DHA and NRAS do they need ASIC intervention?

Below is an article published in The Advertiser on 1st December 2012. It vindicates what i have been saying in my Seminars for over 12 months. The article is brief on the pitfalls of NRAS but clear on the fact that they are not good investments. If anyone is interested in the remainder of the pitfalls please message me here or give me a call.

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Time ASIC eyed Government role in pushing dodgy property to unwary.

By Monique Wakelin and published in The Australian 1^st December 2012

ASIC Commissioner Peter Kell recently told The Australian that self-managed super funds should not be “the preferred vehicle for dodgy property spruikers”.

To show it means business the Australian Securities Commission is establishing a task force on aggressive marketing of speculative property developments.

But while ASIC is to be applauded for its proactive stance on the issue, is the Federal Government guilty of sending out mixed messages about investing in property?

I am afraid that while ASIC is on the lookout for dodgy property spruikers, other arms of the Federal Government are spruiking dodgy property to unwary investors.

The most high-profile example is Defence Housing Australia. This offshoot of the Defence Department is tasked with accommodating defence staff and their families. Typically, it builds or sources properties within 30kms of Defence facilities, sells them to investors at a non-negotiable price, leases them back and manages the property on behalf of the investor for a fee.

I am wary of Defence Housing properties as an investment. The buy-in price is often artificially inflated and the property management fees are very high at about 16%, twice those for conventional property management by Real Estate Agents or other property managers. You can only sell to another investor, which means homebuyers who represent 70% of the market are excluded. This limits resale value.

But my greatest concern with DHA properties is that most of the properties have been built in low land-value areas which are not prime prospects for capital growth – the main game when it comes to selecting investment property.

While you may find rare examples of DHA housing showing satisfactory capital growth, the DHA’s mission is to provide housing for our Defence personnel and not necessarily to provide investors with the best possible investment property.

Don’t be lured by guaranteed rental income or perceived tax advantages that often go hand in hand with these kinds of properties. Often these incentives are factored into the purchase price and/or management costs.

What happens if Defence downsizes in your area? Once your contact with DHA expires you and many other Defence Housing investors may find it hard to find willing buyers or tenants.

But there’s more. The National Rental Affordability Scheme (NRAS) is a government initiative to increase the supply of affordable accommodation by providing a financial incentive of $10,000 per property to investors who lease their property out at a rent of 20% or more below the market rate.

NRAS is a wholesale investor initiative that is open to developers building large numbers of properties rather than the retail residential investor who has just one property to lease out. It is however, possible for an individual to get involved by buying an NRAS property from an accredited developer and having the NRAS credits passed on to them so long as they continue to meet the “affordable rent” criteria.

I warn investors away from NRAS investments because in order to meet the NRAS criteria, the properties, just like Defence Housing, tend to be in areas with lower land values and poor capital growth prospects. Yes, the combination of rent and government incentives might provide a high yield, but your capital would be better off in an area where capital growth is strong.

Once again, I fear that investors see the government involvement as a stamp of approval for these investments. It’s not.

The reality is that investors are now being wooed by advisers to use their SMSF’s to buy DHA and NRAS properties. To my mind, these properties are wholly unsuitable for this investment purpose. If this situation is allowed to continue, we are sowing the seeds of a crisis that may well be reaped during the next downturn.

Mr Kell, it’s time to turn your attention to the complicity of government in promoting dodgy dealings.

NOTE:  I have republished this article because NRAS properties are being heavily promoted on radio and TV as good investment opportunities. They are generally not.

The prices are often inflated and they are often located in areas that are already over supplied.

Long term these areas could become ghettos and NRAS properties virtually worthless. This is not something that we have ever seen in Australia but we need only look the US to see what happens when builders and developers are given free rein to build as many houses as they can with Government supported initiatives.

Property is a good investment dont let a few bad eggs spoil this investment. Do your part and let people know.

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