There has been recent conjecture amongst industry stakeholders about the impact on management rights businesses once the incentive period under the National Affordable Rental Scheme (NRAS) comes to an end. The scheme was first introduced over 10 years ago when housing affordability was one of the central topics of political and social debate. It was designed to provide a rental discount (up to 20% of the market rate) to middle income earning tenants while giving the owner certain tax benefits that can be claimed at the end of each financial year.
In a management rights sense, there are a number of NRAS providers, mainly not for profit organisations, approved to manage properties that are accessible under the scheme. The provider has a responsibility to ensure that the letting of the properties comply with the prescribed regulations and that the objectives of the scheme are met. From there, the scheme has offered a number of different models that govern the relationship between the provider, the owner and a management rights operator. Each offering different levels of control for the provider depending on what model is in place.
Over the years NRAS has received a mixed response from the industry. Financiers and valuers alike have shown concern about the control the provider has over the owner and the property, particularly the influence in directing an owner to appoint a managing agent or to manage the property itself once the incentive period expires. There have been various ways to deal with these issues including warranties and restraints from the provider in favour of the manager. Other practical considerations are the lower rent achieved on the property and the onerous paperwork and compliance obligations on the manager.
Looking forward, managers should be optimistic about the incentive period ending. Upon expiration, the inability of an owner to claim the generous tax benefits will be offset by the higher rent the property will be able to achieve, not to mention enabling the property to be rented by a broader range of prospective tenants. Not all NRAS tenancies in a complex will end at the same time – as with any complex the tenancy durations will be staggered. As for another common fear, there should be little reason for managers to be apprehensive about the likelihood of owners leaving the letting pool. If the manager has been giving a good service to owners, there should be minimal risk of owners looking to an external agent to manage their properties.
From a transactional perspective, the market has historically adopted a lesser multiplier for NRAS properties depending on a range of factors. We expect this will continue as financiers remain uncertain about what the schemes end means for management rights. Indeed we have seen financiers shy away from businesses with a large proportion of units in an NRAS scheme close to its end. However for the reasons expressed above we find that difficult to understand. We do not see why financiers or potential management rights buyers should be deterred about NRAS ending in a complex. We see minimal if any adverse impact to the industry – we expect it to show the resilience it has so often shown in the past and ride through yet another market challenge.