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Shepherd Shaw Logo The Jakob Fugger Bulletin Jakob Fugger by Albrecht Dürer - The Yorck Project: 10.000 Meisterwerke der Malerei. DVD-ROM, 2002. ISBN 3936122202. Distributed by DIRECTMEDIA Publishing GmbH., Public Domain, https://commons.wikimedia.org/w/index.php?curid=150476
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The state of the assets 1 The state of the assets 2

For this initial Christmas edition, The Jakob Fugger Bulletin takes a look at funding for the Australian social housing system - the inadequacy of which can be inferred from a glance at the pictures above. This is a fitting initial topic given the season and that the Bulletin’s namesake, Jakob Fugger (pictured above in a painting by Albrecht Dürer) established a social housing estate in Augsburg back in 1521 - an estate that is still in use today.

The Bulletin presents an Occasional Paper prepared by Shepherd Shaw reviewing a recent report by Infrastructure Partnerships Australia (“IPA”). The IPA report, entitled “From Housing Assets to Housing People: Fixing Australia’s Housing System”, makes strong claims for the proposed Social Housing Future Fund (“IPA Fund”). The Occasional Paper, while applauding the IPA contribution, expresses reservations as to the ability of the IPA Fund to deliver the claimed outcomes.

Download the Occasional Paper.

In addition to reviewing the IPA report, the Occasional Paper outlines an alternative approach that can be expected to optimise value-for-money and concludes: with an outline of the broad cost to taxpayers of the social housing system for a range of future trajectories; with a summary of likely funding sources; and with an appeal for action in place of magical/wishful thinking and procrastination.

The IPA report, notwithstanding the reservations expressed in the Occasional Paper, is a professional, useful and timely contribution to the discussion of how best to provide adequate social housing infrastructure, an issue with which all jurisdictions struggle. The IPA report neatly restates the very unsatisfactory current situation in Australia as documented elsewhere by the Australian Productivity Commission, the Auditor-General of New South Wales (“NSW”) and others.

For this reason alone, the IPA report, in conjunction with the Occasional Paper, should be closely read by policy makers and by any community housing provider (“CHP”) or consortium currently working to execute a contract in relation to the NSW government’s Social & Affordable Housing Fund (“SAHF”), or contemplating a bid in relation to the NSW government’s social housing stock transfer initiative.

The IPA report, in conjunction with the Occasional Paper, brings a clear focus on the cost of delivering social housing, including the existing level of maintenance backlog in the portfolio and the whole-of-life costs of maintenance and ownership - particularly relevant for anyone contemplating a 20-year contractual commitment.

The IPA scheme involves the sale of the bulk of the Australian social housing portfolio to private owners, with replacement and additional social housing then leased from the private market. Such a sale can be expected to be beneficial to the extent that:
  • It mobilises/drives private sector efficiencies (in cost and in outcomes)
  • The ongoing operation of the - then more efficient - social housing system is responsibly funded
  • The sales proceeds are invested in government projects/initiatives with high economic benefit/cost ratios.
However, the IPA report also proposes the establishment of the IPA Fund for the purpose of investing the proceeds of sale into shares, bonds, and other securities - a Commonwealth Future Fund (“CFF”) for social housing. The investment returns from the IPA Fund would be used to lease the required replacement and additional social housing from the private market through CHPs and other providers. The IPA report indicates that the IPA Fund has been modelled using NSW as an example jurisdiction.

Based on this modelling, the IPA report makes strong claims for the IPA Fund, including:
  • That the NSW stock could be increased from 126,000 properties to 157,000 properties over 20 years, thereby stabilising the waiting list
  • That the level of support services for social housing tenants could be expanded
  • That the cost to government of the social housing system could be reduced to zero
  • That additional government revenue could be generated through stamp duties and savings in Commonwealth Rent Assistance (“CRA”)
  • That these gains could be achieved in a financially sustainable manner and without excessive risk.
The implication in the IPA report is that further stock growth could be sustainably achieved in later years (i.e. beyond 20 years) and that similar outcomes could be expected in other jurisdictions.

Intuitively, this sounds too good to be true. The most obvious high-level objection is that, if this approach is possible, then surely every jurisdiction in the world would have implemented it already. And yet they do not seem to have done so. Further, if this approach is possible for social housing, then surely it will work for every other infrastructure sector - roads, schools, ports, police stations, hospitals, water, etc. Indeed, why do governments not borrow money (at their low cost of borrowing), invest it in securities and use the resulting gains to fund everything we desire? The answer may lie, partly or in full, in the fact that governments generally have other investment options available that will generate higher economic returns than can be earnt by an investment in securities.

Notwithstanding the scepticism generated by this high-level objection, the IPA report deserves more detailed consideration. The IPA has not publicly released its model or fully disclosed its key modelling assumptions. While this makes it difficult to be definitive, Shepherd Shaw has undertaken its own modelling using defensible assumptions and has been unable to validate the claims for the IPA Fund.

On the contrary, Shepherd Shaw’s modelling indicates that, in NSW, the existing $38 billion endowment (i.e. the market value of the existing NSW social housing stock) could be expected to be exhausted over the long term if the IPA Fund were implemented. This conclusion rests on two key factors:
  • For the IPA scheme, the main revenue source for government is the rent paid by social housing tenants, which grows at about the same rate as the CPI. The main cost to government is the market rent that is paid to private owners, which grows at about the same rate as property prices. The CPI, if history is any guide, can be expected to be lower than the rate of property price growth, which means that government net revenue will be squeezed over time forcing the sell down and eventual depletion of the social housing endowment
  • To overcome this net revenue squeeze, the IPA Fund must generate a total return that is higher than residential rental housing (about 3.5% higher per Shepherd Shaw’s modelling). However, this additional return will be accompanied by additional volatility. Further, returns on residential rental housing and returns on other securities are not well correlated. Thus, Shepherd Shaw’s modelling suggests a high probability that the IPA Fund would be depleted over the long term due to the sale of securities to cover rents in periods of poor returns on other securities.
This raises the possibility that the IPA Fund may be a mirage, distracting attention from the core underfunding issue, delaying substantive action and potentially leaving the system in a worse position in the long term.

An alternative concession agreement approach is outlined that preserves the sale of the social housing stock as suggested in the IPA report, but which eliminates the IPA Fund. Instead, the sales proceeds would be immediately deployed into government projects/initiatives having high benefit/cost ratios, with ongoing concession payments funded conventionally and the taxpayer reaping the private sector efficiencies. This is the financial, economic and government affordability equivalent of recycling any other government infrastructure asset, such as a port or an electricity transmission network.

The Occasional Paper concludes with an outline of the broad cost to taxpayers of the social housing system for a range of future trajectories, with a summary of likely funding sources and an appeal for rational discussion and decision making - such as is exemplified by the IPA report and, hopefully, the Occasional Paper - and for action in place of magical/wishful thinking and procrastination.

Mark Shepherd
Mobile: + 61 421 618 238
Email: mshepherd@shepherdshaw.com.au
Web: www.shepherdshaw.com.au

“magical thinking” ... the belief that one's thoughts by themselves can bring about effects in the world or that thinking something corresponds with doing it.
Colman, Andrew M.(2012), A Dictionary of Psychology (3rd ed.), Oxford University Press
THE JAKOB FUGGER BULLETIN presents commentary on issues relevant to infrastructure and real estate investment, financing and funding.

The bulletin is named for Jakob Fugger (1459 - 1525), aka “Jakob the Rich”. Jakob Fugger was a major merchant, mining entrepreneur and banker of Europe. Through his financial support of the Habsburg dynasty, he had a decisive influence on European politics at the time. He financed the rise of Maximilian I and made considerable contributions to secure the election of the Spanish king Charles V to become Holy Roman Emperor. Jakob Fugger also funded the marriages which later resulted in House Habsburg gaining the kingdoms of Bohemia and Hungary.

In addition to his financial, economic and political influence, Jakob Fugger apparently also had a social bent. The Fuggerei, which was founded by Jakob in 1521, is the world's oldest social housing complex still in use.

The Jakob Fugger Bulletin brings a rational and analytical focus to the infrastructure and real estate sectors with an eye, like Jakob Fugger himself, on the ultimately social objectives and outcomes of investment and on the tensions of the relationships between capital and state and between individual and collective good.

[With thanks to Wikipedia for background on Jakob Fugger]

SHEPHERD SHAW specialises in project finance, investment and development across the infrastructure and real estate sectors.

Services include strategic advice, investment origination, consortium and process management, asset/investment management, development/project management, and arranging debt and equity funding.

Contact Mark Shepherd for additional information.

Mark Shepherd
Mobile: + 61 421 618 238

© Shepherd Shaw (ABN 99 092 185 932) 2016
Shepherd Shaw, PO Box 147, Gordon, NSW, 2072, Australia

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Disclaimer: Shepherd Shaw provides no warranties and makes no representations in relation to the information in this document. Shepherd Shaw is not a legal, taxation, accounting or technical advisor. Information in this document should not be construed as legal, taxation, accounting or technical advice. It is the responsibility of the recipient to separately engage legal, taxation, accounting and technical advisors and to otherwise satisfy itself as to the suitability of the information in this document for use by the recipient.