Housing New Zealand is unlikely to pick up the 395 pensioner flats Hamilton City Council is trying to offload.
The housing agency's asset redevelopment general manager, Sean Bignell, said buying pensioner housing stock valued at about $28 million from the council was not a priority.
Housing NZ is moving away from its role as the sole provider of social housing - instead the Department of Housing's newly established social housing unit will work with community groups and agencies to provide affordable rental properties.
Mr Bignell said he would willingly discuss the best way to meet the city's demand for affordable rental housing with the council, after its decision to seek Housing NZ interest in buying its entire elderly housing portfolio.
The council wants to free up the money to put towards paying off the city's growing debt.
"We would welcome discussions ... on how we can best work together to meet the demand for affordable rental housing in Hamilton," Mr Bignell said.
Pleas from about 60 pensioners to the council to sell to a compassionate buyer prompted the council to move away from selling it to a private group.
The executive director of the Community Support Association Trust, Peter Heaslip, also expressed interest in buying the flats.
He was concerned a private operator would buy at a low price only to make a windfall from it later. The trust didn't own any elderly housing but was set up to help people, he said.
The city council is the biggest landlord of pensioner housing in Hamilton, followed by St Vincent de Paul, Central Baptist Church, Salvation Army, Methodist Church and Abbotsford House.
Housing NZ provides low-cost housing in Waikato aimed at all groups.