National Rental Affordability Scheme

The National Rental Affordability Scheme (NRAS) is a joint initiative of Federal and State Governments enacted in November 2008 in response to the real and growing need to address the rental affordability problem in Australia.  

Rent increases across Australia have outstripped wage growth and inflation to such an extent that many Australians are now forced to pay more than 30% of their nett household income on rent.

Why the National Rental Affordability Scheme?

• NRAS is a major supply-side initiative aimed at making rental properties more affordable by encouraging large-scale investment in rental housing.

• NRAS aims to assist investors, developers and not-for-profit groups to deliver 50,000 rental dwellings over the next three financial years by creating a new residential property asset class for property investors.

• NRAS offers significant financial and risk mitigating incentives to investors.

The Government incentives provided under the Scheme will assist investors to achieve an attractive rate of return with the peace of mind of secure tenancy. It presents a new investment opportunity in the Australian property market.

More than 1.5 million households will be eligible for tenancies under the Scheme - a large and diverse pool of potential tenants for investors in affordable housing projects that will be made available through the Scheme.

Benefits to Investors

 Despite the recent economic downturn all mainland Australian capital cities have recorded increases in their median dwelling vales. The fundaments of a growing population and increasing rents will inevitability continue to drive capital appreciation in the residential sector.

While the Australian population continues to grow at record levels the amount of new housing stock is not keeping pace. The National Housing Supply Council has found that the housing supply shortfall currently stands at over 185,000 dwellings and could reach 1.5 million over the next twenty years without significant action on the part of Government and private sector investment.

Unlike other “social” housing projects or the Defense Housing Authority scheme investors are not limited to distinct demographic or geographic segments. In fact, by definition, NRAS aims to provide housing in areas of high need and therefore logically areas of potential high capital appreciation. The areas are also targets of increased infrastructure and are in close proximity to retail, education and transport amenity.

Participation in the National Rental Affordability Scheme offers a number of benefits to investors in affordable residential rental properties:

Improved Rental Yields

• The minimum annual $9,140 National Rental Incentive for each approved rental dwelling can significantly improve rental yields over conventional residential investment properties (see example below).

• The National Rental Incentive is income tax-free, indexed to the rental component of the Consumer Price Index (CPI) and is complemented by existing taxation treatment of interest, costs and depreciation.

Reduced Risk Profile

• With rents set at least 20 per cent below market value, and a large pool of eligible tenants, investors can expect a reduced vacancy risk.

• Compliance with the Scheme will offer investors certainty of contributions from the Australian, State or Territory government in the form of the National Rental Incentive over a period of 10 years. The National Rental Incentive will be indexed to the rental component of the CPI.

A New Asset Class

• The Australian Government will allocate 50,000 incentives through the Scheme over four financial years. A further 50,000 incentives will be allocated from July 2012 if demand from investors and tenants remains strong. These incentives aim to stimulate the creation of a new ongoing asset class and a development industry specialising in affordable rental housing.

Large and diverse pool of potential tenants

• Up to 1.5 million individuals and families on low and moderate incomes will be eligible to be tenants in approved NRAS dwellings.

• Income eligibility levels for prospective tenants include key workers and their families, vital to Australia’s continuing economic prosperity.

 Ethical Investment

• Investing in affordable housing through the National Rental Affordability Scheme offers investment opportunities that may meet investors' own criteria for building ethical investment portfolios.

How NRAS Operates

Example:

Property: 1 bedroom apartment in Newstead, Brisbane

Market Rent: $320

Market Price: $350,000

As we can see in this example the usual deductions allowable for investment properties are unchanged under NRAS. The tax benefits come from two sources:

1.    The rental (taxable) income is reduced

2.    The NRAS incentive is post tax

As the NRAS payment is a fixed dollar amount (currently $9,140 indexed) it is not a function of the property value. Logically, therefore, the lower the value of the property the greater the relative benefit of the NRAS incentive. In this case the owner of the NRAS apartment is $7,494 (post tax) better off annually than the owner of an equivalent non-NRAS investment.

(Source:Investor Information Paper, November 2010, Prepared by Mark McKenzie)