This project examined residential investment vehicles introduced overseas to encourage investment in rental properties. It explored the opportunity to develop an effective residential investment vehicle in Australia oriented to enhance the supply of affordable rental properties.

The project analysed potential options for an effective property investment vehicle in affordable housing. This involved considering how the product might be strategically positioned, whether the fund should be listed or unlisted, whether the fund portfolio should involve a mix of assets, and what should be the balance between risk and return. A vehicle was proposed and its performance was estimated using financial modelling.

The project finds that Australian residential property is an effective investment asset class with strong long-run risk-adjusted returns as well as portfolio diversification benefits. Unlisted wholesale residential property funds are the most appropriate model for attracting large-scale investment in residential property in Australia (especially affordable housing investment) since they require a significant minimum investment with low debt levels, tend to be less volatile and more stable in investment returns (similar to appetite of institutional investors in superannuation funds). An unlisted wholesale residential fund is proposed for the Australian context.

Performance and portfolio analysis suggest that the proposed unlisted property fund offers a moderate risk-adjusted return (higher than for stocks and Australian Real Estate Investment Trusts (A-REITs)), and also reduced risk effectively demonstrating its value for institutional investors. There is also (weak) evidence to support it being an effective residential investment vehicle in marginally enhancing returns and diversifying risk over the full risk spectrum.

Key enabling strategies to deliver such an investment vehicle and obtain investor acceptance include: providing ongoing support from the sponsor (i.e. housing operators), housing industry and governments; selecting a fund manager with a good track record; effectively promoting to targeted institutional investors and superannuation funds/property fund managers; and introducing a liquidity protocol to enable entry and exit.

This report suggests that there are good opportunities to structure affordable housing into an effective property investment vehicle attractive to superannuation funds in Australia, particularly those with a strong Corporate Social Responsibility mandate. Unlisted wholesale residential property funds were identified as the most suitable investment vehicle. Implementation challenges relate to commitment and buy in from policy makers and other stakeholders including community housing providers. Policy makers could help facilitate their emergence by: reshaping policy settings on taxation to encourage the development of unlisted wholesale affordable housing funds; promoting the idea of the fund and attract long term investors; and supporting the housing industry in benchmarking the performance of residential property, especially affordable housing.