From Main Street to Wall Street: is the HAFF housing scheme a gift to the money men?

The Labor government and the Greens have finally agreed to pass the Housing Australia Future Fund (HAFF) bill. But how much will go to housing, and how much to fund managers, Harry Chemay asks?

The HAFF Bill was Labor’s key election promise on increasing housing supply and affordability, and with the Greens on side, the Government now has the numbers to pass it.

To their credit, the Greens have extracted significant spending concessions from the Albanese government, including $2b for a Social Housing Accelerator in late June, and now a further $1b for public and community housing, to be distributed through the National Housing and Investment Finance Corporation, which will be renamed ‘Housing Australia’ as part of the HAFF measures.

Once the Bill has passed, the Future Fund, Australia’s sovereign wealth fund, will have $10b credited to a HAFF special account.

The fund will be responsible for allocating these funds across a range of investments that it believes will collectively meet the objectives set. And thereafter managing the HAFF portfolio to ‘create a secure, ongoing pipeline of funding for social and affordable rental housing’, per the press release from Minister for Housing Julie Collins.

Thanks to an earlier commitment extracted by the Greens, that pipeline of funding is set to be no less than $500m each year from the HAFF’s $10b starting balance, a minimum year one distribution yield of 5% after of fees and costs.

Greens extract another $1b for housing package but HAFF numbers still don’t stack up

How the HAFF will work

So how might that work in the real world of institutional funds management, when its well-remunerated investment professionals get their hands on all that money?

Well, thankfully, we have an existing Future Fund portfolio to provide some insight.

The Future Fund (FF) can’t invest the HAFF funds until instructions are received in the form of a non-disallowable legislative instrument called an ‘investment mandate direction.’

And here’s where the $22b Medical Research Future Fund (MRFF) helps. This FF portfolio, seeded with $20b in 2015 under the Abbott government, exists to provide Australian researchers grants of financial assistance to support medical research and innovation.

Under the MRFF’s investment mandate direction, the FF must aim to generate “an average return of at least the Reserve Bank of Australia Cash Rate target + 1.5 to 2 percent per annum, net of investment fees, over a rolling 10-year term.”

The MRFF’s return objective is a handy proxy for what might be set for the HAFF because they share a key characteristic: they will both be required to required to deliver yearly distributions to assist with funding.

Unlike the original FF portfolio, established in 2006 but yet to pay a single dollar of distribution, the HAFF has to hit the ground running as an income-generating portfolio. As with the MRFF, it will operate very much like an endowment fund, an investment pool typically used by universities to help meet operational and asset maintenance costs.

MRFF – Show me the money!

According to the most recently audited FF annual accounts, the MRFF has generated 4.1% per year, against a target return of 2.5% since it started.

It’s been making distributions for medical research and related purposes in the region of $620m to $660m yearly, a distribution yield of a little over 3% per year. Not that the MRFF has been without its critics, when it comes to its funding decision-making.

In order to produce smooth cash-like returns, the MRFF portfolio is, unsurprisingly, dominated by cash, as the latest portfolio asset allocation shows:

Unlike the other FF portfolios, the MRFF, constrained as it is by the requirement to pay annual distributions, can’t invest heavily in high risk investments like shares, instead holding almost 44% in low risk but interest-paying Cash.

There is every likelihood that the HAFF investment portfolio will end up looking somewhat similar.

Thankfully, the RBA Cash Rate is now 4.1% p.a., not the 0.1% p.a. the MRFF had to battle through the COVID-induced rate cuts of 2020-2022.

But that’s still short of the 5% p.a., net of fees, that the HAFF will have to generate if that annual $500m distribution promise is to be met.

And that’s where things get tricky. The MRFF tries to lift its return by leaning heavily on ‘Alternatives’, a catch-all term that incorporates hedge funds, quantitative strategies and all manner of ‘non-traditional investment techniques’.

These investments tend to be of the ‘black box’ variety; opaque strategies seeking to capture ‘excess returns’, for a price. And that price can be steep indeed, with many involving cost structures with high management fees and eye-watering performance fees (so-called ‘Two-and-Twenty’ funds).

While often difficult to parse, the FF does attempt to calculate what it spends on such investment and performance fees, in the form of ‘look-through costs’.

MRFF cost structure

Unsurprisingly, a close look at the MRFF’s cost structure in the latest accounts shows a level of ‘look-through costs’ that would, on the basis of the $21.5b then held by the fund, have resulted in some $380m (1.77% in 2021-22) in fund manager fees, per the below table.

Whichever way one tries to slice and dice the results, the Medical Research Future Fund has an all-in cost structure at present somewhere approaching 2% per year, or $400m.

That’s a lot of medical research that could be funded in Australia but is instead going to hedge fund managers,

many based in faraway locations like New York, Boston, London and Paris.

HAFF – is the price right?

How might the HAFF it deliver a 5% distribution in that first year, after fees and charges that could conceivably reach 2% on an ‘all-in’ basis? What gross return will it need to generate, given the possible costs involved, to deliver a net 5% distribution to Housing Australia?

And how will it generate $500m off a $10b capital base, when the $22b MRFF can only seem to distribute some $650m or so each year?

These are now questions for the Treasurer, his staff at the Treasury and the Board of Guardians at the Future Fund.

Normally in an endowment fund, an investment mandate is established, a portfolio is created and a sustainable distribution policy emerges somewhat organically as the recurring flow of dividends, bond coupons, rent and other returns becomes apparent.

In the case of the HAFF, that logic has been upended by the politics of the day.

The promise is for $500m for social and affordable housing in its first full year of operation. Now all the HAFF’s portfolio levers must be tuned to make that happen, while ensuring the $10b capital base isn’t subject to too great a risk of falling.  It’ll be a delicate dance indeed.

Such is the tangled web that is Australia’s housing dilemma. We now are in a situation where the provision of funding to create housing for some of Australia’s most vulnerable individuals is in the hands of global hedge funds and money managers.

Let’s hope the bulk of the HAFF returns end up as bricks-and-mortar for dwellings in Australian cities and regions, rather than in weekend retreats in the Hamptons, Oxfordshire or the French Riviera.

The Haffelganger: Medical Research Fund fee-fest foreshadows Labor form on Housing Fund