31 Oct 2018
Words ResortBrokers

Could NRAS Management Rights Be A Better Option?

Any operators unsure about taking on buildings with an NRAS component can be reassured.  Having recently sold seven Brisbane management rights with NRAS units in the letting pool, Resort Brokers Australia is well placed to bust myths and misconceptions about the National Rental Affordability Scheme. 

Two of the most important business benchmarks for residential MLR operators are low vacancy rates and strong lot owner loyalty.  Yet some MLR buyers are reluctant to consider NRAS properties.

That is, until they understand their negative perceptions of the scheme and its participants are generally misplaced.

The truth is, NRAS-approved apartments drive strong rental demand and underpin the security of a letting pool (via the 10-year nature of the NRAS scheme), offering a high degree of business stability and income certainty for the operator.  In a sense, the scheme provides an additional layer of security for the manager beyond the standard 30-day appointment period via Form 6 letting appointments.

Value supported

So, when it comes time to sell, the robust business fundamentals support the value.  Experienced NRAS operators are usually enthusiastic supporters who, because of the benefits, will look for other management opportunities with an NRAS allocation.

The sales record of our Brisbane team this year has confirmed that management rights in buildings with NRAS units sell at the same multipliers as comparable non-NRAS buildings (subject to arrangements with the accredited NRAS provider, outlined later in this article).

Our experience is also that the majority of banks will lend at the same LVR (loan to value ratio) as they would for non-NRAS management rights.

Under the NRAS arrangements, which remain in place for 10 years, investor owners receive generous Federal and State Government incentives, and tenants enjoy a minimum 20% and maximum 30% discount on market rent.

That means high demand, co-operative tenants, long-term tenancies, and low vacancy rates.  Eligible tenants want to stay put, particularly in quality buildings and those in prime locations.  For the same reasons, any rare vacancies are readily and quickly filled.

Letting pool security

NRAS tenants are typically extremely appreciative of the scheme and its benefits.  Once granted NRAS eligibility, they do not wish to jeopardise their position.  So they take care to abide by Body Corporate bylaws and tenancy rules to ensure they are able to remain in the apartment for the long-term. 

Having experienced the benefit of discounted rent, tenants feel like they are part of an exclusive arrangement that they cannot replicate in another building, so you enjoy higher retention rates.

Units are also more likely to remain in your letting pool for longer.  CPI-indexed incentives paid to investors are so attractive (currently $11,048.04 / dwelling p.a.), that owners are unlikely to sell to an owner-occupier during the 10-year NRAS period.

In fact, penalties discourage investors from opting out of the scheme early.  Should they sell to another NRAS investor, it is likely the new owner will simply continue with existing arrangements and agreements.

NRAS unit owners can sell, but are unlikely to because their generous incentives apply for the 10-year period.  However, if they do sell to another investor, that buyer enters into an agreement for the balance of the NRAS term, and you will likely retain management.

Retention of the letting appointment by the already NRAS-approved onsite manager in this scenario is generally 100% because of perceived barriers to entry, due to the process required for an outside agent to gain NRAS approval for your specific building.

Sale to an owner-occupier is unlikely because the seller would have to pay a penalty of $300 + GST + CPI for each remaining year – further underpinning the security of your letting pool.

Provider relationship

For management rights operators, I should point out that the greatest benefits arise when you work with an NRAS provider who is supportive of your role.

Especially important is that the provider has no interest in running a competing letting business.  For your assurance and that of your financier, they should provide a written warranty to that effect, in the form of a Deed of Restraint.

When you have a good working relationship with the provider, they can be your greatest ally, able to influence lot owners to remain in
your letting pool.  They recommend to their clients (NRAS unit owners)
the advantages of quality
onsite management.

Because agents need to be NRAS-authorised to manage NRAS units (approved by both the State Government and the provider for each building in which they operate), a change of manager is less likely, further supporting long-term retention of agreements.  Finding an outside agent willing to take on a single appointment in such a building would be difficult.

Nevertheless, for the management rights buyer, NRAS approval is usually a simple process.  Once the provider reviews your resumé and has a copy of your Real Estate Licence, they lodge your application with the government for approval, usually a simple formality.

You don’t need extra qualifications or special software to manage an NRAS building.  A good provider actually handles most of the compliance requirements.  They want what you want – to put the right tenant into the property as quickly as possible, so they help you every step of the way.

As highlighted earlier, whilst compliance is a simple process, it acts as a barrier of entry to external agents, many of whom would not want to work through this red tape which does not exist on standard management agreements.

Established market

In regard to the impact of an NRAS component on your management rights’ profitability, you need to understand the benefits of NRAS from the outset.  This includes gaining high demand, low vacancy, long-term letting pool security and income certainty.

The price you pay for your business is relative to the income it earns.  In the case of the NRAS units, you earn full commission on a slightly lower rent.  Over time, many find this preferable to commissions earned on higher rentals but with a much higher vacancy rate.

So, back to the question of marketability.  As I said, our experience shows valuers see no reason to treat buildings with an NRAS component any differently to traditional MLRs.

The market is well established and accepted. Experienced operators who understand the model have demonstrated a strong appetite for these businesses. 
I know if we had more buildings with an NRAS allocation in the Brisbane market, we would have ready buyers.

If you want to know more, or are interested in considering NRAS opportunities, give our Brisbane office a call.  Our expertise in this specialist field is well established.