20 Sep 2019
According to Infrastructure Australia, the body charged with monitoring the nation’s key physical and social capital, “without access to appropriate housing, people are unable to focus on other aspects of their lives (such as health, education and employment) and are unable to contribute productively to society”.
"In simple terms, $NZ500 million builds around 1,000 warm, safe and dry houses for people who need it most.” - Sam Direen
That is true for every human society. And it is particularly crucial for those more disadvantaged whom, almost by definition, are the most vulnerable to inadequate housing. As a society, it is up to us to provide that housing.
Yet New South Wales’ City Futures Research Centre estimates a social housing shortfall of 437,600 today – a figure which will more than double by 2036. New Zealand faces a challenge of similar scale.
Of course, housing construction on the scale to close such a shortfall is not cheap – but the good news is it can be done without over-burdening taxpayers. The social housing sector is actually a commercially viable one.
As our chief executive here at ANZ, Shayne Elliott, says “one of the areas we can impact the community is in the area of housing. This is not about charitable works, it’s about bringing the full force of ANZ, one of the largest financial institutions in the county to bear; to have an impact”.
Bonds are a key source of funding. ANZ has deep experience in this sector and recently led social bonds for both Australia’s National Housing Financing and Investment Corporation (NHFIC) (formed a year ago by the Federal Government to address the housing challenge) and Housing New Zealand Corporation (HNZ). The bond issues were aimed at increasing access to and availability of affordable housing on both sides of the Tasman.
Investor demand for these issues has been robust. Ratings agency Standard & Poor’s (S&P) notes, “HNZ's strategy and management (is) strong, and a key factor supporting the ratings.” Adding “the organisation has a track record of market leadership and innovation”.
We saw this in the issue and Dean Spicer, ANZ Head of Capital Markets New Zealand, says the success of the bond goes a long way towards building a new asset class for investors seeking quality credit underpinned by positive social impact.
“A significant transaction of $NZ500 million certainly provided liquidity which has been sought by many investors, helping drive interest from offshore investors who account for just over 20 per cent of the book, as well as the fact we had more than 20 investors participate and some new investors into the transaction who were focused on the sustainability aspect,” he said.
So what does a $NZ500 million investment in social housing look like? It looks like around 1,000 houses.
“One thousand warm, safe and dry houses for people who need it most,” says Sam Direen, Treasurer of Housing NZ.
Part of the attraction for investors – particularly as global interest rates decline and investors look for yield with acceptable risk characteristics – is the social bond sector in general offers portfolio diversity.
Whether it be housing bonds, social impact bonds, wellbeing bonds or others, more specialised segments are developing in capital markets.
Social (and also wellbeing) bonds are structured so the proceeds fund a social purpose. In this case, owning a NHFIC or Housing New Zealand bond is an indirect investment into Australia and New Zealand’s social and affordable housing sector.
The return is based on the credit worthiness of the borrower who is responsible for directing the financing to social causes, with an obligation to report accordingly.
Katharine Tapley, Head of Sustainable Finance at ANZ, believes the well-received issues reflect the increasing sophistication of capital markets in Australia.
For ANZ, these were the first times issuing a social bond in different segments, across different geographies. The bonds set benchmarks as the first ever capital markets issue for NHFIC and the first social bond for Housing New Zealand.
“It really showed (a concept like) the green bond market can apply to a broader class of assets, into social assets for example,” Tapley says.
“It was also unique because NHFIC is a legislated, AAA rated government guaranteed entity that was brand new into the capital markets generally. A lot of interest was attracted into the transaction because of the nature of the issuers, as well as the format being a social bond.”
NHFIC chief executive Nathan Dal Bon says working in partnership with other stakeholders is key to the solution for social housing.
“We need to work with others to ensure we develop their responses to make sustained inroads into the shortage of housing in Australia,” he says.
“In particular, we need to work with private financiers who are already playing or working in conjunction with the Community Housing providers (CHP) in this space.”
According to S&P, the expansion of social and affordable housing remains a key priority for the New Zealand government. The agency noted plans to increase the stock of social housing by a net 6,400 properties over the four years to June 2022. The net increase in the 2018-2019 year was approximately 1,200.
S&P says: “to finance its pipeline of new housing construction, HNZ issues New Zealand dollar bonds to wholesale investors. In September 2019, it issued $NZ600 million of fixed-rate medium-term 'wellbeing bonds,' a type of sustainability bond. This followed an earlier issuance of $NZ500 million in April 2019, and brings HNZ's total outstanding commercial term debt to $NZ1.9 billion.”
What is a housing bond?
Social bonds are a form of financing with the proceeds to fund a social purpose. With a housing bond that purpose is social and affordable housing. A “wellbeing bond”, while it may have similar intentions, is generally a broader category of bond.
For example, owning a NHFIC [or HNZ] bond is an indirect investment into Australia or New Zealand’s social and affordable housing sector.
How does it differ from a green or social impact bond?
A social bond, like the NHFIC and HNZ examples, is a funding instrument with proceeds used to have a positive social impact with the return based on the credit worthiness of the borrower. The borrower is responsible for directing the financing to social causes and obligated to report accordingly. This is very similar to a green bond where proceeds are focussed towards environmental outcomes.
Examples of social impact bonds in Australia have been slightly different in that the return is directly linked to the social outcomes rather than the credit worthiness of the borrower. Linking the return to the borrower (rather than the direct social outcome) unlocks a larger pool of investors and greater volume of funds can be raised
While these latest NHFIC and HNZ benchmark transactions have created great interest in the region, bond markets in the United Kingdom and the United States have a long, multi-billion track record of financing social and affordable housing.
ANZ’s Spicer believes growing interest is linked to the conscious consumer.
“We are seeing consumers looking very closely at the products they are buying and that is now coming into financial products as well,” he says.
For ANZ, we want to see more people in housing – and that doesn’t mean selling more mortgages. We know better housing helps communities. As part of these communities, we do better – our shareholders do better – when communities are thriving and we’re helping our customers’ financial wellbeing.
In housing, that means partnering with clients and customers in order to impact change. We have a huge opportunity to target and finance the types of projects that can be scaled up, replicated and delivered to make substantial change in the delivery of housing supply.
When there’s a partnership between government, the financial sector, community housing providers and the private sector, I think we can see real change.
With both the NHFIC and Housing New Zealand deals, we saw a real opportunity to help deliver more social and affordable housing. That will improve rental outcomes and security of tenure. It will help us deliver housing that is more sustainable. That means lower cost of bills, better environmental efficiency.
For us, it is an ideal partnership which reflects our purpose and commercial reality.
Caryn Kakas is Head of Housing Strategy at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
20 Sep 2019
20 Feb 2018