Disability housing shortage driving high-yield opportunities

Rental yields of around 15 per cent are every landlord’s almost unattainable dream, but for many, a relatively new investment model is making returns in this vicinity a reality.

Many retirees are now doubling their returns by investing in National Disability Insurance Scheme (NDIS) accommodation.

As ever increasing numbers of people turn away from large superannuation providers to manage their own retirement funding through a self-managed super fund (SMSF), more and more of these individual superannuation investments are being made in the property sector. 

The ATO's latest SMSF quarterly statistical report showed more than 6,000 new SMSFs were established in the three months to April 2021, with the total number now sitting at just under 600,000.

An SMSF is a private super fund that is entirely self-managed, without any institutional guidance (or fees), with the money that would normally put in a retail or industry super fund 

The federal government’s NDIS funding helps to improve the quality of life for participants with disability, their families and carers.

One of the most meaningful ways the NDIS supports the lives of those affected by disability is through providing specialist accommodation via funding. 

But demand for these properties is far outstripping supply, creating an investment opportunity that is delivering high rental yields.

“SMSFs are investing in properties all over the country and leasing them out as NDIS accommodation to help solve the accommodation shortfall for people that need supported independent living,” SMSF Loan Experts founder Yannick Ieko said.

“When you think of NDIS property investment, think of it as your social-minded, ethical investment choice with low risk and high returns.” 

Government support

More than 28,000 new or refurbished Specialist Disability Accommodation (SDA) places are needed across Australia but only a paltry 650 to 700 places were created in the past 12 months across the country.

There are fewer than 4,000 people currently being housed in SDA accommodations.

The NDIS has introduced a funding scheme to build new accessible housing for the remaining Australians with a disability who qualify to be a participant under the SDA policy. 

Housing is delivered through an ongoing subsidy for people with a disability to access this housing.

The SDA payments drive the market-driven model where providers create and maintain housing for people with a disability across Australia with a budget of $700 million for the SDA under the NDIS.

For providing an NDIS dwelling, investors receive higher-than-market rate yields as an incentive that are pegged to the inflation rate. It is estimated the market requires $5 billion to develop sufficient housing.

SMATS Group executive chairman Steve Douglas said investors could certainly reap greater dividends, but there were certain variables to address to be successful.

“Rental incomes will generally be higher than traditional rents, as there is an additional component of support from the Government but there is no guarantee the subsequent growth would be any more than for a traditional investment property,” Mr Douglas said.

Each property needed to comply with required modifications, Mr Douglas said, including wider hallways, lower cabinetry, accessible bathrooms and, potentially, lifting rigs, which can add significant additional cost compared to a traditional build.

“The additional expense may not necessarily add to the market value of the property, which could significantly affect the loan amount available and may mean a larger than expected deposit is required,” he said.

Finance hurdles

In the past, it has been the case that the amount investors can borrow has been less than for a traditional home, exacerbated by bank property valuations being less than the actual price, and the assessment of rental income being less than the amount actually received.

This has limited this investment model to applicants who have a lot of equity in other properties or a substantial deposit to cover these valuation issues.

Mr Ieko told API Magazine that these hurdles were not insurmountable. 

“All of these issues have been a problem but we have been working relentlessly with some of our specialised lenders and now have the access to a 90 per cent (inclusive of risk fee) loan to value ratio (LVR) product for NDIS properties,” he said. 

“We have also been successful in adding specialised valuers to their panel and received our first on-the-dollar accurate valuation just last week. 

“The rental income used for assessment at purchase time is still that of a standard residential property but we are making progress on that front and hope to have this addressed shortly. 

“However, once the NDIS participants have been signed up, we can use the actual NDIS income, which substantially boosts the owners borrowing/servicing capacity.”

SMSF investment in SDA properties is subject to the same fluctuations in supply and demand as the rest of the property market, Mr Ieko said.

“Some areas, most notably in Queensland, have seen a lot of supply coming to market and have a strong pipeline of properties to be delivered, while not experiencing an above-average demand," he said.

“Some other areas and states have seen much less in terms of supply and are experiencing above-average demand. 

“Research work should always involve accessing updates from the NDIS, speaking to local councils and local supported independent living (SIL) and NDIS providers, which is absolutely crucial to a successful outcome in this space.”

He added that there were four types of disabilities an investor can decide to cater for.

At the entry-level, the modifications required are minor and the government incentive less. At the higher (High Physical Support) end of the spectrum, the modifications are more significant, including larger rooms, rails, ramps for access, lower kitchen bench and a lot of in-built technology within the structure). 

Government incentives for these properties were much larger, but the additional cost in building these properties can be in excess of $50,000 for a house at the higher end.

At the end of the 20-year program, investors have the choice as to whether to sell the property as is, bulldoze and develop, continue to rent the property to SDA participants at around 60 per cent of the rent at that time, or rent to the open market.