Food For Thought: NRAS and Management Rights

The effect of change and prototype business models within the management rights industry is always interesting to watch and even more interesting to be a part of.

I can recall the shift in sentiment when the old Building Units and Group Titles Act was effectively replaced by the Body Corporate and Community Management legislation in 1997 and the subsequent enshrinement of lender’s rights and obligations that followed after amendments to the act were made in 2003. The net result of changes made to Queensland legislation has been an improved confidence in the industry, particularly in respect of the lenders.

In fact, so persuasive has been the impact of these changes and thanks to the efforts and foresight of industry lawyers based in Queensland, Owners Corporation Deeds of Consent as used in NSW and other jurisdictions are starting to mirror the Queensland legislation.
I wonder how recent trends in our industry will be judged with the benefit of hindsight ? Let’s look at the National Rental Affordability Scheme first. There’s been enough written about this scheme already so I don’t propose to go over the technical mechanics but simply to focus on the flow-on impact on the management rights industry. A resident manager in a predominantly NRAS-based building has a number of challenges that do not face the average manager.

The first is that there is an interaction between the manager and the NRAS provider and in my mind a concentration of influence risk. This risk can to some degree be mitigated by a deed of restraint that essentially works to try and ensure that the NRAS provider does not act to remove unit management from the resident manager where the resident manager is meeting his obligations under NRAS guidelines. In my view the deed is essential at least in terms of reflecting the intent of the parties.

The next challenge is income. NRAS rents are discounted and so the letting agent’s commission will be impacted. There is an argument that commission can be charged on market rather than actual rent but I don’t believe this is the case. For the NRAS based resident manager there is a significant degree of compliance associated with providing property management services and the usual practice appears to be an NRAS administration fee that essentially makes up for the commission shortfall. I am told by existing operators that such a fee is not covering the additional compliance costs and fee increases to owners are likely to be required in the future.

Let’s move on to market rent. NRAS rentals are provided at a discount of 20% of market rent. If a whole building and many others in the same geographic area are mostly NRAS and the predominant rental is 20% discounted then what is the market rent? You can see where I’m heading with this. Taken to its ultimate conclusion could we end up with free rent?

Maybe not but I suspect the trend will not necessarily be favourable.

Now to the elephant in the room. Like it or not there is a feeling in the industry that subsidised rentals equals social housing. Given the income means tests associated with NRAS I don’t necessarily agree with this view although feedback from resident managers would indicate that NRAS units are attracting a different tenancy profile to other units in the same building. I am also being told that non-NRAS compliant tenants are avoiding predominantly NRAS buildings and choosing to seek rentals in the more traditional types of rental apartment model. Given that NRAS units are focused purely on rentals rather than owner occupiers and that these rentals are subsidised I wonder what an NRAS only, 150 lot strata complex might look like over time. Again, I don’t necessarily have a view one way or the other but make no mistake these are the sort of discussions that are taking place in our industry.

On the upside NRAS units are unlikely to be owner occupied or to be lost to an outside agent for at least the 10 years that the arrangements stay in place. The tax concessions are so attractive to an investor that I suspect the risk of the owner withdrawing from the NRAS scheme or objecting to moderate fee increases is remote. So, not all bad news but certainly in my mind a story yet to fully play out.

In closing I am reminded of a favourite quote of my old friend and occasional sparring partner Chris Kennedy. Certainty = Value. I’m not certain of how the whole NRAS/management rights dynamic is going to play out so based on Chris’ quote you’d have to think that at least for the time being NRAS based management rights will be sold on a discount to the traditional model.

Next month I’m going to tackle leasebacks. Hopefully I can make the counter argument to the Certainty = Value quote.

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