Specific financing instruments and forms of impact investing must be better understood as must different groups of vulnerable household cohorts if impact investing is to make a serious contribution to resolving Australia’s affordable housing challenge, a new study has found.

Releasing the second of its third report into the potential of social impact investment (SII) to deliver housing which is suitable for low-income families, the Australian Housing and Urban Research Institute (AHURI) said impact investing had the potential to provide desperately needed housing to vulnerable Australians.

But it says both financial instruments and the needs of different vulnerable groups need to be carefully understood so that the solutions which are pursued are suitable in terms of the outcomes they need to deliver.

“SII presents an important opportunity in Australia, but we need to better understand the finance instruments and models that might be feasible and which vulnerable housing groups can most benefit from social impact investment,” said Professor Paul Flatau, study author and director of the Centre for Social Impact at UWA (CSI UWA).

“The finance vehicles are only useful if they can be matched to community housing and social support providers’ capabilities and people in need of housing support including those seeking to exit homelessness and low-income older people in housing stress.”

Broadly speaking, SII represents a type of investing whereby investors seek social benefits through their investments along with financial returns.

Common forms of financial instruments which are already being considered and implemented include a bond aggregator model for funding affordable housing and social impact bonds.

The former involves social impact loans for affordable housing at subsidised rates, with government payments to individuals able to be pass through to the lender in order to meet interest and principal expenses.

The second option involves the government (rather than providing services directly) issuing bond to private investors which are based on a return which is paid according to the social outcome which is delivered.

According to the report, however, extra options which need to be considered include private capital impact investment firms which invest in affordable housing projects and work closely with project managers, impact investment mutual funds and social impact loans (where government payments are made to individual or the lender to cover part of the interest and/or principal payments which are due on a loan which covers the purchase of a property).

It is also important to understand the groups which the stand to benefit most from SII in the housing space.

According to the research, vulnerable housing cohorts include those in financial stress or housing crisis, Indigenous Australians, those experiencing family violence, young people, people with complex needs such as mental health and/or drug/alcohol issues, people with disabilities and older Australians who have low incomes or insecure housing.

The study recommends several measures, including that impact investing vehicles such as impact investment mutual funds work alongside the Commonwealth’s bond aggregator model and social impact bonds (SIB).

It says SIBs are suitable to support vulnerable populations enter and maintain housing within a framework of strict accountability and performance measurement.

Flatau says the modelling indicates that impact investment models work well when investors are aligned to the social impact of the investment.

“They will accept a lower than market financial return, higher risk, low liquidity, and limited ability to exit the market in return for the understanding that their investment is doing social good,” he said.

“However, we do see a need to mitigate this risk, and this can be done in part by taxation benefits or other direct government subsidies to assist the financial viability of the proposed impact investment.”