Impact Investing in Real Estate
8 April 2015 at 10:40 am
Innovative new funding models are tackling pressing social needs and the reduced availability of financial support to address those needs across Australia. Journalist Nadia Boyce spoke to one NSW property developer who recently secured $2.1 million in an impact investment to kick start his solution for funding new social housing developments.
Currently the NSW social housing system faces many challenges. Social housing, managed by Not for Profit organisations who act as landlords, provides long term security of tenure at an affordable rental rate. But as funding decreases, operating costs rise and homes age, it is becoming difficult to maintain existing properties and build more homes to meet the increasing demand.
Last year the NSW Government proposed reform in a discussion paper, Social Housing in NSW: a discussion paper for input and comment, and invited the community to provide comment via submissions and public forums.
One person keenly engaged in the consultation process was Josh Vrsalijko, who says he has built a new and innovative funding model by drawing on his expertise in property development.
Involved in the building Industry for over 20 years, Vrsalijko has established Sustain Community Housing, with the goal of growing Social and Affordable Housing solutions within New South Wales. He recently launched the organisation off the back of $2.1 million in impact investment, secured largely from social finance providers.
The premise is simple: to allow Not for Profit organisations to harness the commercial potential of redeveloping land to boost social housing availability, with profit also in the mix.
Pro Bono Australia spoke to Vrsalijko about his model, securing investment and why he believes it has the potential to change the face of community housing in NSW – and Australia-wide.
A Model for Change
Vrsalijko speaks with unwavering conviction about the system he hopes to build; developing sites for community housing and on-selling a proportion to the private market for profit, thereby generating funds to put back into the cause.
“The Government announced they were not spending any more money on social housing, and they put it out there to community organisations and private enterprise to come up with some ideas, innovate and create some social housing differently to what the Government’s doing. We put in a submission in January on how to do it,” Vrsalijko says.
“I designed a model that didn’t rely on Government funding – if it’s backed by Government policy and the Government changes, it’s not really a model. My idea was to be more sustainable, providing an opportunity to develop houses.
“We can develop in the Not for Profit world, make some money, retain the stock [properties] and put out some social housing with zero Government funding and zero grants from people. You look for an investment, where it’s more of a recycle of the money.”
“You’ve got to create some sort of wealth to sell, so you can retain some of the assets.”
Social housing built as part of the model will be managed in partnership with Sustain by a reputable registered community housing provider on a fee for service basis, with the profit on the private sale to fund future social housing projects.
The first development is in the Sydney suburb of Colyton, where Sustain built six dwellings, sold four to the private market and retained two to be tenanted by social housing tenants, with a profit of around $1 million.
“People do a lot of events to raise a million dollars. We’ve made a million dollars off building six houses, selling four and keeping two. If we did 50 houses and kept 20, we could make five million dollars,” Vrsalijko says.
Designing for Disability
Part of what makes Sustain unique is its focus on disability service providers. Vrsalijko says
one of the organisation's founding tenets is that all Sustain developments should be accessible not just to people generally, but to those with disabilities as well.
“Most social housing companies have been evolved over the years and the people who run them are great at running social housing companies, but they’re not doing much in the way of innovation,” he says.
“It’s our mandate that every house we build be suitable for a disabled person. A problem with Government is that 95 per cent of their housing stock is not suitable for disabled people. And as people get older, if a house is designed for a disabled person, it will suitable for an older person as well.”
The focus will be on partnering with disability service providers to get the best outcomes.
“The disability sector for accommodation is going through huge amounts of changes. By 2019 there’ll be no services done by Government. In the disability sector, the Government doesn't have money to keep building houses and supplying rent for people who can’t afford it,” Vrsalijko says.
“Sometimes the Government doesn’t always do the best job – I think where you can get private investment into things some time it can run a more efficient outfit and it can be better for the sector.
“I’m very passionate about the disability sector…that’s where the idea comes from, to build group homes and partner up with great service providers. We’ll never, ever do services, and we’ll never do people – my skillset is developing.”
De-risking Impact Investment
Vrsajko says the strength of his model is that after some initial money from fundraising, philanthropists and impact investors, it can be scaled up easily given its independence from Government funding.
Sustain received its initial funding after he approached Social Ventures Australia and Social Enterprise Finance Australia, who were allocated Government funds under the Social Enterprise Development and Investment Fund (SEDIF) program, a $20 million fund in partnership with the Federal Government intended to facilitate investment for early-stage social enterprises.
Vrsajko needed $2.1 million and was able to secure $1.6 million of that when the two organisations banded together to support him. The final $500,000 was secured via private investment.
He believes part of his success in securing funding was down to the depth of knowledge and experience on his board, which includes prominent social, public and corporate sector representatives.
“Our biggest issue was that we were a startup but I think the experience of the board and my experience as a developer was an advantage,” he says.
“Banks want personal guarantees but most Not for Profit boards, they’re retired people normally putting their time in for free, and I wouldn’t expect my board to risk their livelihood for something that doesn’t make them or anyone else money besides the community.
“The good thing about organisations like SVA and SEFA is that they don’t require signed personal guarantees. The bad thing about them is that sometimes they’re more cautious, and funding is harder to get than if you do it with a personal guarantee.”
Sustain Foundation, the fundraising arm of Sustain, will also play a pivotal role through fundraising and the potential to offer guidance around requirements for effective social housing.
“The fund sits outside Sustain, and can attract investment from people who want to invest in social outcomes,” Vrsajko says
“That money can then ideally be lent back to Sustain and will also lend money back to other social housing companies who may have land assets in their portfolios but no experience developing the properties – they have no idea what to do with it or how to get houses on the ground.
Sustain Foundation also intends to raffle a home every year and the sales proceeds will fund further affordable and community housing within New South Wales.
Developing for Change
Vrsalijko says sustainable investment-based models are the future, rather than traditional models of corporate philanthropy and in-kind gifts. But, he says, there is a way to go before impact investing becomes more widespread.
“Social housing is a ten year wait and they need thousands of houses. You can’t just go to [philanthropic or corporate] organisations and say ‘I need the concrete free for a thousand houses’,” he says.
“I still think people do impact investment for two reasons. One is the publicity, and for returns. They should be looking at the impact on the community. In trying to solve a problem, you can't focus on the return, you’ve got to focus on the outcome.
“My background is developing, so I’m used to an element of risk, and the board I’ve set up is comfortable with that risk.
“The impact investing world is a bit like banks. Unless they can see it’s zero risk, they won't look into it. They won't take a risk. But that’s what impact investing is, there’s a level of risk in it. It’s about minimising that risk, and it depends on the organisation that’s lending the money out, what risk they want to take.”
Establishing strong partnerships with Government will be pivotal to the rollout of Sustain’s long term vision.
“The Government spends $700 million a year in NSW paying for rent for people eligible for social housing, but there are no houses to house them,” Vrsalijko says.
“Working with Government doesn't take a short period of time. To build that relationship, you have to work on it. The good thing about us is that we go to Government, not to ask for handouts or money or free land, but we go to them offering to buy their land, full freight – that’s why I believe we’ll get quicker traction than other organisations.
“The Government could solve the problem of homelessness by making a policy like other countries where if a developer wants to develop land, and make money off the community, they need to set aside a percentage of their land for social housing.
“If they’re forced to do it, they will do it. That’s where policy changes can be made.”