This Aussie small cap is doing its bit to solve Australia's housing affordability crisis

Australian housing affordability has sharply deteriorated in recent years amid a perfect storm of high inflation, rising interest rates, builder and supply constraints, and returning immigration.

The proportion of rentals available for under $400 per week in capital cities has fallen from over 35% in 2020 to just 11% in 2023. In regional areas, it has fallen from nearly 60% of rentals to around 25%. Over 32% of Australian renters are now paying more than 30% of their income in rent. 

For the 40^th percentile Australian household by income, only 10% of Australia’s rental housing stock is now ‘affordable’, i.e. available for under 30% of household income. Of course, it is the households with the lowest incomes who are most impacted by the lack of affordable housing.

Government is scrambling to fill the gap

A significant supply-demand imbalance is the driving factor behind Australia’s affordable housing problem. Australian rental vacancies are at historical lows of 1.2%. Continued immigration, a shortfall of builders and supplies, and ‘not in my backyard’ opposition to new development are just some of the factors which continue to tighten the screws on Australia’s housing market.

It’s estimated that Australia’s social and affordable rentals shortage amounts to over 650,000 homes. In addition, the NHFIC is forecasting the shortfall to expand by 106,300 homes over the next five years based on expected household formation and housing supply additions.

The Federal Government has acknowledged the need for more social and affordable housing. This year, the Government announced a number of new initiatives to increase supply. One of these is the Housing Australia Future Fund (HAFF). The HAFF is a $10 billion investment fund managed by the Future Fund Board of Guardians. Returns generated by the Fund will go towards funding 30,000 new social and affordable rental homes over the Fund’s first five years. However, this is a drop in the ocean compared to what is needed.

Aspen Group (ASX: APZ): Dedicated to helping solve Australia's housing affordability crisis

During the September quarter, we increased our position in Aspen Group (ASX: APZ) in the Firetrail Australian Small Companies Fund. Aspen develops and operates affordable housing for the 40% of Australian households who cannot afford to pay over $400 per week in rent or $400,000 to buy a house.

Aspen is playing a key role in helping to plug Australia’s affordable housing shortage, and is delivering strong returns while doing it. Aspen provides affordable housing across Australia through three segments: Residential, Retirement Communities, and Park Communities.

In its Residential business, Aspen develops and leases out a portfolio of residential dwellings at competitive rents. The average rent across the portfolio is $326 per week, compared to an estimated average market rent of $369 per week in the same regions. The residential portfolio continues to experience high demand with only frictional vacancies across the portfolio. Aspen also maintains a strong redevelopment and refurbishment pipeline which will lead to margin expansion as these projects are complete.

In the Retirement Communities business, Aspen develops and operates land lease communities. Land lease communities are an alternative to traditional retirement villages, providing retired people with affordable housing and shared facilities such as a clubhouse, swimming pool, bowling green etc. Tenants acquire a manufactured home at a large discount to local real estate prices, but lease the land where the home is located for a weekly fee.

Retirees are often asset rich, but cash poor, with a significant proportion of their wealth locked up in their home. Downsizing to a land lease structure allows retirees to unlock equity in their home and live a more comfortable retirement. Importantly, Aspen’s average fee in its Retirement Communities portfolio is $186 per week, which is below the Commonwealth Rent Assistance Cap of $212. The cap is increasing by another 15% in FY2024, which gives Aspen headroom to increase rents without encroaching on tenants’ ability to claim Rent Assistance benefits.

Demand for land lease communities and other forms of affordable accommodation for retirees will continue to grow as Australia’s population ages. 

Aspen also operates holiday parks across Australia in its Park Communities business. These communities attract a diverse mix of ‘permanent’ tenants through to shorter stay tourists and workers. Aspen’s ‘dynamic yield management’ approach optimises the rental rate charged according to the lease term and park occupancy at the time.

After several difficult years of bushfires, floods and COVID lockdowns, demand for cabins and camp sites is firing. Occupancy is back up to pre-COVID levels and Aspen has been able to push through healthy price increases. Aspen’s Park Communities generate average weekly revenue of $291 per dwelling/site.

Solving an acute social problem, and delivering value for shareholders

Aspen has developed a strong track record of delivering affordable housing for Australians, and value for shareholders. Over the past five years, Aspen has grown its operating earnings per share by 18% p.a..

How do they do it? Aspen’s experienced team is skilled at finding real estate in desirable locations priced below replacement cost, and large land parcels that are under-utilised. Management are savvy dealmakers and have completed more than 10 acquisitions of assets in receivership. The company also has a track record of increasing the value of acquired assets through refurbishing and repurposing, and in finding alternative, more profitable uses for acquired real estate.

Looking forward, Aspen is well positioned to capitalise on the soaring demand and undersupply of affordable housing across its Residential, Retirement, and Parks portfolios. Aspen also has a deep development pipeline which, once executed on, will result in a material uplift in rental income.

Valuation is attractive. At the same time, Aspen’s shares are trading at a 30% discount to book and a 50% discount to key competitors.

With a proven management team, multiple levers to grow future rental income, an attractive valuation, and ever growing demand for affordable housing, we see material upside to Aspen Group shares on a three-year view. The company remains a key holding in the Firetrail Australian Small Companies Fund.

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