Tomorrowland 2019 discovered what can be created when you team an architect with a passion for affordable, sustainable housing with impact investors and bankers: carbon neutral, low-cost housing that creates resilient communities.
Panel members: Hanna Ebeling, Social Enterprise Finance Australia, Caryn Kakas, ANZ, and Jeremy McLeod, Nightingale Housing. Moderated by Katherine Leong, Spark Beyond.
On his long journey to deliver financially, socially and environmentally sustainable housing, Nightingale Housing founder Jeremy McLeod has learnt that affordable housing is all about finance, and impact investment is all about people.
But McLeod, founding director of Breath Architecture and affordable housing company Nightingale Housing, told the audience at Tomorrowland19 that at university he was taught that housing was all about design.
“We need to find smarter, better ways to construct,” he was told.
“There is a pre-fabricated way to do this, there is fast track way to do it, we will build stuff off-site … [but] what I have learnt in the past 12 years is that the answer to affordability is in finance,” he says.
“Form follows finance. It is not about the construction; it is about the money.”
But that was only part of the journey to finance a housing model that caps profits at 15 per cent to keep apartment prices down and sets aside 20 per cent of the apartments in any one project to affordable housing.
Designed to reduce operating and maintenance costs, Nightingale projects are 100 per cent fossil free, have a minimum 7.5 star NatHERS thermal rating, and each project is completely pre-sold through a ballot from a waiting list. This means huge savings on a display suite, marketing and real estate agents.
It’s a model from hell for some bankers and when McLeod first approached Bank Australia in 2009 he was knocked back. That led McLeod on a long journey to find someone who would “say yes”.
For Nightingale 1 (Florence St, Brunswick), he spoke to 34 different lenders. Each connection he made in the affordable housing and finance sectors led to another and then another until finally he met chief investment officer at Social Enterprise Finance Australia (SEFA), Hanna Ebeling, which led to SEFA deciding to back the model.
Champions and translators
SEFA led McLeod to NAB, and around the same time, he met people at ANZ who had seen his Nightingale project, including head of housing strategy at the bank, Caryn Kakas, who has a background in housing policy.
And, nine years after they had first met, McLeod was reintroduced to the lender at Bank Australia who had knocked back the first Nightingale project, but was now back at the table.
McLeod explains he couldn’t have done it without the help of people like Ebeling and Kakas who acted as “translators” and champions for the Nightingale model.
“Impact investing, for me, is not about investment; it is all about the people,” he says.
“The biggest thing we have learnt is how do we speak “finance” and I can’t, I don’t but [people like Ebeling] do and they were patient and they could talk to bigger organisations about how to make it work.”
For the financiers, it was about due diligence, credit processes and looking at these projects through a different lens. Ebeling built a lending syndicate for Nightingale 1 made of six different entities, which each invested about $1.2 million.
SEFA and NAB both backed Nightingale 2 at Fairfield in Melbourne and are helping to finance Nightingale 3 (Sydney Road, Brunswick).
Nightingale Anstey – two buildings side by side in Brunswick worth about $24 million – started with SEFA and then received backing from Housing Choice Australia, Sydney private equity fund Atrium and Bank Australia.
SEFA is a small social debt fund with a $20 million balance sheet so Ebeling knew it couldn’t fund all of the $6.5 million needed for Nightingale 1. It underwrote $3.5 million while helping bring onboard other investors.
Selling the model
“You have to work with institutional credit approval processes, in other time lines … with a highly complex construction project,” says Ebeling, who spent time explaining to other potential investors that this wasn’t going to be like other construction projects.
The positives were that Nightingale had 100 per cent pre-sales and very strong community support, she says.
“It is really important to bring investors on that journey and… yes, there are certain buttons in your credit process that the project is pushing but [there were] a lot of other things that I would classify as social resilience or intangible assets that the project had.”
Ebeling says there is an element of tactics in getting investors across the line.
“I can’t emphasis enough that it is all about people, and you have to have champions within an organisation.
“You think a project is dead and then one person picks up the baton and runs up the escalator again and you give it another try. Until you have that loan document signed I know anything can go wrong.”
For ANZ’s Kakas, the challenges were many, including “getting under the hood” of the deal.
“In the finance space, the first time you look at a deal you try to work out how many exemptions [to your finance rules] there are, how many challenges, how many credit exceptions you will work through before [the credit department] tells you to leave in an orderly fashion,” says Kakas.
“How do we take what [McLeod] is trying to do and put it against the standard boxes and say he can be an exception or work through some of these things?
“On an individual basis, [the project] is not that scary but on paper it is really scary,” she says, adding that it was only after her team visited the project that they understood the quality of the build and how the community would work.
“That doesn’t come across on paper; it comes across as something a bank would not do,” she says.
“Our challenge was trying to figure out how we felt differently about risk. It is very much how we felt about scale, things that could be trialled.
“Banks are highly regulated and they really like things that look like things they have seen before.”
Ebeling says SEFA’s cost of capital as a social investment fund is higher because it is raising funds from the wholesale market.
“We did Nightingale 1 at just under 70 per cent Loan to Cost ratio, at 6.5 per cent for construction … for Nightingale 2, SEFA did just under $1 million mezzanine at 10 per cent. NAB senior debt came in at a lower price so overall … with [industry super fund] Hesta on board for [Nightingale Village in Duckett Street, Brunswick] you don’t have to get mezzanine [finance].”
Will investors accept below market returns for these developments?
“That is what we are grappling with,” Ebeling says. “Some impact investors have the unicorn conversation where they want it all, impact and financial returns, and there are others who put impact first and will accept sub market returns.”
Kakas says the investment market is moving towards impact investing, with a number of recent government-underpinned bonds well over subscribed.
“With Housing NZ we have done two well-being bonds, one for $500 million, and one for $600 million for later this year, oversubscribed by people who are attracted by return, certainty and social purpose.”
McLeod says he and his colleagues established Nightingale Housing with the core intent of changing the market.
“I am a reluctant participant in Nightingale Housing,” he says.
“I will happily close the doors the minute a big property developer asks me to build carbon neutral housing at a reasonable cost for someone.”
The Nightingale model struggles in Sydney where land costs are high. Its one project in that city – Nightingale Marrickville – came about because Nightingale Housing teamed up with church group Fresh Hope, which contributed all the finance and land it already owned.
Nor is the model right yet for Brisbane or Adelaide because people have not yet given up on the idea they can own a house and because they have shorter commutes to work than people living in Sydney and Melbourne, McLeod says.
However, there are signs the market is shifting in Melbourne, where high-rise apartment towers are struggling to sell because of ongoing fears about construction defects and cladding issues.
But two apartment projects have been selling quite well: Nightingale Village and nearby Breeze St by developer Milieu, which he says “looks and smells like Nightingale,” with minimum 7.5 stars, rooftop solar and rooftop gardens, a shared laundry, and green power.
“It is a carbon copy of Nightingale,” McLeod says “except that it is selling at whatever the market will bear and it has a car park downstairs and you can buy airconditioning as an optional extra and the car spaces are sold as an optional extra.”
McLeod says developers are realising a project’s green attributes can sell apartments.
“The future is looking pretty bright for me that I can go back to my life as an architect because I feel like the market is shifting.
“People are finally seeing what people actually want.”