Specialist Disability Accommodation – an Investor Perspective

Specialist Disability Accommodation (SDA) is the housing element of Australia’s National Disability Insurance Scheme (NDIS).

In broad terms, it is intended that investors in the sector will provide housing across the four prescribed design categories (Improved Liveability, Robust, Fully Accessible and High Physical Support) to meet the needs of NDIS participants whose care plans include SDA housing funding. SDA homes may also require further modification to meet the specific needs of the individual resident.

The NDIS SDA world can be described as all of the following: complex, emerging, changeable, challenging, and a target for spruikers. At the same time, it is incredibly important to break through these obstacles if the admirable objectives of the Scheme are to be achieved in any substantive way. For the investor, SDA encompasses all the customary elements of property development, plus a few extra wrinkles thrown in, such as a blurry line of sight to the residents that are the very point of the programme and a vital element of getting the SDA wheels to turn.

Similarly, the SDA Design Standards were released some five years into the Scheme – meaning that enthusiastic early players may find that their SDA properties do not meet the SDA design standards released subsequently, and as a result will not qualify for SDA funding beyond the short term transitory arrangements envisaged by the Scheme.

SDA is a specialised asset class much like childcare, aged care, storage and others where the property value is primarily derived from the businesses operating within the properties, and where the alternative use will often be lower.

In the case of SDA, the alternative use as traditional investment properties can be markedly lower, as we can see from this recent example for a High Physical Support apartment project valuation:

Valuation Basis Valuation
NDIS SDA Cash Flow $12,900,000
Alternative Use   $3,600,000

The two valuations bear out the impressive outcomes achievable with Scheme-compliant and fully occupied SDA properties; the SDA Cash Flow basis valuation is more than 3.5 times that of the Alternative Use. This emphasises the crucial importance of occupancy and underlying demand on the viability of SDA investments.

Unanticipated vacancy levels can decimate rental streams, cause LVR caps on loan facilities to be exceeded, and precipitate further investment damage because alternative use values as traditional rental accommodation stock will not only be considerably less than the SDA basis valuation, but may well be less than the build cost. It is the responsibility of the lender or fund manager to make sure that the developer has sufficient contingency and reserves to mitigate any shortfall created by lower than expected occupancy levels.

A cautionary reminder taken from the SDA Institutional Investor Think Tank convened by Summer Foundation (2021) is that “Some fund managers reported vacancy rates well in excess of 25% in the SDA they finance.”

Not unlike the childcare and aged care sectors, SDA cash flows are heavily reliant upon government funding. While funding for childcare and aged care seems to be on the increase in recent times, the outlook is less clear for SDA given the overall funding pressures on the NDIS as the annual costs now well exceed earlier forecasts. The chart below reflects this, with participant numbers exceeding the latest 2017 Productivity Commission estimates.

Graph

Note: NDIA projections were peer reviewed by the Australian Government Actuary.

Unhelpfully, the relatively new and complex SDA market is ripe territory for spruikers. On its website the SDA Alliance cautions that it is “aware that unrealistic (or potentially false representations) are being made by some organisations involved in the sector.”

Beware promises of excessive SDA returns from those whose business model centres around making money from building and/or selling SDA projects, only to leave the unwitting investor stranded to deal with navigating the myriad NDIS SDA challenges.

More generally, it seems that in the absence of clear lines of sight as to which SDA design categories are in demand and in which locations, the High Physical Support single resident apartments have been targeted by investors as they are the design category eligible for the highest rental streams.

However, as reported by the National Disability Scheme Authority (NDIA), the entity responsible for administering the NDIS, “there will continue to be a need for innovative single-resident dwellings, however the rate at which High Physical Support single-resident dwellings are being enrolled compared to other dwelling types does not align to the likely approved demand profile anticipated by the NDIA.”

The NDIA’s sobering assessment of prospective vacancies may be a precursor to more underperforming SDA assets, which might well qualify as a “new way” in the following quote from John G Stumpf*, then CEO of Wells Fargo:

“It is interesting that the investment industry has invented new ways to lose money when the old ways seemed to work just fine.”

To conclude this admittedly superficial treatment of the SDA sector from an investor perspective; the SDA sector is undeniably a complex one, littered with obstacles and often demanding inordinate effort and perseverance. Which of course is not dissimilar to the daily challenges confronted by many of the SDA residents who are at the very heart of the matter.

*Rather ironically, Stumpf himself subsequently came up with another new way as reported by CNBC on 23 January 2020 “Former Wells Fargo CEO John Stumpf barred from industry, to pay $17.5 million for sales scandal”.
Article written by Warren McGregor of Carousel Financial, an authorised representative of TierONE Capital. His professional background encompasses management consulting in Australia and South-East Asia, investment banking, and a property focus since 2006. Warren holds Economics (Hons), Accounting, and Applied Finance qualifications. warren.mcgregor@carouselfinancial.com.au

Share this story, choose your platform

Comments are closed.