NRAS - Doing the investment numbers on the National Rental Affordability Scheme

[Paul Thewlis]

NRAS (National Rental Affordability Scheme) has received a deal of comment in this forum. Some great information has been shared and some comments have in my view lacked a basis in fact.

Perhaps it’s my research background but I like a good set of numbers to support a point of view. So I was delighted to find a report conducted by RMIT for the Victorian Government which had done some modeling of NRAS for investors.

The report published in October 2010 examines Melbourne house and apartment data over 1998-2009 and looks at the impact for investors had NRAS been available over that time. It provides modeling of internal rate of return (IRR) for individual, company and superannuation funds. If you what to read the whole 56 pages here is the link http://www.housing.vic.gov.au/__dat.../507779/Investment_Returns_Rental_Housing.pdf.

I’m not sure of the reason why but the report only models the impact of NRAS for companies and super funds but not for individual investors. Needless to say the results are still quite compelling.

Here are the key results for internal rates of return (IRR).

Average IRR - No NRAS
Individual
- House = 18%
- Apartment = 15%

Company
- House = 12%
- Apartment = 9%

Super Fund
- House = 7%
- Apartment = 6%

Average IRR - NRAS
Individual
- House = Not reported
- Apartment = Not reported

Company
- House = 24%
- Apartment = 23%

Super Fund
- House = 10%
- Apartment = 9%

From this you can see why residential investment property is more attractive to individuals rather than super funds and companies. It’s important to note that the modeling for super funds is where 100% of the equity is provided by the fund. So this doesn’t apply to the situation where a self-managed super fund borrows to buy the property.

The impact of NRAS is significant for companies. IRR for house investment doubles. For the unleveraged superfunds there is a 50% increase in the IRR.

I’ll quote a couple of key conclusions from the report:

“A highly leveraged company investor, holding a large portfolio of NRAS-subsidised rental dwellings over the period in question would have reaped a very high IRR and enjoyed a substantial net cashflow.”

“Superannuation funds would have achieved both significant net yields and capital growth – had a scheme like NRAS been in place – even if investing 100 per cent of equity upfront.”

So what about individual investors? Of course, as you’re on this forum you will be aware of the Somersoft PIA software which enables you to do your own modeling. I suggest you try modeling NRAS yourself. Alternatively I intend to post some modelling shortly based on some real life NRAS property figures.

Regards
Paul
____________________________________
Dr Paul Thewlis

 

[WillG]

Perhaps it’s my research background but I like a good set of numbers to support a point of view.

What point are you making?

 

[euro73]

That NRAS is about cash flow, and the numbers are very very very compelling. Thats what I think he's saying, anyway And PS- he's right!

If investors only want to chase capital growth and can sustain the holding costs year in, year out - NRAS may not be appealing, as the properties are by necessity, never going to be uber expensive properies in uber cool areas...but eventually almost every investor needs to inject some cash flow into a portfolio and this is the most attractive vehicle with which to do it. There's nothing that compares, really.

 

[mo_cheeks]

If it is CF+ and it is still growing in terms of CG, but perhaps not at a rate of other non NRAS properties, surely it is still a good investment. There is a lot of talk on here about neg gearing and the ultimate is CF+ and CG, and it appears this might be a way to accomplish it, even if the CG is slightly down.

Thoughts?

 

[Ausprop]

anyone that says CG on NRAS properties will be less than non NRAS probably has a hidden agenda

 

[DJBarnstar]

Where can I buy one of these in the ACT?

I can't find anyone.

 

[tobe]

the problem I see with NRAS is they only seem to be available through marketing companies, and there seems to be some markups in the prices, anecdotally, I havent done thorough research.

 

[euro73]

the problem I see with NRAS is they only seem to be available through marketing companies, and there seems to be some markups in the prices, anecdotally, I havent done thorough research.

Tobe - thats the case with any new development stock. Its usually sold by marketers, and that means big fees are generally attached. Ive written on this previously- scroll the forum and read those posts.

You have to look at this as the sum of its parts. A property that's 20 or 30K dearer than you think its worth, but which generates 100K plus tax free..... you just have to weigh it up.

 

[parra1]

Hi Guys,

Doing my DD on the pros and cons of NRAS etc. Plenty of companies that do it on the internet. i am looking at the most reputable, the most consistant with fees/costs etc and lastly stock choice.

Amy suggestions of companies please :

ONYX, NRAS solutions, TANDEM, ?

Cheers

 

[euro73]

Parra Boy, it's important to understand that fees and charges relating to NRAS differ only between NRAS consortiums, not NRAS property marketers. The groups you have listed (and just about all the others you will find on a google search for NRAS) are property marketers- not NRAS consortiums. Yes, they sell properties with NRAS allocations, on behalf of developers,but they are paid a fee by the developer to do so, much the same way as real estate agents are paid a fee to list, market and sell property. They should not be charging you anything; the developer pays them- you dont

Where you will find a difference in fees however, is between the NRAS consortiums, and the legal vehicles /models they use to deliver you the NRAS incentive annually.
To explain - NRAS allocations belong to NRAS consortiums. They are not attached to the title on the NRAS approved property you buy. The NRAS allocation will never be "yours". It is owned and controlled by an NRAS consortium- always. What that means is that once you buy a property which has been allocated an NRAS approval, in order to receive your NRAS incentives (75% from the fed Govt and 25% from the state Govt) you must enter your NRAS approved property into the NRAS, which requires you entering into a legal arrangement with the specific NRAS consortium which owns the NRAS allocation on the particular NRAS property you purchase. NRAS allocations belong to a variety of different NRAS consortiums, such as QAHC, UAHA, Aspire, Questus, Ethan Affordable Housing and many others... each has different legal vehicles, fees and charges. Some use head lease agreements, some use non entity joint ventures. Thats where you need to focus your research.
I have written extensively on this on this forum, and others have also. Do a search for NRAS and you'll find detailed posts about the various NRAS consortiums- how each of them works, the differences between their models/legal vehicles, the differences in fees and charges, and which lenders you should be dealing with.
You should find everything you need to know on here already. Hope this helps

 

[Paul Thewlis]

I'd just like to clarify on Euro73's comment as Onyx being one of a number of "property marketers" being paid "much the same ways as real estate agents".

I'm not taking offense but I would like to clarify that Onyx is a licensed real estate agent and we get paid for our work as such. All real estate agents are property marketers by definition. Our speciality is with property investors.

Like most people who have been around property investment circles over the last decade or so I am aware that there are people who market property with high commissions built in. We are not one of those companes.

We also hold an Australian Credit Licence, and are registered legal practitioners so we take responsibility to arrange the finance and do the conveyancing if the client wishes it. So if the property was over priced it wouldn't value up and we would wear all the dissatisfaction on all fronts.

We prefer to make modest income and have a happy client who will come back to us again and again. It's just better business practice and more enjoyable.

Regards
Paul

 

[euro73]

Fair play Paul. Just making sure people understand that they shouldnt be paying any fees to a property marketer or a Ray White or LJ Hooker type of "branded" real estate agent, to purchase NRAS properties, or any other properties for that matter.
The subject of what marketers are paid by developers to sell their properties VS what "branded" agents are paid to sell property, is a different discussion entirely
For the record, I know Onyx mainly sells NRAS stock under the Ethan Affordable Housing model and that Ethan's model places very responsible and sensible restrictions on the size of the marketing fee paid by developers. ie- the traditional 30K plus marketing fees that most developers pay to marketers to sell their new development stock, doesnt exist with the Ethan NRAS model. Correct me if Im wrong but I believe its actually less than half that "traditional" amount?
For that reason, it's one of the NRAS consortiums whose model should be applauded, and whose properties arent experiencing any issues with lender valuations.
There's a free plug for Ethan!!! (and Onyx by association )