SDA Housing

There’s no such thing as a quiet day in private debt.

Many commercial clients see brokers as their one-stop-shop for property updates, financial guidance, borrowing advice and emotional support. I have heard brokers say they feel like advisers or finance therapists more than debt arrangers. Clients beg for recommendations and insights on what is happening in the market, and with the appropriate disclaimers and diligence, why not talk shop?

Even though it has been doing the rounds in some circles, many brokers, developers, and lenders are unfamiliar with the SDA housing requirements and benefits. It is a handy topic to tuck up your sleeve when discussing opportunities for developers or investors in the private market.

In this week’s episode, I give brokers the scoop on the affordable housing scheme with an overview of its benefits for a developer or investor.

First, let’s set the scene on the demand side.

NSW is in dire need of affordable housing.

Over the past decade, population growth has far outstripped changes in the social housing stock. This has forced governments to ration out affordable housing, making rental applications hotly contested.

With rising interest rates, already weak pre-pandemic new home approvals have collapsed. The total dwelling units approved fell by 49% in January 2023. The waitlists are growing.

The current unmet need for social housing equates to 437,000 households, and the outlook isn’t positive. By 2025 we will need 200,000 more affordable homes in NSW alone.

Renters and low-income families are battling a financial tempest. As a broker, this is your chance to flex your advisory muscle. You can steer developers into the eye of the storm with the right advice. Your clients can then ride high on the generous financial incentives for social housing and lead the charge of meeting a critical undersupply.

Coupled with a new Labour government eager to fix the dismal state of affairs in social housing, developers can expect a pipeline of prosperity long into the future. But only if they play their cards right.

What incentives are on offer?

The hallmark government schemes involve rent subsidies and favourable planning approval.

Developers who have acquired surplus government land can spearhead new projects so long as one-third of the dwellings are allocated for affordable housing. This opens the door for developments in prime locations, with the scope to start from the ground up.

Furthermore, rent subsidies ensure that developers are not disadvantaged by accepting a lower market rate on affordable housing. The landmark $10 billion Housing Australia Future Fund will shore up developer confidence in long-term support as the scheme has reinvigorated interest in affordable housing.

The NHFIC is a key originator of finance for social housing developers.

The National Housing Finance and Investment Corporation, or NHFIC, is the key housing affordability scheme to look out for. It delivers loans, grants, and even equity finance for social developments. The scope is incredibly broad, so whatever your client mix, there are opportunities for your developers.

NHFIC is, first and foremost, a public funding partner.

They provide long-term and low-cost capital to community housing providers by issuing social bonds to investors. It is a neat funding arrangement. NHFIC has delivered fixed interest rates of around 2% for more than ten years, a remarkable discount on the rates in conventional bank finance. Furthermore, in their modelling, they have the scope to finance up to 70% of the total project cost with a cash flow loan.

These are truly groundbreaking advantages over traditional banking finance.

But what are the eligibility requirements?

Firstly, projects must support the development of new affordable housing infrastructure. The NHFIC is not a genie in a bottle. You don’t get three wishes to dispense at your choosing. Developers will only get approved if their projects are directed explicitly at low-income households and tenants.

You can bet that the NHFIC is extremely thorough and very strict on this. They require you to have done an independent audit on your accounts, modelling and taxation. They want bulletproof due diligence, valuations, and project appraisals supported by modelling. The list is exhaustive.

When it comes to public institutions, you play chess, not checkers.

Additionally, the development proposal must demonstrate that the project would likely fail without NHFIC funding. If your project lacks urgency or stacks up as a good investment for the private sector, you’ll face some tighter scrutiny.

Brokers dealing with ambitious and large scale developers could consider the NHFIC as a pathway for developers to scale up their social housing projects.

Brokers should also be aware of SDA housing.

SDA housing, or Specialist Disability Accommodation, is an investment scheme where the government will subsidise rents well above the market rate to SDA providers. Once a property is approved by an NDIS assessor it can be advertised on the rental market as an SDA property.

But brokers, your clients shouldn’t fear. It won’t be vacant long.

The current supply of SDA housing needs to grow by 60% over the next few years to cover an additional 33,000 people. La Trobe university notes that the composition of people in SDA housing is changing. Rather than just intellectual disability, there are more people with neurological and physical disability in need of accommodation. This will require developers to shift their approach. They will need to build more highly accessible property.

In return the government will subsidise your tenant’s rent well above the market rate, with an increase indexed to inflation. As such, the real value of your rental return will never decrease. This accounts for the unique costs incurred building an accessible home and the opportunity cost of not listing on the private rental market.

In some cases developers can achieve a whopping yield of 16%.

But brokers should ensure that developers are doing their homework.

The most important consideration in an SDA development is that it must adhere to the NDIS design standards. These standards outline the minimum features and characteristics of a property. First and foremost the property needs to be accessible. It should have a safe and step free accessway, corridors with a minimum width of 1200mm, and accessible bathrooms among many other features.

The specifications are very clearly outlined in the design standards.

This will be a developer’s bible when it comes to disability housing. Developers should consult it extensively, taking care that every fixture and fitting is perfect. While building an SDA property can be lucrative, you won’t get approved for funding if it doesn’t’ meet the stated design specs.

Another thing to consider is the home’s social and economic integration. Location matters! The best SDA housing offers opportunities for participants to engage with their community and stay close to their support networks. You’ve also got to keep in mind their access to specialist care and services – which typically come with a central metro location.

With Labor governments in power federally and nationally, the momentum for social housing projects will continue to build.

Pardon the pun.

Federal Labor has created a $10 billion housing fund to build 30,000 social houses over the next five years. NSW labor is committed to solving the state’s chronic housing shortage with new planning commitments and an opening of the state’s coffers.

This opens up great opportunities for brokers to flex your knowledge and property expertise. You want to sound like an expert and have the facts to back it up. So when advising property developers, talk them through the lucrative options available to them.

Whether it is public-private partnerships or NDIS constructions, we hope you have an arsenal of suggestions for your clients.

The next time a property developer or investor comes your way asking for the next big thing , dig into that war chest and tell them.

About the author

Ulrika Lobo

Ulrika Lobo is the lending specialist at Sparrow Loans and has over ten years of experience in the commercial business loan space. Ulrika co-founded Sparrow Loans to provide Australian SMEs with a faster and easier way to access finance. Ulrika is responsible for managing the lending process from underwriting to execution and settlement and post-settlement support.