NRAS: friend or foe?
In this article I will cover what NRAS is; the disadvantages, which can generally be avoided, and the benefits with NRAS, and will summarise with the most important thing any investor must do.
Blogger: Andrew Crossley, Australian Property Advisory Group
We have all read the reports that there will be a massive shortfall of housing in Australia over the next few years. The HIA (Housing industry of Australia) notably stated there is going to be an anticipated 500,000 shortfall of housing by 2020.
In response to these predictions, the Australian Government commenced the National Rental Affordability Scheme (NRAS) on the 1st July 2008, designed as a long term response to address this issue of rental affordability. The intent was to spur on the supply of 50,000 affordable new rental dwellings (the incentive cannot be added retrospectively to an existing dwelling) and reduce the rental cost for low and moderate income households.
To encourage investors to purchase these new rental dwellings thus encouraging large- scale investment, the Government offers a guaranteed incentive, these incentives run for a period of 10 years. In return for these incentives, the investors must rent the dwellings out to eligible approved tenants at a rate that is at least 20% below market rent, some participants’ charge 75% or less.
Currently the incentive is $10,350, a mix of State & Territory Government non-assessable income amounting to $2,587 and Federal Government refundable tax credits/offsets or cash amounting to $7,763. As a general rule, the investor receives the lower amount in September each year and they typically receive the Federal component in July/ August which may be then included their tax return. The NRAS year is from May 1 to April 30 for which these incentives are based.
Basically you may have the normal benefits of negative gearing but the added benefit of positive cash flow in terms of the tax offset, rather than positive gearing, but, if the incentive is provided to a not for profit approved participant, who then passes the value of the incentive through to an investor, there may be tax implications.
There have been several perceived disadvantages with NRAS and of course several benefits. I note that many of the disadvantages and benefits depend on a number of factors such as where the property is, what it is and who the tenant managers are i.e. consortium/ non profitable or charitable organisation charged with managing the particular location.
The legislation sets out tenant eligibility. The main and original (as many believe) designated group of eligible tenants that NRAS was designed to accommodate was low to moderate income earners such as nurses, police, prison officers, fire-fighters, and teachers (collectively; the critical infrastructure industries) , who cannot necessarily afford to live in the area where they work. The reality is there are many of these tenant managers placing tenants into these properties that are on welfare, pension or basically fall into the lower socio demographic of social housing type tenants. NRAS is not a public housing initiative though, hence the problem I have with some of these approved participants/tenant managers.
Whilst there are maximum income bands ranging from $45,956 p.a. for a single adult to $109,264 for a couple and three kids, the abuse of the spirit of NRAS as some are calling it, probably comes down to the fact there is no minimum income requirement for an eligible tenant, as long as they can afford the rent many of these tenant managers could not care less.
Another major risk, is there can be a high concentration of these NRAS approved dwellings in any given area/ building/ development due to the greed and irresponsibility of the developer mismanaging the situation and compromising what could have been a perfectly good area for growth. NRAS incentives are generally issued in agreement with State and Territory Governments’ for priority areas, with intensive criteria applied for the selection of the location for these dwellings.
Amenities, schools, public transport, and employment are key drivers that underpin the location of NRAS properties, areas of undersupply of affordable dwellings, in sort after locations, with vacancy rates quite low. Investors are in a way, riding on the back of the research the Government has affectively already undertaken. Others think these locations are rather less discriminate and thus impact on future capital growth. Some no Sayers suggest they have not seen one of these properties sold for a profit yet, but let’s not forget the last few years have not been years of abundant growth, and besides, although NRAS commenced in July 2008, it took 2-3 years for it to catch on and so not enough time has passed to make fair judgement. Additionally, many NRAS investors would typically prefer not to sell them anyway given the incentives they receive.
There is simply not enough data to make this uninformed, scare tactic statement. Some of the negativity in the market is predicated upon other self-interests some of these comment makers have. An NRAS property looks the same as a non NRAS property, so it should not affect the resale price, BUT, it can depend on whether the developer or marketing company or spruiker overcharged the buyer and this does happen far too often, and not just on NRAS properties.
The incentives can normally mean the property is cash flow positive, the lower the price point the more of a positive cash flow affect the incentives can have on the overall yield of the property. Contrary to some negative reports out there making it sound impossible to sell an NRAS property without the NRAS license attached, in most cases it is in fact possible for an Investor to choose to sell the property with or without the NRAS overlay; however this can be restricted by the purchasing arrangements the buyer originally entered into with the approved participant.
One of the biggest problems investors face is themselves, purchasing a property just because it is NRAS. The NRAS incentives can be very good, but the fundamentals of adequate research cannot be under estimated and certainly not ignored. Another hurdle is Accountants; some are merely tax agents and/ or non-investors and lack the knowledge and skills to assist investors. You need an experienced Accountant who understands property investment and NRAS.
Marketing companies and spruikers can be paid exurbanite fees to flog these properties to unsuspecting investors. Some developers are charging 10-20k more just for providing an NRAS license with the property, a sort of black market has materialised.
Bank valuers have had issues with NRAS properties due in part to the risk of high commissions being paid, in part to these being ‘Off the Plan and/ or House and Land (but this valuation problem is not just with NRAS) and in part to their personal prejudices. Lenders also have been hesitant to lend on NRAS, for this reason and for reasons such as simply not understanding what NRAS is, or rather, simply not wanting to due to overzealous credit and risk staff. Importantly, some of the purchase contracts for NRAS properties neglect to contain the fact the property is being sold with NRAS, leading to lenders potentially being none the wiser.
The Government it seems are clamping down on this black market and the improper manner in which NRAS licenses have been managed by some developers. With 4 rounds of licenses released so far, applications for the Shovel Ready Round and Round Five have closed, but the properties that will end up with these incentives have not been released yet.
In summary, I cannot stress how important it is to seek advice, do your research, understand where and what the property is, who the consortium is, the fees they are charging, the stipulations in their contracts, the concentration of NRAS in the location and development, the type of tenant the consortium is dealing with and the price charged for the dwelling and commissions being paid. NRAS is a good scheme but you need to ensure how it is being implemented with the property you are purchasing. It can have excellent cash flow and the potential for capital growth in a number of these areas can be very good. You should carry out your own investigations, and seek independent property and taxation advice to ensure it suits your personal situation.
