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Year 5 Valuations - NRAS

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Year 5 Valuations - NRAS

4 August 2016

What you need to know about NRAS Rent Valuations

Did you know that all National Rental Affordability Scheme properties in Australia must have their Market Rental prices revalued by a Licenced Valuer before the beginning of years five and eight of the scheme?

As an investor, are you aware and prepared for the impact of receiving either a higher valuation or lower valuation than the current market rent price attributed to your property? It's important you are ready and to explain why let’s quickly look at why we even have to do this!


How it works

  1. Before your property is activated into the scheme a licenced valuer sets the Market Rental price for your property. It is from this price that you must discount by a minimum of 20.00%.

  2. On each subsequent anniversary of your properties activation date, the Market Rent figure is increased by the CPI rate for Adelaide, as set by the Department of Social Services and the NRAS Legislation. For example, no property can increase its Market Rent by more than 1.2% between now and the 30th of April 2017, which is the last day of the current NRAS year.

  3. This CPI figure is based on the whole of Adelaide, and is not necessarily specific to your individual suburb which may have seen a bigger or smaller adjustment in inflation due to different changes in supply versus demand in that area.

  4. On the 5th and 8th Anniversary of your NRAS property a Licenced Valuer is once again required to re-set the market rent for your property. This valuation should be completed before the respective anniversary dates and while you can have as many valuations prepared as you like (in the event you are not satisfied with a particular valuation), once it has been submitted to the Department it cannot change.

  5. At all times, you must be discounting by at least 20.00%.



Why a licenced valuer?

Put simply, a licenced valuer is required because the legislation mandates it.

In reality, a qualified property manager monitoring your area on a full time basis that is actively holding opens and obtaining live feedback from prospective tenants is probably better positioned to set a more accurate rental price. However, given the motivation for your property manager to maximise your return on asset, we are obviously incentivised to select a high Market Rent price (particularly knowing it will not be fully tested in the market due to the NRAS Discount applied) and so a licenced valuer is most likely seen by the Government as a way to introduce a third party and remove any potential bias.



What happens if the new Market Rent price set by the valuer is higher than the previous price?

Fantastic! If your new market rent price is higher, you must wait until it has been 12 months since the last increase (on a continuing tenant) to implement a rent increase. The timing of increases is mandated by the Residential Tenancies Act 1995, which also forms a part of the NRAS Legislation.



What happens if the new Market Rent price set by the Valuer is lower than the previous price?

If your new market rent price is lower than the current market rent price, you must drop the rent immediately. If you don’t, you will not receive your NRAS Incentive for the period during which you fail to do so! That is not a loss anyone wants to incur.




What does this all mean?

What this really means is that:

  • At years five and eight of the scheme there is a reasonable chancethat you may need to drop your Market Rent (and therefore the rent charged to your tenant) if the Licenced Valuer decides that your property has not increased in Market Rent value at the same inflationary rate as the wider area of Adelaide.



What is actually happening in the Market Place?

Not too many NRAS properties that have reached the Year 5 Valuation trigger point yet however for those that have got there; we are seeing a large drop in rent price has been required as a result of a mismatch between the growth rates in the wider area of Adelaide versus that particular suburb.

Most early NRAS properties were developed in the Norther Suburbs and so this is where most Year 5 Valuations are currently being completed. We are seeing almost all of these properties experience a shift in Market Rents to a lower rate due to the area not growing as quickly as other parts of the Greater Metropolitan area of Adelaide.

Here is a snapshot of the CPI rate used in Adelaide/ South Australia so far in the scheme:


NRAS Year Ending
30 April…

Inflation Rate (%)

2010

5.4

2011

4.0

2012

4.4

2013

4.2

2014

2.5

2015

2.4

2016

1.7

2017

1.2



Let’s now take a look at a real example; a property in the suburb of Andrews Farm which experienced a particularly large change to its Market Price:

Year

Date

Who Determines the Market Rent?

CPI Applicable at Anniversary Date

Max Market Rent

Change ($)

Max NRAS Rent

Change ($)

Start

23-Sep-11

Valuer

4.4%

320.00

-

256.00

-

2

23-Sep-12

Property Manager

4.2%

333.44

13.44

266.75

10.75

3

23-Sep-13

Property Manager

2.5%

341.78

8.34

273.42

6.67

4

23-Sep-14

Property Manager

2.4%

349.98

8.20

279.98

6.56

5

23-Sep-15

Valuer

1.7%

300.00

(49.98)

240.00

(39.98)

6

23-Sep-16

Property Manager

1.2%

303.60

3.60

242.88

2.88

7

23-Sep-17

Property Manager

-

-

-

-

-

  • The Market Rent increased by CPI each Year
  • The Market Rent dropped by about $50 per week at the beginning of Year 5
  • The NRAS Rent was therefore dropped by about $40 per week
  • The effective date of that rent reduction was the 23rd of September 2015 and this was irrespective of how long ago the last rent change occurred.




That seems unfair you say!

In actual fact, when this happens it actually means that the previous Market Rent figure being used was over inflated and in this case the landlord was receiving up to $40 a week more than they really should have been (based on actual market conditions). So it might seem unfair at the time, but in reality it is a sign that you have probably been getting a greater return on your asset in the preceding years than what the scheme intends.

Remember, the new valuation is based on market comparable properties and the person performing that valuation is an experienced and qualified valuer with no connection to the Government or NRAS. It is simply a re-adjustment of the price to better reflect the broader market. If this property was to exit the scheme, it would not have been able to achieve a Market Rent of $349.98. Using the CPI rate actually made this a better investment than the scheme probably even intended it to be!



What now?

Let’s take a quick moment to rejoice that your property manager understands the scheme so well and you are in safe hands!

Wondering if your property is likely to have a rent reduction when you reach this property? Feel free to email us at cameron@apmrental.com.au for assistance or call the office on 8232 7623.

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