NRAS in a post-boom market

Other forum members have purchased this product, would be great to get their feedback if they care to share.
I think in the main it's worked well if chasing cashflow and sourcing right property at right price.

How difficult to finance?... more hoops to jump with this product?.

 

I've got a few - happy with what they've done and all served a purpose.

Useful play, particularly valuable in slower markets. When markets are rising, the 'value' of an NRAS grant is diluted. 10k p.a. isn't really that much when markets are moving 50-100k p.a. Given the type of stock purchased, market gains may be lower (units, townhouses, greenfield houses). When they're not moving at all, its great as your earning a decent return anyway.

Great play for property investors with buy and hold strategies who don't want to manufacture growth and would like to earn some cash flow returns through holding.

From a finance point of view, its not difficult to finance now, banks understand them.

In insurance territory there's fewer funders available:
1. E.g CBA don't do it at 90, Neither do Westpac/St George anymore. Don't think ANZ go to 90 either (but could be corrected on that one). NAB don't go to 90 and their borrowing power calculator means that they're often relied upon for investors requiring that little bit more firepower.
2. Lenders like Macquarie, ME, FirstMac, etc can go to 90% no dramas.

The main financing issues are:

1. No equity releases. Don't budget on it, as you will likely need to get exceptions. Exceptions on investment loans based on security isn't something to be relied upon when banks are trying to stay under their caps.

• Note this should have big implications on your own investing strategy. The property may be worth double in 5 years time. You want to access the equity to go again? Sell up shop, or get rid of the NRAS grant.

2. Borrowing power. 95% of lenders will take 80% of the discounted rent and won't include the grant into your servicing - so if you're getting a 5% yield, you'll only use 4% on borrowing power calcs. FirstMac will take the grant into consideration, but limiting your lender pool to one lender is a poor finance strategy that isn't very flexible to changes.

Euro puts NRAS as part of a greater investing plan - its a very smart way to utilise the cash flow to assist both from a borrowing power angle and a longer term debt reduction approach. He also has the stock to match it and the appropriate vetting systems to weed through a lot of the difficulties in purchasing (valuations, providers, etc).

Cheers,
Redom

 

There wont be any NEW NRAS incentives issued beyond the existing 40,000 , but all 40,000 of those EXISTING incentives ( which have until June 30,2016 to be activated and commence their 10 years) are proceeding and are fully funded in forward estimates until 2027/28

Behind the scenes, there is a growing push for the final 10,000 incentives of Round 5, which Hockey canceled in the 2014 budget, to be reinstated. There is also a fully formulated NRAS 2.0 as I understand it, but whether that ever sees the light of day - your guess is as good as mine.

Election is less than 12 months away. if Labor and the Greens can make housing affordability a national issue...maybe there will be something.

 

Why is this?

 

Lender policy for most (ANZ, CBA, ME, St George/Westpac, etc). Why - i'm not so sure of the logic, they don't want you reborrowing on the capital thats built up though. Perhaps lender misunderstanding of the product.

 

A lot of these appear to be selling for less than their original purchase price. Is this just because they were inflated sales originally, or are there other considerations keeping the price down?

 

Probably some people overpaid - its quite hard to find stock that values up (unless you talk to euro!).

NRAS markets probably slowed a little with the scheme winding up, history of late payments, APRA have made yield more important and NRAS doesn't really help here, etc all reasons that may cause people to exit so soon after purchasing.

By the same token, there's also plenty of NRAS thats gone up in value. Sydney.

 

The price of being a global city: Sydney's rent crisis

 

So @euro73 what do you think is going to happen with existing nras once 10 years is up? Any talk of extending the nras licences under some modified agreement or something similar?

 

The legislation only provides for 10 years. Properties with NRAS eligibility will revert to full market rent at the end of their 10 year eligibility - there's no scope to extend that term.

Beyond that, no idea whether there will be a version 2.0, or some other form of developer or investor incentive to deliver more affordable housing. The model used in the USA took several years to get traction with developers in the 80's but is now an extremely well accepted and successful rolling program which provides certainty to those developers ... they know the core scheme is now a cornerstone policy supported by all cities, states and federal planning authorities, so they have comfort they can invest in it and plan for it in their developments.

Unfortunately, Australia is a different beast. Here, just as NRAS was finally getting some real momentum with larger developers, who were starting to embrace it and understand how to use it in conjunction with the various state affordable housing regulations to deliver the kinds of integrated mixed use developments everyone agrees are needed , it was canned. Round 5- the final 10,000 allocations, had been heavily oversubscribed by developers , and was shut down - end of story.

It's just another example of Australia's extremely short sighted politicians, and the inability of all 3 layers of Govt to deliver outcomes cooperatively. Financially, its a very cheap model for Govt and both the State and federal levels. Far cheaper than the federal Govt funding State Housing departments to construct the dwellings themselves.

In simple terms, the feds fork out 7.5K per year in tax credits over 10 years, and the states fork out 2.5K per year in cash payments for 10 years, to you and I- and we pay for the dwellings. versus Govt having to spend 300-400-500K per dwelling in Year 1 to buy sites and build them themselves. Numerous studies have confirmed its a very low cost program when stamp duties and GST and so on are accounted for .

There has also been a senate economic committee review of NRAS this year where they recommended reinstating the 10,000 incentives from Round 5 which last years budget canned - as a first step, and it also recommended that in the absence of a better alternative, NRAS should be expanded ... and that possibly an annual rolling pool of NRAS incentives ( or something similar) be introduced , so that developers can have certainty and actually plan around it . As usual, no decisions came from that - that paper was referred into a broader white paper into tax, due to deliver next year. And I'm sure nothing will come of that either.... unless affordability becomes a big enough issue politically that they have to address it.