Encouraging Institutional Investors Into The Private Rental Market Presentation to Shelter NSW seminar 15 June 2006

1. Encouraging Institutional Investors Into The Private Rental MarketPresentation to Shelter NSW seminar 15 June 2006 Neil YourenMonash Capital Group

2. Background Australia is unique in the western world in the lack of institutional investors in the residential investment market Most other markets are dominated by Corporations, funds and investment trusts Consequently the investment characteristics of the Australian market are different

3. How has this happened? A number of reasons… Australia's historic preference for detached housing and lower densities has made it difficult to amass large investment parcels which has discouraged large investors Private investors have been happy to hold the individual assets Availability of low price point investment product for an increasingly wealthy middle class Investment preference over shares

4. Contributing Factors Taxation bias Taxed on entry not exit Stamp Duties but limited Capital Gains Taxes Negative gearing benefits Depreciation allowances Principal Place Of Residence exemption has focused investors on Housing Assets Supply/demand = capital growth Continuing population growth Generally an increasingly limited supply

5. Consequently . . . Strong capital growth and a naive investor base has lead to Very low yields (2 – 4%) Unsophisticated purchasing decisions med density & off the plan Absence of historical information and research All of these factors are inhibitors to Institutional participation

6. Why Institutional Investors? Depth of funds Huge financial reserves and growing Ability to use sophisticated funding techniques Can think long term which can provide more diversity Longer lease terms More energy efficient built form

7. Types of Institutional Investors Differentiated by size Super Funds Listed Trusts Listed Companies Larger private groups similar in scale to above entities

8. Forms of Investment Equity 20%+ Outright ownership Preferred Equity 15% - 20% Med involvement Subordinated Debt 10% - 15% Low involvement Debt 5%-10% Passive

9. Equity Return Characteristics Total Return Yield plus Capital Growth = 20%+ Yield Most funds require running yields of >7% to meet investor preferences Less important for Super Funds, but still need to report total return annually Capital growth Is the “blue sky” but must be able to be predicted and capable of rational explanation

10. Other Equity Requirements Sound external management Long term investments need long term solutions Liquidity Scale Tradable assets Other co-investors Not proprietary Political environment Cannot be a “fad”

11. Housing Investment Advantages Diversification benefits Not strongly correlated with other asset classes Scale Significant portion of National wealth Total return history very strong Many markets have outperformed equities, bonds and commercial property Real Return = >8% (+CPI)

12. Data Issues If an investor is to rely on capital growth for their return then they need surety Improving but it is difficult to get agreement on history and interpretation Needs more sophisticated analysis Investor Vs Owner Occupier State vs National effects Size of house vs land Inner vs outer

13. Partnerships My current experience shows you need: Social & Development & Finance Or more broadly: Social & Housing & Finance Takes time to build trust and understand motives PPP’s Not true partnerships – are really another form of contractual obligation

14. Role of the Sponsor Can be an individual or an organisation Bridges the gap between Idea and reality User and investor Brings Subject Matter Expertise plus ability to make things happen Sector capability is limited at this point

15. Institutional Housing Debt Debt Institutions already active Securitisation vehicles – Residential mortgages Project funding participants Sub Debt Structured financing just beginning…. Long dated assets Low coupon

16. Institutional Housing Equity Equity Suitable for large scale projects Med Density Residential – can now get scale Develop and Hold - most likely – still some development profit available Listed Residential Investment Trusts Failed to date, but reducing investment alternatives and increasing sophistication should lead to success in med term. Unlisted Trusts More likely – small number of institutional investors and focussed sponsor

17. Institutional Housing Equity Preferred equity Financing Housing Associations’ assets Investor can get his return while leaving the assets in the ownership of Housing Associations (to gain excess and long term return) Leveraging Govt subsidies Debt has been growing in its use, and equity will follow

18. My current activities . . . Monash Affordable Home Loan $275,000 loan (100%) for a $45,000 income Uses Institutional Sub Debt Housing Associations key player Incorporates financial management training Rent To Buy scheme Finances low rental properties for HA’s & offers ownership No subsidy required - MAHL key component Unlisted Residential Trust Geographic diversification and low-rent product Public Housing Structured Product To increase government leverage

19. Conclusion Institutional funding is the missing link for Affordable Housing problems in Australia It is not a quick fix and will take time to grow However it will become a permanent part of the financing equation, and Will provide increased flexibility in the provision of housing solutions for low income earners Need to form partnerships now with the sector