SDA Market Wrap: Putting up the Money

In July 2016, the NDIA launched a policy that will fund $10-12 billion of housing stock. The SDA will support over $5 billion worth of new investment into housing for people with disability over the next five years.

This new funding stream is attracting a significant amount of attention. Interest in providing loans has come from Australia’s big banks, as well from more specialised market players. On the other side of the financial equation is a broad range of investors– including large community housing providers, superannuation funds, private sector folk, right through to individual people with disability providing their own housing.

A question increasingly being asked is how much of this interest is actually translating into investment opportunities for those looking to lend or invest in this market? And from the other side of the equation, how easy is it to get finance if you want to build SDA?

These questions are especially critical for SDA. With no upfront grants from government, SDA housing growth depends entirely on investors and financial institutions putting their money on the line to build housing. They rely on the SDA payments to pay back this debt over 10-30 years.

This article builds on DSC’s experience working with banks and other financial institutions looking to invest in SDA, as well as with SDA providers seeking finance to pay for their SDA properties.

 

How much finance is needed through the SDA policy?

The NDIS SDA policy is designed to support housing for a total of 28,000 people with disability. Of these, 12,000 currently do not have a suitable place to live. A further 4,000 or so live in out-dated and inappropriate disability housing.  

A joint report into the SDA market that I recently co-authored with PwC found that over $5 billion of new investment in the SDA market is required. And that is a conservative estimate.

Supporting 16,000 people with disability to access new housing is a massive undertaking. It is estimated that participants with SDA will have an average housing cost of $410,000 per person. This means that a staggering $6.5 billion of new investment is needed to house this cohort.

All this finance will be required over the next five years. The NDIS will be fully rolled out within three years. Two years after that, it is reasonable to expect that all people who will have an SDA will have been provided with an SDA payment.

 

What do banks think about SDA?

Meeting the vision for 12,000 new SDA places (and the likely refurbishment or replacement of 4,000 further places) will not occur without Australia’s banks coming to the table.  

Australia’s big four banks have to be part of the equation. Beyond them, this undertaking will also rely on a myriad of smaller financiers. The first movers lending to SDA will be especially important.

The NDIA’s funding model for SDA relies on someone else (i.e. banks) providing 5-30 year loans for the construction of housing. The NDIA is not providing grants for the upfront construction.

 

Why would banks choose to enter the SDA market? Two reasons.

First, this is a huge growth market for banks. Many banks see this as an extension of their current lending to community housing providers. In fact, lending to SDA would double (and potentially triple) the amount of finance currently available for all community housing providers across the country.

Second, in a climate where bank bashing is a household sport, this is a great opportunity for banks to show they are giving back to the community. Funding the building of new housing for people with disability—and doing something that helps implement the NDIS—are all PR wins for financial institutions.

Bank Australia has been an early adopter in this space. But for Bank Australia, it is also about a third motivation: mission alignment. As a community owned bank, Bank Australia regards lending to SDA projects as an investment their members want them to make.

Where will this head from here? Banks are inherently conservative institutions. Bank Australia is acting as a trailblazer in this market. Once there is a track record created by a number of their transactions we can expect to see lending in this market take off.

 

Who else is investing in SDA beyond the banks?

Banks will not fund 100% of any SDA investment. Between 20%-60% of the SDA property will need to be owned by an investor for the bank to lend. At this stage, the amount of equity required depends on the bank’s comfort and confidence in the SDA income.

We are moving from a grant-driven charity sector to a market framework. This change comes with new language and ways of thinking about ownership. In the SDA world, anyone who owns part of an SDA property is an investor.

When people with disability are buying their own home to register as an SDA property, they are the investors. When a community housing provider includes 5 new SDA properties in a redevelopment, it is an investor. And when a developer builds 10 SDA units and rents them to participants, they too are an investor.

This means that the SDA market has a wide range of investors with very different motivations.

 

What about profit focused organisations building SDA?

Let’s start by being frank. Some SDA investors are in the market for profit. These are private companies investing in SDA as a new market, just like any other commercial investment.

The social benefit of SDA helping people with disability is an added advantage for these providers. But if the SDA payments dropped below their minimum threshold for financial returns, they would exit the market.

These private providers range in their form. They are large building developers looking at holding and renting SDA properties as a small part of a big portfolio. They are small businesses set up just to deliver a small number of SDA projects. And emergently, they are property trusts created by private capital firms or superannuation funds just to own SDA stock.

Is this is a problem? To turn this argument on its head, there would be a problem if for profit providers were not entering this market.

The NDIA’s whole approach is to empower people with disability to make choices about where they live and who they live with. If SDA prices did not provide a market return, people with disability would rely on providers adopting a charity model of providing housing.

The entry of for profit SDA providers shows that the NDIA pricing is commercially viable and enables anyone to enter the market, including not for profits and people with disability self-providing.  This moves SDA out of a charity model and into a model of genuine market choice for participants.

Whether the provider is not for profit or for profit, pretty much every SDA provider is developing SDA because it generates a surplus/profit. The only difference is where the surplus goes. Not for profits will reinvest it somewhere in the organisation and for profits will distributed it to owners/shareholders.

To what extent should NDIS participants with SDA be concerned about whether a large not for profit reinvests its SDA profits into other charitable work compared with a private provider’s profit being distributed to the superannuation fund members who invested in the project?

Another way to answer that question is to ask how important is it for new SDA properties to be built. From DSC’s understanding of the market dynamics, over 50% of the new SDA places are being constructed by private providers (when we exclude SDA projects funded by government grants, or through government tenders).

If private providers were not investing in these SDA projects, the provision of new SDA properties would shrink by half. That would be a terribly detrimental outcome for people with disability currently living in inappropriate housing.

Ultimately people with disability will vote with their feet. The not for profit sector will be successful if it can develop higher quality SDA properties that are better located and provide the tenancy support and long term security people with disability desire. If they cannot, then we can expect private providers to continue to be a significant part of this market.

 

Where is investment in SDA headed?

Investment in SDA to date has been small in scale. SDA investments are made by those with cash on hand to make investments.

This is because many banks have been acting conservatively, requiring 40-60% equity in order to get a loan. Consequently, more of the cost of SDA is coming from existing cash reserves.

The low loan to value ratio has given SDA providers with quite a lot of flexibility in what and where they build. Organisations have not needed to convince anyone except their boards/directors/owners what they are building.

As the market moves to scale, this is changing. Growth in SDA will increasing rely on higher loan to value ratios, or finding other equity investors beyond the SDA providers’ own cash reserves. This makes it necessary to convince financial institutions that every individual SDA transaction is a worthwhile investment, thus raising the bar for due diligence on SDA projects.

Going forward, more and more SDA providers are sourcing equity beyond their organisation. This often results in SDA properties being owned by a property trust or Special Purpose Vehicle and then head-leased to the SDA provider.

At the end of the day, these investors are taking a financial risk. These SDA properties could be left vacant, or the SDA price could change. As SDA providers come to rely on equity investments, there is an increasing level of sophistication required to make a case for investing in SDA.

DSC has been supporting providers seeking large scale capital financing from these new types of vehicles. Our experience is that their bar for due diligence is much higher than the average not for profit board.

When it comes down to it, financial investors ultimately want to know that the two biggest risks are being managed: vacancy risk and SDA price risk. SDA providers can’t do much about SDA price certainty. But they are essential in managing vacancy risk.

SDA providers will need to be prepared to convince investors that they have the skill to do tenancy selection and tenancy management. And it’s hard to think of anyone who can do this better than a person with disability providing housing to themselves!