Residential Housing risk and returns and their importance to responsible investors and social housing providers: Evidence from Australia

Abstract

The Australian housing market is severely unaffordable. Australia forecasts demand for one million social and affordable dwellings by 2036. The social housing sector in Australia struggles to finance private investments to meet the rising demand for affordable houses. Increasing Socially Responsible Impact (SRI) investors are an excellent source of finance for the affordable housing sector. However, housing associations and relevant government institutions have not paid sufficient attention to the SRI investors as a source of housing finance. SRI investors consider the environmental, social, and governance (ESG) performances in their investment process. Therefore, this study evaluates the Australian social housing sector’s ability to attract SRI investors. This study aims to connect socially responsible impact investors and social housing associations as a solution to the lack of private investments for the provision of much-needed affordable housing. First, the downside risk measures are collected from the residential housing market transactional data in Brisbane, Australia and ESG-related investments. Then four focus-group discussions are conducted with industry experts to support the impact evidence required by SRI investors. We also apply a multifactor asset pricing model to estimate the risk parameters of affordable housing submarkets and expensive submarkets. Finally, a three-dimensional portfolio optimization technique is employed to evaluate the profitability of responsible investors’ investment portfolios after incorporating affordable housing assets. It was found that affordable housing submarkets have more downside protection and risk-adjusted returns than other real estate and ESG-related investments. The multifactor asset pricing model shows that the affordable housing submarkets have the lowest risk exposures. Focus-group discussions provide strong impact evidence on the ESG performance of the affordable housing industry. The results of this study demonstrate that affordable housing is a safe and sound investment that provides the social impact and profitability required by socially responsible impact investors.