Specialist Disability Accommodation

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Why are investors reviewing Specialist Disability Accommodation?

Historically, Performance Property has mainly adopted a growth strategy in our clients’ portfolios, targeting quality assets in the value stage of the property cycle. This strategy has been highly successful over the last 10 years and has generated large amounts of equity for our clients.

As we move into the next phase of the property cycle in Australia, Performance Property is focusing on balancing our clients’ property portfolios with higher-income-producing assets. To achieve this, we meet with our clients annually and review a number of statistics, including:

• Debt-to-income ratios
• Cash buffers
• Net yields
• Loan-to-value ratios

For clients looking to balance their property portfolio, we may be recommending releasing equity or selling property in locations that are near or at the top of their property cycle, and reinvesting in assets that have a higher yield profile.

One potential high-yielding asset that we have been investigating is Specialist Disability Accommodation (SDA).

What is Specialist Disability Accommodation?

SDA is housing that is provided for people with high support needs or extreme functional impairment. It is funded through the National Disability Insurance Scheme (NDIS), a government agency that provides Australians living with a disability with funding, information and access to necessary services in their community.

SDA must be built to meet NDIS criteria, which makes the capital costs of this type of project significantly higher than a mainstream residential investment. This may involve inclusions such as wider corridors, adjustable benches and accessible bathrooms.

The government incentivises private industry and individuals into SDA by returning a rental yield above market expectations. Our research suggests that a net yield of 6–8% can be achieved through SDA, in comparison to a quality residential investment that will return a net yield of 1.5–2% in a capital city or 2–3% in a regional area.

How does SDA fit into an investor’s broader strategy?

SDA may appeal to investors because of its higher yield profile, but it also requires a more detailed assessment than a standard residential investment. Investors need to weigh income potential against vacancy, construction, valuation, funding and liquidity risks before committing capital.

For clients balancing income and growth across a broader property portfolio, SDA should be considered in the context of the investor’s overall financial position, risk tolerance and exit strategy.

It is not simply a question of yield. A clear property portfolio strategy should consider how an SDA asset would affect cash flow, debt exposure, diversification and future flexibility.

What are the key risks of Specialist Disability Accommodation investment?

Upon reviewing the SDA program in detail, we have identified five key risks:

• Vacancy risk
• Construction risk
• Valuation risk
• Funding risk
• Liquidity risk

What is the vacancy risk with SDA properties?

SDA properties must be leased through a registered NDIS service provider. A lease cannot be signed prior to the commencement of the build, which is a critical issue as a specialised property is being built without the security of a tenant commitment.

Reliable NDIS providers estimate that the overall vacancy rate sits around 20%; however, vacancy rates can range from 0–40%. This is a multifaceted problem that is impacted by factors including the generic oversupply of average-quality or not-fit-for-purpose SDA, as well as a lack of tenants, carers and/or service providers in a specific area.

The vacancy rates of high-quality builds in excellent locations are relatively low, with most unoccupied properties being of low quality where the investor has executed a bare-minimum build in order to meet NDIS requirements.

What construction risks should investors consider?

Quality SDA cannot readily be purchased on the open market, so in order to participate in this strategy, you will need to engage in a development, which brings about construction risk.

In a typical market, we rate the construction risk on a project as moderate to high. However, with the post-COVID supply and pricing issues facing the construction industry, evidenced by several large national and local builders facing insolvency and going into administration, the construction risk is significant.

Why can valuation risk affect SDA investment?

Your ability to settle can also be impacted due to valuation risks. At the moment, there are very few lenders who understand and are willing to lend in this space.

What we are finding is that valuers are not taking into account the specialised nature of these properties and, as such, are valuing them as normal residential property. This results in properties coming in under valuation by 10–30%.

How can funding risk affect SDA investors?

The valuation risk can lead to financiers requiring a lower loan-to-value ratio (LVR), in some cases around 60%, which is comparable to financing a commercial property. The balance between the sale price and the valuation or approved LVR must be funded by cash.

There are also general risks with funding when committing to a project now, with settlement being 12–24 months away. These include changes to interest rates, changes to property market conditions and changes to your personal income.

Particularly with interest rates on the rise, market risks can impact your ability to settle or qualify for your loan.

Why is liquidity risk important when buying SDA?

When selling a property, you want to make sure there is a large enough pool of buyers willing and able to purchase the property. That is why we always consider the exit strategy when looking at an investment acquisition.

There is a reduced market of buyers looking to purchase SDA assets. They will not appeal to all investors, as they are more complicated to understand and finance, and therefore harder to sell.

SDA investments are far less liquid than standard residential investment properties that appeal to owner-occupiers. As the market for purchasing pre-built SDA is limited, the exit strategy will likely need to include remodelling costs to make the property appealing to the mass market before a sale can occur.

What are the potential benefits of SDA investment?

While the risks listed above have prevented Performance Property from taking a position in SDA investments for our clients right now, there are some benefits that make this an attractive investment for some people if they can overcome these risks.

These benefits include:

• Tenants aim to find life-long accommodation. Once settled in a property, they will sign leases of 5–20 years.
• SDA can provide a significantly higher net yield than a residential investment if there is low vacancy.
• SDA payments are made by the government directly to the service provider, reducing the risk of rental arrears.
• This could be a better option for investors with budgets below $1 million to access a defensive high-yielding asset without having to purchase a poor-quality commercial asset.

How should investors assess SDA before buying?

At Performance Property, we are of the view that the current risks involved with setting up an SDA investment are too high for us to engage with or recommend to our clients.

We will continue to workshop innovative ways to minimise the risks associated with SDA, as well as evaluate other income-producing options, to deliver balanced portfolios for our clients. For investors researching how to build a property portfolio Australia, the key is to assess whether each asset strengthens the broader plan rather than focusing on yield alone.

For investors considering SDA or other income-producing assets, working with a property portfolio manager at Performance Property can help determine whether the opportunity aligns with their broader investment position.

Before adding SDA to a property portfolio, investors should consider borrowing capacity, settlement risk, cash flow, tenant demand, likely exit options and how the asset fits within their long-term strategy.

By Saskia Georgeson-Rowles

Disclaimer

This article is intended as general information only.

The article includes economic and market commentaries based on proprietary research, which are for general information only. The author believes the information contained in this article to be reliable; however, its accuracy, reliability or completeness is not guaranteed. Any opinions or forecasts reflect the judgement and assumptions of the author on the basis of information as at the date of publication and may later change without notice. Past performance is not a reliable indicator of future results.

Any advice in this article is general in nature only and does not take into account your personal objectives, financial situations or needs. Before making any investment-based decision, carefully consider the appropriateness of the advice in light of your financial circumstances and seek independent personal financial, legal and tax advice.

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