Why investing in NDIS property has its own hurdles

NDIS houses must be appropriate for the tenant’s personal requirements.

The majority of property investors focus on traditional house and apartment assets occupied by long-term tenants and managed by real estate agents.

However, if you look further afield beyond obvious choices, there are some interesting options. But they require careful assessment.

Although most people may be aware of Defence Housing Australia property, a newer segment of property investment has emerged within the NDIS accommodation sector.

Over the past 10 years, property investors looking for extra rental yield have typically been drawn to short-stay rental platforms such as airbnb and stayz. It has become popular for landlords to convert long-term tenancies to short-term rentals.

This has become such a large problem for hotels that after much lobbying, the NSW government placed restrictions on short-term rentals to help protect the hotel sector. In the greater Sydney region, short-stay property owners are restricted to letting out the property for 180 days per year.

But along comes the new kid on the block.

The National Disability Insurance Scheme has been in place since 2013 and is now reaching maturity. Within it, there is a flurry of activity occurring within NDIS housing, and promoters are offering potential returns of 10 to 20 per cent per year.

Known as Specialist Disability Accommodation (SDA), the federal government pays up to $700m per year to NDIS participants so that they can find appropriate housing for their needs.

Investment banks like Goldman Sachs and fund managers like Australian Unity have set up funds to invest in NDIS housing. So given that the big end of town has jumped on the opportunity to invest in this niche area, you would think there could be something in it for the average mum or dad investor.

But here is the catch. Promotions may tag their ventures as “underpinned by the government” but there is no direct government backing for property owners.

Payments made for NDIS housing are made directly to NDIS participants. The individual then decides which SDA rental accommodation they wish to stay in that best fits their needs.

Consequently there is no guarantee you will have a queue of NDIS tenants lining up to move in. In fact, some NDIS service providers say that it can take between nine and 12 months to find a tenant, and vacancy rates are on average between 10 and 15 per cent; mainstream property vacancy rates are well below 5 per cent.

When peeling back the cashflow forecasts from SDA property promoters, potential issues may be found. Of the four categories of accommodation, the “High Physical Support” category attracts the highest rental payment, which can be double the lowest of the other three categories which are improved liveability, fully accessible and robust.

High Physical Support only accounts for a quarter SDA funding, however some promoters assume all rooms in the property are occupied by Higher Physical Support tenants.

It is not to say that NDIS housing cannot not get a higher rental yield than an average investment property. This is entirely possible, and in most cases probable.

But what is potentially misleading is when significant returns are based on rubbery assumptions.

Corporate regulator ASIC has even stepped in and made several public comments over the past 12 months, warning consumers to be wary of SDA housing investment return claims, given the aggressive advertising made by promoters.

Another problem is likely to appear down the track when the SDA property owner decides to sell: There is a limited resale market given the property was configured specifically for housing people with special needs rather than the broader population.

If NDIS housing is not for you, then another property niche is Defence Housing Australia (DHA). Properties are rented by the federal government on six to 12-year terms for defence personnel. At the end of the term, the property is repaired and returned to the owner in a good condition, which can involve repainting and recarpeting.

The attraction of DHA property investment is the guaranteed income and reassurance that the property will be returned to the owner in a satisfactory state.

These properties are not always in the best locations but they may suit lower-risk property investors.

Investing into property is a big decision and getting all the information and assessing risk is key. You need to understand what you are getting into and what could go right, but more importantly what could go wrong.

Both NDIS and Defence housing are specialist areas. Investors should be careful and take time to make a decision in this area. Most importantly, do not be dazzled by the hype.

James Gerrard is principal and director of Sydney financial planning firm www.financialadvisor.com.au