF Unlisted Retail Fund
UWF Unlisted Wholesale Fund
ix