11 September 2020
With COVID-19 causing market uncertainty in Australian commercial property, some investors are looking to focus on other asset classes which offer safer returns.
In particular, a number of investors are beginning to turn their attention to the emerging specialist disability accommodation (SDA) market given the government-backed nature of SDA income streams.
Despite SDA requiring higher entry and modification costs, investment returns are significantly higher than those of the traditional residential housing market. With participant demand for SDA housing continuing to grow, SDA represents a unique investment opportunity, but will require investors, developers, governments, banks and disability care providers to formulate a strategy to resolve the undersupply of SDA.
The policy framework in Australia has fundamentally shifted from funding disability institutions and services that can be accessed by recipients to funding individuals to make their own choices about their care, including how and where they live. This provides the potential for those living with disabilities to live independently and away from institutional/communal disability facilities or care in the family home. This shift has resulted in increased development of new custom designed or retrofitted housing to meet the needs of people with a spectrum of disabilities and care needs.
With the backing of the National Disability Insurance Scheme (NDIS), institutional investors are being attracted by the relatively high (and partly government-backed) returns. For example, the current NDIS annual payment for a newly built one bedroom apartment with high physical support and on-site overnight assistance is A$90,992. For a two bedroom apartment with one resident, the amount increases to A$113,129. Apartments attract the highest level of payment, with a single resident townhouse attracting A$57,992 and a house with two residents attracting A$44,502 per resident. The annual rates are lower where there are lower levels of physical support and no on-site overnight assistance.
According to the NDIS, there are approximately 28,000 individuals who are eligible for SDA. This demand will be met by a mix of new construction and refurbishment of existing dwellings, requiring an estimated A$5 billion of new capital. The Government has allocated the NDIS an annual budget of A$700 million (indexed for the next 20 years), partly to pay the SDA rent of NDIS participants.
For a property to become available to NDIS participants seeking SDA, the property must be enrolled and compliant under the SDA Rules and the landlord is required to be registered as an SDA provider.
The National Disability Insurance Agency (NDIA) connects NDIS participants (who have an approved SDA budget), with SDA providers that may be able to fill the participant’s SDA needs.
However, given the infancy of the SDA sector, investors need to approach the sector differently to traditional housing. Investors will need to:
Other matters for investors to be aware of include:
One way to fast-track investment in SDA and mitigate the risks unique to SDA is for investors to partner with an already established SDA provider, for example, by fund-through of the development of new SDA and with the development, management and letting of the SDA managed by the SDA provider. These organisations intimately understand the housing and care needs of NDIS participants and can provide valuable input into site selection and design. This model passes the heightened risk of letting the SDA to NDIS recipients with high needs and allowing the attendance of various support services onto the SDA provider, who is best placed to manage them in return for a fee.
While such arrangements between investors and an SDA provider can mitigate the NDIS-specific risks, as a residential asset class (depending on the particular legal structures adopted) leases granted by investors to an SDA provider will likely be captured by residential tenancies legislation. This means that the parties will be constrained with regard to the commercial arrangements that they can document and their agreements will need to be jurisdiction-specific.
Investment activity within the emerging SDA sector is building. For example:
An increased focus on funding SDA will build confidence in the sector, make further investment more accessible and, with time, encourage legislative reform to reduce barriers to investment.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.