A new and emerging type of property sector investing, specialist disability accommodation, gives investors the opportunity to create meaningful social impact whilst achieving financial return.
ANZ Private recently published an ‘Impact Investing 101’ article, which explains impact investment and its investible opportunity set. In this article, Tram Bui, Portfolio Risk Analyst at ANZ Private Bank, leverages research by Australian Impact Investments (AII) to cover a specific area of impact investing - Specialist Disability Accommodation (SDA). This is a new and emerging property sector where meaningful social impact can be achieved alongside financial return.
What is Specialist Disability Accommodation?
Specialist Disability Accommodation (SDA), as defined by the National Disability Insurance Agency (NDIA), refers to accommodation for people who require specialist housing solutions, including to assist with the delivery of support that caters for their ‘extreme functional impairment’ or ‘very high support needs’. SDA relates to the homes in which these services are provided, rather than the support services themselves. It has specialist designs, such as wide doorways, lower countertops, remote control technology and spaced-out layouts or have features or a location that make it possible to provide complex or costly support for independent living. It is these unique features that make SDA very different to normal residential properties.
The Australian Commonwealth Government provides funding for SDA participants who meet specific eligibility criteria, as part of its National Disability Insurance Scheme (NDIS). The annual NDIS budget for SDA is estimated to be $700 million, with approximately 15,000 participants utilising SDA. Like other parts of the NDIS, SDA employs a market-based approach by allocating funding to eligible participants. A participant can use that confirmed funding to then source the support that appeals to them from the market. For SDA, this means the NDIS provides funding through a participant’s plan and the participant then finds and applies for the SDA option that best suits their needs. SDA payments range from $4,000 per annum for ‘Basic’ category to $110,000 p.a. for High Physical Support apartments with on-site overnight assistance (OOA).
What’s the impact?
The majority of people with disabilities in Australia have inadequate accommodation – SDA seeks to solve this problem. Research undertaken in 2018 by the Summer Foundation, the Australian Housing and Urban Research Institute and SGS Economics & Planning indicates there was then upwards of 33,200 people requiring accommodation. The research also concluded that 6,200 younger people with very high support needs are living in aged care facilities, which are inappropriate for them, but no better options are available. The remaining 27,000 people with very high support needs cannot even find places in aged care. Providing SDA will vastly improve the quality of life for those in need, and contribute positively to society in doing so.
We believe that SDA is aligned primarily with SDG 11 (Sustainable Cities and Communities) and to a lesser extent SDG 10 (Reduced Inequalities). The United Nations created 17 SDGs (Sustainable Development Goals) in 2015 as “a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030”.
Is SDA a good investment?
In order to encourage investment in SDA, the Government has provided long term certainty of SDA Payments for investors (as well as participants and SDA Providers).
In consultation with our Impact Advisor, Australian Impact Investments, we believe the most attractive features of SDA investment include:
- A 20-year inflation linked revenue stream which includes built-in lease vacancy provisions
- Minimal credit risk given that 100% of the rents are paid for by the Commonwealth Government (other than in a few exceptional circumstances where tenants can contribute a voluntary contribution for higher rental properties)
- Demand for these assets currently significantly outstrips supply, and is predicted to remain so for some time
- The features mentioned above contribute to SDA being lowly correlated to mainstream growth assets like equities and credit, thereby acting as a potential diversifier for an investment portfolio.
- The belief that long term target returns within the SDA sector of approximately 10% p.a. are achievable. Income yield is forecast to be the primary component of return, and projected to increase gradually over the investment terms once accommodation is constructed and tenanted. (Capital appreciation is conservatively assumed to be minimal.)
These dynamics also compare favourably to other traditional investment property sectors, such as office and retail. The long term prospects for these sectors have been falling and are currently being hampered by tenancy pressures caused by a growing trend of consumers doing more of their shopping online and professionals working more from home.
What about the risks?
Like any investment, SDA is subject to numerous risks; some of which will be typical of unlisted property funds and some which are specific to SDA or individual products. Potential risks include: regulatory risk, a lack of available investment opportunities, development and construction risk, tenant vacancy and lack of rent, counterparty risk, venture partner performance and illiquidity.
As a new property sector, SDA is somewhat untested, and its investment case depends on the continuation of the NDIS social policy supporting it. Thus, regulatory risk (the risk that Government changes this policy) is the main specific risk associated with SDA. Given the Government’s 20-year commitment to the policy (which has bipartisan political support), we believe this risk is low and offers a sufficient risk premium, as well as diversification benefits.
Illiquidity is another main consideration, given it will take a period of years for accommodation to be constructed and tenanted. Some SDA funds have investment terms of 10-20 years, so investors need to be comfortable with this investing horizon before committing capital. Some funds also offer liquidity windows every five years, whereby the manager may source matching sellers with buyers on the secondary market, disburse available cash or sell assets. This is strictly on a “best endeavours’” basis however so liquidity cannot be guaranteed.
Careful evaluation and detailed due diligence are therefore critically important when considering SDA investments and investors need to be aware of the general and specific risks before investing. ANZ recommends that investors should read the applicable offer documents for any investment product and consider whether it is appropriate for them.
Specialist Disability Accommodation (SDA) is a new segment of the property market which we believe may offer investors a risk appropriate financial return (supported by Commonwealth Government payments) whilst simultaneously creating positive social impact for people with disabilities.
The websites below are useful sources of further information on SDA. Please contact your ANZ Private Banker or Adviser to find out more.
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