Welcome to our latest Disability Accommodation update from Barwon Investment Partners.
Tom Patrick, Head of Healthcare Property is joined by Portfolio Manager, Joss Engebretsen to give an overview of the Fund and its successful performance over the last 12 months as well as discuss the SDA Price Guide review and its impact on the SDA sector.
Transcript:
Tom: So, let’s start with an overview of the fund. What is the Barwon Disability Accommodation Fund, and what does it do?
Joss: The Barwon Disability Accommodation Fund is a closed-ended fund that invests in specialist disability accommodation across Australia. We acquire going concern assets or enter into fund-to-own structures for best-in-class disability accommodation, creating great housing options for people with disabilities.
Tom: And how has the fund performed over the past year?
Joss: The fund has performed very well over the past 12-months. We’ve achieved a net return of around 7 – 7.5%, with a distribution yield of around 4.5%. This is due to a number of factors including the strong occupancy at our operating assets, rents increasing in-line with inflation, and relatively stable cap-rates compared to other core asset classes. We’re glad to see the fund returns are trending toward our target range as the fund becomes a more established vehicle.
Tom: That’s great to hear. And so, what’s going on the fund as we round out the financial year and head into FY24?
Joss: It’s actually a very exciting time for the fund Tom. We are about to reach the financial close of our High Wycombe project where 18 out of the 24 Participants have moved in and we’re actually about to settle on our Dandenong asset in the second half of July. Settling these two assets will see the GAV nearly double, and as a result we’ve now called the balance of undrawn committed capital from our investors and the fund’s committed equity will shortly be fully deployed. On top of these 2 assets, we’ve got some great deals under exclusive due diligence which should come into the fund shortly.
Tom: Good work, I know our investors are keen to get their capital to work and delivering great outcomes for people living with a disability. Now, let’s talk about the latest government price guide review. What are your thoughts on the changes?
Joss: Yes, well as our investors may recall, the sector was awaiting the final outcome of the first 5-yearly SDA Price Guide review. This was the result of an extensive review of the sector’s rents in the face of the escalation of land and building costs over time. Barwon lodged a submission with 15 recommendations and it was good to see the SDA Price Guide Review addressed 10 of those were addressed in the final report. Overall, the changes are positive. The government has increased the prices for a number of specialist disability accommodation categories; however, the most significant outcome of the price guide review was the lifting of Improved Liveability funding by about 80 to 120% across all categories and a substantial lift in Fully Accessible funding which has substantially reduced the income reversion risks for assets in the sector. This should also make many more feasible and able to house these previously lower funded participants. We’ve started doing our numbers and we are really excited for the next 2-3 years which will hopefully present a lot of great opportunities to develop and own SDA for a wider part of the Participant continuum.
Tom: That’s terrific to hear. Now, let’s move on to some questions from our investors. Are you seeing any risk to the SDA programme given all the conversations going on about growth caps on the NDIS expenditure?
Joss: Whilst the government has announced a desire for an 8% growth target on the NDIS expenditure, we’ve always got to remember that the SDA expenditure is currently less than 1% of the NDIS budget. In the 12-months to March 2023, the expenditure was only $228m, or one-third of the $700m SDA budget – so it’s running well under. SDA is for NDIS participants with the most extreme functional impairment and very high support needs. If the Government were to undertake actions to slow growth it is unlikely impact the SDA program which not only enables Participant’s inclusion in society, the very aim of the scheme, but when SDA is done well it can actually reduce care costs providing an efficiency dividend Government. It’s for these reasons, and the outcomes of the SDA Pricing review, that we remain very positive on the longevity, necessity and prospects of the SDA sector.
Tom: Very interesting. So, what are the opportunities for growth in the disability accommodation sector?
Joss: The opportunities for growth in the disability accommodation sector remain significant. The population of people with disabilities is growing, and the demand for disability accommodation is increasing. The recent SDA Price Guide review revealed that whilst there are $353m of SDA approved funding out there, only $228m of SDA payments were claimed up to March 2023. That tells us there’s a cohort of Participants with $120m of approved funding that need a suitable home. The Government also recognises that SDA is a key enabler for the NDIA to meet the Government’s commitments with respect to reducing bed blockage in hospitals by people with disability and assisting younger people with disability to exit residential aged care, as the provision of suitable alternative accommodation is crucial in both these cases. From the recent Government estimates, another 11,000 SDA new build places will be required over the next 5 years and that presents a big opportunity for investors to help fill that gap.
Tom: A lot of work to be done for sure, any other news to update investors?
Joss: Well actually yes! Now that we have deployed all of our committed equity, we are starting the process of raising more capital to continue to grow the fund. Moving forward we are going to change up the structure a little bit so instead of a committed capital structure we are going to raise capital on a deal-by-deal basis so raising capital is more closely aligned with deployment. If any of our existing or new investors would like to express their interest in participating in the Fund then they should feel free to get in touch with our team who can guide them through the process.
Tom: Great – thanks for your insights today, Joss. That’s all the time we have.
Joss: Thank you for having me, Tom.