NRAS – What is National Rental Affordability Scheme all about?

The National Rental Affordability Scheme (NRAS) is a long term commitment by the Australian Government in partnership with the states and territories, to invest in affordable rental housing.

The Scheme, which commenced in 2008, aims to address the shortage of affordable rental housing by offering financial incentives to the business sector and community organisations to build and rent dwellings to low and moderate income households at a rate that is at least 20 per cent below the prevailing market rates. NRAS aims to:

•     increase the supply of new affordable rental housing
•     reduce rental costs for low and moderate income households
•     encourage large-scale investment and innovative delivery of affordable housing

The Australian Government is committed to stimulating the construction of 50,000 high quality homes and apartments, providing affordable private rental properties for Australians and their families.

NRAS is not a public housing program; it is a tax incentive to induce more private investment in the lower price range of the residential construction market.

NRAS – A new asset class

NRAS is a new opportunity for government, debt and equity investors, property developers and not for profit housing organisations to work together to increase the supply of affordable private rental housing and create a new ongoing asset class in Australia.

It recognises that governments have a role in creating and encouraging new markets.  The Australian Government has made a 10-year financial commitment to NRAS. NRAS has bipartisan support.

NRAS is a new investment program for Australia, and based on the US experience, will take a number of years to fully develop.  The Australian Government is committed to working with State and Territory governments, the business sector and not for profit housing organisations to ensure the Scheme’s success.

NRAS is well underway to deliver against its target of 50,000 dwellings across Australia.

The design and quality of NRAS dwellings compare favourably with any private non-NRAS dwelling.  Typically, they are indistinguishable from other ‘middle-market’ dwellings.

Rigorous selection criteria are applied by the Australian Government to the location, design and amenity of NRAS dwellings, all of which must also comply with State, Territory and Local Government planning and building codes and requirements.

NRAS – What do investors get?

NRAS offers a substantial annual tax-free incentive, the NRAS Incentive, for every dwelling built under its auspices.

Investors need to apply for NRAS Incentives, and if offered, must agree to rent approved dwellings at a rate that is at least 20 per cent below prevailing market rates, to low and moderate income households.

The NRAS Incentive is a funding stream not available to standard residential property investors.  Each approved dwelling attracts the NRAS Incentive for 10 years, so long as investors continue to comply with conditions relating to tenant eligibility and rent discounts.

The annual income-tax free Incentive is currently $9,981 per dwelling, and is indexed each year to the rental component of the CPI.  The Incentive comprises:

1. an Australian Government (Federal component) contribution of $7,486 per dwelling per year (as a refundable tax offset or payment); and
2. a State or Territory Government (State component) contribution of $2,495 per dwelling per year (in direct or in-kind financial support).

The Incentive provided under the Scheme assists investors and property developers to work up proposals that offer an attractive and competitive rate of return.

The Government is committed to ensuring that the full value of the NRAS Incentive is passed to all investors. Prospective investors are encouraged to talk to the Australian Tax Office before finalising their investment structure or applying for NRAS Incentives, to ensure this policy objective is achieved.

The Australian Government has no legal or equitable claim over an NRAS property.

NRAS – Benefits of investing in NRAS

NRAS investors can expect to benefit from the annual NRAS Incentive, rental yields and capital gain.

NRAS is intended to be a commercial, profitable investment for participants, while also assisting Australia to increase the supply of affordable housing.

With higher returns on direct residential property than returns on office or industrial property over the last 10 years,¹ residential property can be a profitable investment.

While global house prices have fallen substantially globally, the Australian housing sector has shown resilience, primarily due to strong fundamentals – low vacancy rates, high population growth, insufficient housing stock, high employment and sound lending practices. 

Demand for residential property is high with the National Housing Supply Council’s State of Supply Report 2010 estimating a current housing supply deficit of 178,400 homes across Australia.

Partly due to the shortfall in supply, the residential rental market represents a good long-term investment.  Independent financial modelling of the NRAS Incentive shows that it can provide market rates of return at levels that are strongly competitive with other asset classes.

Compared with a conventional residential investment property, in certain markets the NRAS Incentive can provide a better cash return to investors than the receipt of full market rent.

In addition, investors are able to apply property expenses and non-cash deductions and allowances against a lower assessable rental income, increasing the negative gearing benefit.

NRAS can counterbalance the risk and volatility of equity markets and assist in providing a balanced portfolio.  It offers great flexibility, with investors encouraged to develop portfolios with diverse dwelling types across different locations.

It is estimated that more than 1.5 million Australian households are eligible to rent NRAS properties.

NRAS – How can investors participate in NRAS?

Individuals who are interested in purchasing just one or two NRAS properties as an investment can become involved by approaching entities who are applying or already have a larger allocation of NRAS Incentives. In other words, investors can invest in NRAS-approved residential projects/dwellings.

NRAS – Property and tenant management

As with any private investment property, there are a range of property and tenant management services that need to be performed for all NRAS properties.

NRAS investors must appoint a tenancy and/or property manager to provide services including selection of tenants and periodic assessment of their ongoing eligibility to rent an NRAS property, as well as property maintenance.

A tenancy manager can be contracted on a fee-for-service basis by an investor, or be part of the consortium which applies for NRAS Incentives.

Standard State and Territory residential tenancy laws apply to NRAS properties just as they do for any private residential investment. This includes laws applying to registration and licensing requirements for tenancy managers.

NRAS tenants and landlords are regulated under State and Territory tenancy laws. The same rules regarding evictions, maintenance obligations and responsibilities of tenants apply to NRAS tenants as they do to other tenants in the private market.

NRAS – NRAS tenants

NRAS tenants tend to be key workers, such as childcare workers, nurses, police officers, fire-fighters and paramedics.  It is estimated that 1.5 million Australian households are currently eligible to rent NRAS properties.

Investors can pick any tenants for NRAS properties², as long as these tenants do not exceed a certain income threshold.

Income levels for eligible NRAS tenants are generous and allow for tenant salary increases of 25 per cent above the entry income limit.

For example, a couple with three children, earning a gross income of $108,169 per annum, is eligible to rent an NRAS dwelling.  With the income increase allowance of 25 per cent, this family could earn up to $135,212 for two years before they become ineligible to remain in an NRAS property.

NRAS – Key facts about NRAS

• NRAS dwellings are private property. No Government holds caveats or claims over NRAS properties.
• NRAS homes can be bundled with non-NRAS properties: they may be only a minority of a new multi-storey development, with other properties sold off-the-plan to homebuyers and individual investors.
• NRAS dwellings can be sold without penalty during the 10-year holding period:
• a dwelling can be sold to another investor who undertakes to comply with NRAS obligations; or
• an equivalent dwelling can be offered as a substitute dwelling for the remaining part of the 10-year period.
• At the end of the NRAS 10-year period, properties revert to full control of the investor, who has no ongoing obligations to the Australian Government.
• Where dwellings are approved under NRAS, investors should be aware that this does not mean that the Australian Government endorses, guarantees or secures the investment in any way.

The Australian Government has made a 10-year commitment to NRAS.  The Scheme is managed and regulated under the legislative framework provided through the National Rental Affordability Scheme Act 2008.

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