Investment Returns and Alternatives

What the HAAF?

The Australian government introduced the Housing Australia Future Fund (HAFF) to address housing affordability and supply issues. This long-term initiative is designed to finance the construction of new affordable housing and support various housing projects, aiming to improve housing outcomes for Australians, particularly those in need. Let’s delve into the HAFF’s investment returns and compare them with two alternative investment strategies to see which approach might yield better results for public housing funds. See more on the HAAF here.

Investment Mandate and Expected Performance

The Housing Australia Future Fund Investment Mandate Direction 2023, issued on 1 November 2023, requires the Future Fund Board to target a long-term benchmark return of the Consumer Price Index (CPI) plus 2.0% to 3.0% per annum, net of investment fees. With the CPI currently running at an annual rate of 3.6% (as of July 2024), the HAFF should aim for a performance band of 5.6% to 6.6%.

These are rather modest goals for a $10 billion investment!

Current Economic Environment

1. Investment Strategy

The HAFF’s returns depend on its investment strategy, which likely includes a diversified mix of assets such as government bonds, equities, and other investments to balance risk and return.

2. Management

The effectiveness of the fund’s management team in navigating market conditions is crucial for achieving the fund’s objectives.

3. Market Conditions

Broader economic conditions and market performance significantly impact the returns of the fund’s investments.

4. Goals vs. Returns

While the HAFF’s primary focus is on addressing the housing supply, its financial performance must also be considered to ensure the effective use of public housing funds.

Early Performance and Evaluation

According to the Department of Finance, the HAFF’s early investment returns were a nominal 1.9% for the quarter ending 31 March 2024. This equates to an annualised return of 7.6%, which falls within the targeted range but raises questions about the adequacy of these returns for public housing funds.

Option 1:

Investing in Australian Property Trusts

An alternative strategy could involve investing the HAFF in Australian property trusts. The Residential Real Estate Investment Trust (REIT) industry in Australia is dominated by companies like GPT Group (GPT), Stockland (SGP), and Mirvac (MGR), which own and manage residential properties across the country.

The reported performance of these companies typically shows higher returns than the HAFF’s early performance. For example:

GPT Group (GPT): Historically stable with periodic high returns.

Stockland (SGP): Consistently delivers solid returns with moderate volatility.

Mirvac (MGR): Known for strong performance and resilience in market downturns.

While these REITs have demonstrated the ability to outperform the HAFF’s returns, they also come with higher volatility, which might not be acceptable for public housing funds. The recent “unprecedented” times have shown significant fluctuations in real estate markets, suggesting that such investments might expose public housing funds to undue risk.

Option 2:

Direct Investment in Residential Property

Another viable alternative is direct investment in residential property. With $10 billion, the government could purchase 10,000 homes at an average cost of $1 million each. This approach leverages the dual returns of rental income and capital gains, which have historically increased at higher rates than these early HAFF results.

Direct investment in residential property can provide steady rental income and capitalise on property value appreciation. Given the current market trends, this strategy could reasonably be expected to outperform the HAFF’s early returns of 7.6%. However, managing a large portfolio of residential properties involves significant administrative efforts and potential property management and maintenance challenges.

Before conclusions can be drawn, we need to step back and ask a key question:

“To increase public housing supply, this mechanism aims to take public funds and maximize their impact.”

Does this current strategy achieve this aim?

Is investing in producing income and then using that ongoing income to make a difference the best return on funds in this strategy?

In Summary big goals is this the right plan?

The Housing Australia Future Fund is a promising initiative to address the housing crisis, but its early returns have sparked debate on its financial performance. Comparing the HAFF with alternative investment strategies, such as Australian property trusts and direct residential property investments, reveals that while these alternatives might offer higher returns, they also come with increased volatility and management challenges.

Ultimately, the best approach depends on balancing the need for stable, reliable returns with the primary goal of increasing housing supply and affordability. A diversified strategy that combines elements of these options might offer a robust solution, ensuring the effective use of public housing funds while addressing Australia’s pressing housing needs.

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