Could the Federal Budget be a windfall for disability housing investors?

Most budget coverage this week has focused on what investors stand to lose. Barwon Investment Partners is focused on what they stand to gain.

The proposed changes to negative gearing and capital gains tax (CGT) discounts on established residential property have dominated the post-budget conversation.

For Joss Engebretsen, portfolio manager of the Barwon Disability Accommodation Fund (BDAF), the more interesting question is where that displaced capital goes next. His answer: Specialist Disability Accommodation (SDA).

The investment case just got stronger

The proposed removal of the 50 per cent CGT discount on established residential property, combined with restricting negative gearing to new builds, fundamentally changes the numbers on one of Australia’s most popular investment strategies.

Barwon estimates tens of billions in annual investment capital previously directed to established, negatively geared housing will need to find a new home. And SDA is likely to receive some of it.

Unlike negatively geared residential property, well-located and strongly occupied SDA properties are cashflow positive. They also carry substantial depreciation benefits, which means income distributions carry very low or even nil taxable components in the early years. As Engebretsen puts it:

“SDA offers investors access to cashflow positive properties supported by government-sponsored, inflation-adjusted rents, and high depreciation benefits that retain much of the tax advantages held before these changes, offering an increasingly attractive after-tax return compared to other investments.”

Strip away the tax advantages of established residential property and capital has to go somewhere. Increasingly, that somewhere is SDA.

The trust tax headline does not apply here

Budget coverage has also flagged a 30 per cent minimum tax on discretionary trusts, which has rattled some investors. Engebretsen is clear about where BDAF stands. “BDAF is a fixed unit trust, and so the new minimum tax on discretionary trusts does not apply at the trust level here,” he says.

The fund’s quarterly distributions already carry a very high proportion of tax-deferred income, meaning investors were well positioned before the budget. If these measures pass parliament, that position only improves.

Advisers whose clients are asking about the trust tax changes should be across this. BDAF sits outside the new measure entirely, and that is a conversation worth having.

NDIS reforms leave SDA untouched

The other concern circulating in the market relates to the government‘s National Disability Insurance Scheme (NDIS) reforms. The government has committed to bringing NDIS expenditure growth down from 10 per cent per annum to 2 per cent over four years. For some investors, that headline has raised questions about the security of SDA funding.

Barwon says the concerns are misplaced. SDA makes up approximately one per cent of total NDIS expenditure and runs on a separate funding track. The people it serves have the most significant and permanent disabilities. They are not who the government is targeting with eligibility changes.

In a recent National Press Conference, Minister Butler outlined measures focused on community participation spending and participants with higher functional capacity. Accommodation support for participants with extreme functional impairment and very high support needs was explicitly not the focus.

Barwon has argued for some time that the SDA sector is actually safer under a more financially sustainable NDIS.

A scheme under constant political pressure from unchecked cost growth creates uncertainty. One that is fiscally disciplined while explicitly protecting its highest-need cohort does not. The government’s approach is consistent with that view.

The opportunity in front of advisers

Unmet demand for SDA nationally currently exceeds 9,500 places. Supply has not kept pace with need, and the budget changes are likely to accelerate capital flows toward the sector rather than away from it.

For clients rethinking their property strategy after the CGT and negative gearing changes, advisers should be putting SDA on the table.

The combination of cashflow-positive assets, government-backed inflation-adjusted rents, strong depreciation benefits and protection from the new trust tax measures adds up to a more compelling after-tax proposition than it was a week ago. The budget did not create the SDA opportunity. It just made it harder to ignore.