It would be remiss of us not to observe that we have had nearly as many years of the National Rental Affordability Scheme as we have had prime ministers in the last decade. Boom-tish.
For those of you who don’t remember, we first wrote about the NRAS and how it affected management rights in 2012 here and also here when the government announced that there would be no more NRAS incentives allocated.
The time has now arrived when the first of the NRAS allocations is coming close to the end of their 10-year time frame.
So we have dug out and polished off the crystal ball.
We think this issue first needs to be looked at from an investor’s perspective, and also from the NRAS provider’s perspective. After that, we can look at what the consequences may be for management rights businesses that have NRAS units as part of their letting pool.
For the property investor
For a property investor who owns an NRAS property the consequences of the end of the NRAS incentive are pretty simple:
- They will lose a tick over $11,000 of their tax incentive.
- They will be released from the obligation to rent their unit at whatever discount to the market price they agreed to as a condition of their NRAS incentive.
- The arrangements they have with their NRAS provider will simply expire.
Their unit will then come back to being part of the normal rental product in the market.
We have had very little feedback from clients over the years about the loss of NRAS units from their rental pools, which to us says that the tax incentive was a very effective way to ensure that the units stayed as investor product.
Now that the unit is a ‘normal’ unit we cannot help but think some of the long-term investors will test the market to see whether they can sell them.
For the NRAS provider
There are bucket loads of NRAS providers out there. Some are for-profit and some are not. For those whose core business was dealing with NRAS units, their business model will be coming to an end.
They have three choices as we see it:
- let the NRAS component of their business die a natural death;
- adapt it to something else; or
- sell to someone who might adapt it to something else.
This is a risk for management rights in the sense that if you have an NRAS provider who wants to keep some form of business going, the natural step would seemingly be property management via their existing client relationships.
This is where the restraints of competition we have been advocating for management rights clients with NRAS providers as part of their business will tell. With a correctly drafted one of those in place, the NRAS provider cannot manage lots in the building. Without one, they can. Whether they will do that or not is another thing entirely.
For the right compensation, some NRAS providers may agree to provide a restraint if you don’t have one in place now. You will never know unless you ask the question.
For the management rights owner
How buyers (and more importantly, valuers and banks) look at this will be a major issue for management rights.
We think the key questions that will be asked about any deal involving NRAS properties will be these:
- What tenure is left for the NRAS lots in the scheme?
- Which NRAS provider the lots are with – and whether that provider’s business model includes property management?
- Is there a restraint of trade in place?
- What will the net financial effect be for the management rights business when the NRAS incentive expires?
This will be a balancing act of assessing any additional income that can be earned from assisting the NRAS provider being offset against the administrative time (and risk) associated with it. There is the potential to earn increased income via increased commission/letting fees and the like when the units can be rented for their full market value and perhaps outside whatever financial limitation the NRAS provider imposes on the resident manager.
Time will tell.
If you need help with any NRAS issues as they come to the end of their natural life in your business, just let us know.