NAB’s involvement in a landmark social loan to fund the $262m acquisition of specialist disability accommodation (SDA) by a Lighthouse Infrastructure (Lighthouse) fund could help to establish a new capital market to accelerate the provision of desperately needed affordable housing.
NAB will contribute half of a $135m debt facility for Melbourne-based Lighthouse’s ADAPT 2 (Australian Disability Accommodation Projects 2) fund to acquire a portfolio of 188 operational SDA homes, which accommodate about 400 participants in the National Disability Insurance Scheme.
The deal is notable for a number of reasons – it’s the first time bank debt has been substituted for equity to finance SDA assets; ADAPT 2 is among the nation’s largest pools of SDA dwellings, and the transaction is NAB’s biggest single commitment to the SDA sector.
More importantly, according to Lighthouse managing director and co-founder, Peter Johnston, it also creates a precedent to operate at scale instead of a disaggregated, individual model of service delivery.
“The sector has been challenged with access to capital and trying to deliver services to the front door of people in need,” Mr Johnston said.
“What we’re trying to do is to create access to funding for the community housing sector when they see opportunities, instead of waiting for funding from a government program or grant funding.
“If we can develop that capital market, like the one for the larger private sector where there’s almost unfathomable levels of capital for productive projects, our ability to tackle social problems will become faster, more efficient and more productive.”
Collaboration and partnerships
Exploring the topic further, NAB Group Executive Corporate & Institutional Banking (C&IB), David Gall, sat down with Peter Johnston, to discuss Lighthouse’s purpose and the value of our long-standing partnership in enabling positive social impacts.
Affordable, safe and suitable housing
NAB has been increasingly vocal about the housing shortage and its disproportionate impact on people with lower incomes and those living with disabilities.
Chief executive Ross McEwan said last month it was the “biggest issue” facing the country.
This followed NAB’s commitment last December to allocate a further $6bn to affordable and specialist housing by 2029.
The targets would be specialist disability accommodation, development of social and affordable housing projects, and access to finance for low income-earners and essential workers through government-supported housing schemes.
Lighthouse is also increasing its focus on investment in the sector, having started with its first SDA investments in 2018 as part of a broader, diversified sustainable infrastructure investment fund.
ADAPT 2, on the other hand, is a specialist SDA investment fund with no specific cap, attracting institutional investors from the real estate sector looking for alternatives to commercial property.
In the most recent, $262m transaction, total bank debt was about half the purchase price, with Commonwealth Bank contributing an equal amount to NAB, and the remainder coming from equity commitments.
One of the features of the deal was the portfolio’s diversification across geography and building-type.
There was a mix of one, two, three, four and five-bedroom dwellings, with NSW accommodation the biggest component, followed by Victoria and the ACT and Queensland.
Developing a viable and sustainable capital market
During his question-and-answer session with David Gall, Mr Johnston said the overriding purpose of institutional investors who invest with Lighthouse was to ‘make money’.
“But they are governed by people, and those people have a degree of compassion for their community,” he said.
“While they don’t have the attention span every day to solve those problems, our value proposition is that’s where we will focus our energy, so the money and the capital they support us with will help catalyse that change.
“As you would expect with most things, if you can harmonise your value proposition for your clients with your employees, you can start to create momentum and, with that, growth.”
Mr Johnston said it was critical to offer investors long-term, “scale” opportunities.
“What we need is an NDIS-type framework that’s designed to look through decades rather than a two-year program,” he said.
“Also, 15 years ago you could take a $50m deal to a super fund and it would make a difference; now you’ve got to add two zero’s to make any difference at all.
“So it’s vital, if we’re going to maintain the attention of the large capital pools in Australia, which is one of our most precious resources, that we’re creating systems, structures and efficiency that enables them to bring about social change.”
The hallmark of a successful capital market, according to the Lighthouse managing director, was the uniform structure of the transactions it hosts.
The bond market was a case in point.
Mr Gall pointed to the development of social housing providers in the UK, where the business model had become self-sustaining as these housing associations expanded their profits and size.
“It’s not a bad thing for these entities to make money and build their corpus because they’ve got more capital to do the next project and the next project,” he said.
Mr Johnston agreed, adding that housing associations typically “run the show” in the UK.
While political parties would come and go, the social housing sector tended to “plan in decades and invest in decades”.
Mr Gall added that they were self-sustaining and strongly-rated entities, typically pegged around AA by the global credit-rating agencies.
The challenge in Australia, according to Mr Johnston, was that every deal and every government program looked different.
“We need a system if we’re going to successfully tackle the housing challenge by 2040,” he said.
Mr Gall said NAB used the term “innovate and replicate”.
“Bingo!” Mr Johnston said.