Welcome back to the Rated Change with York Wealth Management. As advices to some of the
wealthiest families in the country, the Rated Change is a podcast designed to help you in
the pursuit of building long term wealth through the insights of some of the brightest minds
in asset management. I'm your host Murdoch Gatty and today's broadcast
we're speaking with Joss Engerbretsen, portfolio manager at Barwon Investment Partners and
he oversees the Barwon Disability Accommodation Fund. If you have any loved ones with special
disability accommodation needs or you've been following the SDA and NDIS news from the government,
then I think you're really going to benefit from the insights Joss has to share on these
areas. For people unfamiliar with these schemes, Joss unpacks exactly what is the National
Disability Insurance Scheme and the specialist disability accommodation. He shares his thoughts
on what improvements should be implemented in these schemes, what risks to avoid when
investing in this space and how they are investing in specialist disability accommodation, which
is both favorable for their clients and investors. The funds been around now for two years, has
a five year lock in the fund targets a total return of eight to 10% comprising of an income
distribution yield of five to 7%. The fund for the past 12 months has returned 14% with
4.85% of that being an income yield and 9% capital growth.
Before we get into the podcast, I'd also like to encourage you to listen to this glamour
at the end of the broadcast and to feed keep your feedback coming. You can reach me at
mgatty at ywm.com.au. So with that being said, I hope you enjoy this conversation as much
as I did. So sit back, relax and enjoy it.
Joss Ingerbretson, welcome to the rate of change with York Wealth Management.
James Murdoch, thanks very much for having me here today.
Good to have you on. So who is Joss and how did you get into financial markets?
Sure. Well, I'm the portfolio manager for Barland's Disability Accommodation Fund. I
have a pretty squiggly path into financial markets, which is probably a little bit less
conventional than most that find their way into funds management. So I started out, go
firstly, going to uni at Sydney University doing a combination of civil engineering and
economics. And so actually was a civil engineer for a number of years outside of uni, got
more interested in the commercial side of real estate development and the real estate
game. And so actually moved transitioned across into more of a development management style
of role. So the commercial manager for real estate projects. But I moved across to a group
called Ingenier Communities, which many would be familiar with on the podcast nowadays,
but back then it's a much smaller organisation starting out developing what's now called
land lease communities or what we used to call manufactured home estates, which is,
was effectively a new form of retirement living to challenge the incumbent deferred management
fee model or rental retirement model. And that sector has grown quite substantially
over time. And I saw it from both my time at Ingenier and then moved on to another ASX
listed group called Aspen Living Villages. And was with both those organisations as you
know, cap rates in that sector came down from circa 10, 11% right down to around about five
and a half percent where they are now. So I was quite involved in seeing how that new
sector formed up as well as other adjacent sectors as well that both of those companies
worked in, which was caravan parks and FIFO mining camps and things of that nature. So
alternative style residential accommodation. And then subsequently went on to be the head
of property for a major telco and infrastructure business called BAI Communications, which
provides all the backhaul infrastructure for ABC, SBS and Channel 10. And then went and
actually studied my Masters of Applied Finance at Macquarie University and got more interested
in the kind of financial markets or funds management side of real estate and moved across
to Barwon just over two years ago after a prolonged study of the SDA market and how
it was shaping up and came across Barwon who had actually just themselves launched a fund
in the specialist disability accommodation sector, which I work in now and decided to
join forces to build an institutional grade funds management response to the specialist
disability accommodation sector. So we've been investing in SDA for just over two years,
two and a half years now, and we've got a fund that's looking to be around about 80
million of GAV. And so that's how I find myself here today.
Yeah, that's an interesting path. They always say that the best person to essentially run
a factory is the person that's worked on the floor, right? Not just the manager coming
in over top, but that sounds like the path that you've had.
Yeah, it's been an interesting one. I mean, when I set out on my career, I always had
that more commercial interest to me, you know, whilst, you know, doing civil engineering
design for large master planning communities and other projects was, you know, really interesting.
You know, I found that I was drawn more towards the commercial management side. And I think
the ultimate evolution of that is being very close to where the capital comes from and
being able to actually, you know, understand from the bottom up, like we're allocating
capital, particularly in physical asset class, like real estate, you know, you've got to
understand how these projects actually come together, what's actually going to work for
the end user of those different types of real estate to be able to allocate capital well.
So it's been a bit of a strange path, but I've been able to bring and adopt learnings
across the technical front end through the project management development management
side and now apply them, you know, as a fund manager in the real estate space.
Yeah, I think it's you might have a for our listeners, a very interesting insight from
like, I suppose, the three main vantage points or where this interests a lot of Australians,
which is, you know, if you look, if you have a loved one or you are yourself, you know,
having, you know, a dwelling, you know, in the SDA framework, or, you know, the government
stepping in, you know, providing a funding framework to actually get these things built.
And then secondly, so thirdly, the developers themselves, you know, seeking out to, you
know, build these properties.
And obviously, no one does anything without trying to make profit.
But, you know, there's always the good, the bad, the ugly inside that.
But I would love to hear your thoughts on, you know, how the, well, essentially the community
within this particular asset class operates.
Yeah, well, for the listeners that might not be so familiar with exactly what the specialist
disability accommodation space is, I mean, it's a relatively new sector.
It's really genuinely only five years old.
So it's still as a sector growing, growing quite rapidly, but still finding its feet.
And at the end of the day, it's purpose-built accommodation for people with severe and permanent
disabilities that have very high support needs or, you know, a great degree of functional
impairment.
So it's for the very top kind of circus, 6% of lower functionality under the NDIS.
And it's brought about by a rental stream that was created out of the NDIS, which is
to incentivise the private market to build out this new dwelling category or residential
asset class.
And so, you know, it's very much, you know, caters towards people with quite severe disabilities,
but also, you know, you've got to take into account their families that are helping them
make those decisions.
But also, because these residents do have a high degree of functional impairment, they've
actually also need daily care.
So you've also got to think about how is that real estate offering providing a safe work
environment?
Making sure that that piece of real estate is near local amenities that carers can go
and get a coffee or a sandwich at lunch.
And of course, you know, we've got, you know, it being a very new sector, you know, being
only five years old, there's only about 6,500 places or 6,500 beds built to date.
And from the current metrics of how many need it, that's about 22,000, 23,000 kind of need
it now today or have eligible funding.
So we need to be incentivizing and working with developers to create, you know, viable,
profitable projects that they want to go out there and do the hard work to find the land
and actually build this product and build a good product for us who are going to ultimately
own it over the long term.
So there's a number of different stakeholders in this space that you have to think about.
You've of course got to think about like any business and any real estate play, the end
user, and that's our, you know, customer centric focus here on the participant and making sure
that we enable as an independently independent and inclusive life as possible.
The carers and making sure that that that property sits within an area that can be easily
serviced with care.
We've also got the developers that we need to take care of here.
So you've got to actually think about, you know, multiple different components of how
to bring together an SDA property, which is good because I've kind of worn a few of those
hats in the past and it just helps you triangulate that.
So with, you were saying the other day that they had the SDA price guide review, right,
which happens, what was it, every five years?
Is that correct?
Yeah, that's correct.
So with that, do you mind giving just an overview of the universe?
Because this has been up and running for five years and if anyone's been reading the headlines,
you probably see headlines such as NDIS on track for a $5.7 billion budget blowout, you
know, changes to the SDA scheme to, you know, hopefully improve this.
And I think I was trying to someone the other day that made a comment that potentially if
it continues on this course, this might, this particular scheme may become the single largest
cost to Australians and the taxpayers going forward.
So do you mind giving, fleshing out what are the real numbers, what's actually happening
within the scheme?
And you also said that you helped, you know, make some suggestions on changes with that
particular review and some were adopted.
So I'd be really interested in a year.
Yeah, well, that's quite a big set of questions to unpack.
But maybe if we just take it back to the beginning of, you know, what is the NDIS?
Because I think a lot of people's association with the NDIS is about budget blowouts and
that's much of the rhetoric that we do see in the paper.
But let's maybe just take a little bit of a time machine back in time to why it even
exists in the first place.
So back in 2009, in that kind of era of the Gillard government, it was identified that
we weren't funding care services in this country very well for those with a disability.
And so they did a number of investigations, found out, you know, the money is kind of
going to waste or not being used effectively on just actually not getting good outcomes
for those vulnerable members of our society.
And so they went and they said, look, let's actually flip the whole thing on its head.
Let's turn it into a market based system.
So effectively, people who have severe and permanent disabilities, who may be eligible
for this new thing called the NDIS will do an assessment of their particular functional
requirements, their level of disability, and will assign them a package of funding that
they get to use to approach the market.
So it very much turned it from, you know, the whole system on its head to a market based
system where a participant could go and find the care services that suited their particular
disability and to create greater choice and control.
And that was, you know, really started being rolled out in around about 2011 and then really
started going across the country in 2013.
And so jump forward 10 years to where we are now.
And we have 550,000 Australians who have a severe and permanent disability.
Just remembering for a second, there's actually 4.3 million Australians that have some form
of disability, but the NDIS is designed for the 550,000 who are deemed to have permanent
and severe disabilities.
And that 550,000 of people out there getting, you know, daily care, getting daily activities
or receiving things like SDA, that directly employs, you know, estimates of around 270,000
Australians and indirectly many, many more.
So, you know, it's a pretty big part of the employment and the economy at the moment.
The last 12 months, I think the expenditure was around 34 billion or kind of in that number,
which is obviously a pretty big number.
And that's about one and a half percent of GDP, one to one and a half percent of GDP.
And so if you look at what's going to happen over the next kind of 10 years, the estimates
at the moment, which is, you know, very much what people are alerted to, is that's growing
to about 90 billion a year, and which is around about two and a half percent of GDP.
And to give you a sense of relative scale, that's around about the same size of the agricultural
industry.
So, yes, it's a huge cost, but it also is a huge employer.
And there's actually a lot of GDP that comes out of that as well, both, you know, the direct
spend, but then the follow on indirect spend as well to all the support services that sit
around to members who participate in that part of the economy.
So yeah, look, the concern is from many people, you know, we're concerned about what, you
know, what the budget is and how it's growing.
However, what affects us in this specialist disability accommodation world isn't necessarily
the overall budget, but it's actually the line item of SDA.
So SDA is just a line item in the budget.
It was created in circa, you know, 2015, 2016.
They identified that the NDIS was doing a really good job in terms of creating a market
based system for delivering high quality services to participants.
They're seeing a lot of great outcomes of the NDIS and they, but what was happening
is there was still about eight and a half thousand people kind of under the age of 55
in residential aged care, which is, you know, designed for people in their 80s who, you
know, might be in their last series of life.
There was a whole bunch of people stuck in community housing stock.
There was a whole bunch of people, you know, stuck in government housing that hadn't,
that wasn't modified for their needs.
And so they created this new line item of SDA.
And as at today and kind of still from the beginning of this game, that was, that budget
is around 700 million per year.
But as a sector in SDA over the last kind of 12 months, we're collecting about 230 million
of that.
So the 230 million, that is the SDA amount within the NDIS is actually less than 1% of
the overall budget.
And even if we were to be claiming the full amount, we're still kind of less than 2% of
the overall NDIS budget.
And I think that's really important for people to reflect on, particularly when thinking
about investing in the specialist disability accommodation sector, because we're such a
small part of the overall budget, but also our residents is catered to those most in
need, the most severe disabilities.
And so if the government were to provide sustainability measures, which they will over time, much like
they do, you know, most government programs when they get up and running, is we don't
think they will get much of an efficiency dividend by taking on the smallest part of
the overall NDIS scheme, which is actually for the most severe impacted by their disabilities
as well.
So a vast majority of that NDIS budget is around the daily provision of care and supporting
the 550,000 Australians, not necessarily the SDA component.
And I'm sure there'll be sustainability measures over time.
But when you look through to the rhetoric is both sides of the political divide or the
aisle do actually support the NDIS.
There's no talk of wholesale scrapping of the NDIS.
But when you look through to actually what's being said, it's they're saying we want to
make it sustainable for those who it was originally intended for.
And everyone can see the benefits that the NDIS delivers.
So you know, what does that look like?
What does that mean?
Well, we just see some slightly heightening of the barrier to get into the NDIS and maybe
some some funding tweaks around the edges.
But you know, for those particularly in SDA part of the cohort, we think, you know, that
part of the NDIS will continue on as is.
Okay.
So and then with the review, what were the suggestions that you made and that was taken
on board?
Yeah, sorry, I didn't touch on that.
So the SDA price guide review.
So just to give people context, SDA is increased each year by CPI.
So the rents to the sector are inflation hedged in that way.
So each year since 2017, when the scheme first came into existence, we had CPI increases,
which is linked to the March CPI.
And each year, each of those five years, we had an increase.
And then every fifth year, it's written into the scheme or the regulation that the government
undertakes what's called the SDA pricing or price guide review to basically check off
the escalation in land and build prices versus the broader CPI basket.
And so those on the call or listening to the podcast today might be familiar with how much
land and building construction prices have increased over the last five years.
And it was substantially more than the broader CPI bucket.
So they go away and they undertake a number of investigations into land and building prices.
I think they employed Ernst and Young to help them out with that and do a number of technical
reports.
They also engage quite broadly with the industry at large.
So everything from developers to fund managers like myself to SDA providers who actually
manage the day to day tenancies of the properties.
And they do a really broad sweep of the market to understand what's working and what's not
on top of just the prices that need to be set at such a level to continue to encourage
supply.
And as part of that process, we here at Barwin did submit a discussion paper to the NDI just
to say, hey, look, from a fund manager's perspective, this is what we're finding hard for us.
This is what is working well.
And here's a number of recommendations that we would make if you were, you know, as part
of this process to make it easier for everyone.
And so fortunately, a number of those recommendations did make it their way in there.
This was things like, you know, clarification or consideration of how GST is considered
in the terms of building these things and selling these things.
There was a little bit of ambiguity around that.
Making sure that CPI, when it does index, goes up on the 1st of July.
So what used to happen is you would have your rents go up for the sector that actually wouldn't
flow through to your asset until the individual participants plan renewed.
And that wouldn't necessarily be on 1 July.
That might be in November, December or March next year.
Making sure that there was more clarity around the participant demand and supply data or
the dwelling demand and supply data.
But also ensuring that there was a lower margin or a narrower spread between different levels
of funding packages.
And so I'll just dwell there for a moment.
So in the NDIS or under SDA, there's actually four funding packages, depending on your level
of functional impairment or level of support need.
And so I won't go into all four, but in essence, what used to happen between the highest funded
package and the lowest funded package was about 50-55%.
And so when you think about building one of these properties or buying one of these properties,
if you've got to buy the land, it's probably the same, whether it's the highest funded
person or the lowest funded participant.
When you think about the broader structure of the building, it's broadly the same.
When you actually got down to it, there's probably a 15 to 20% difference.
And so that kind of 55% difference in income didn't really make a whole bunch of sense
to a lot of us in the industry.
So look, a lot of us must have put forward the same kind of suggestions, but they brought
that narrowing of the highest to the lowest funded down to about 8%.
And that kind of had two major impacts on the sector, or at least our portfolio.
One it de-risked the assets that we already had.
So we had a large number of our people in our portfolio were on that high funded rate.
And so there was always a possibility you might lose some of the high funded category
and then replace that with some of the lower funded category.
So it de-risked the portfolio from that income reversion perspective.
But going forward and working with developers, we would always have this tension between
that we might build it, you know, expecting the highest funded participants to come to
the property, but that actually might not eventuate and we might only be able to attract
lower funded participants.
So there was always this expectation difference around what the revenues of an asset might
be.
Well, bringing those substantially closer together made those conversations a lot easier
now to the point where we're working with developers and they're saying, oh, we're
happy to underwrite it just at the lower funded participant level.
And if you're able to get high funded participants there over the long term, then that's okay,
but it still works for us at the lower funded level, which makes it much easier to bring
on more supply to the market.
And thirdly, from kind of a social perspective, it's now nicer to be able to offer our stock
to a much wider range of participants because we don't have that, I guess, that tension
around the level of funding gap that was previously there.
Thanks for that.
So that's the overview and the space.
What's actually the strategy of Barwan?
Because a number of people will be reading, you probably see it over social media, you
know, there's a number of people out there.
I get clients emailing me going, hey, there's this new NDIS scheme.
It's making 15% or higher, you know, but I'm concerned that it's in the middle of nowhere.
Is this actually a good idea?
What do you think?
What in your opinion, running this strategy and what return should people be expecting
from your portfolio or from these assets and where should these assets be located?
Yeah, well, I'll probably touch on, you know, who Barwan is and how we found our way to
this space.
So Barwan is an institutional grade independent fund manager based in Sydney, but with offices
in Brisbane and Melbourne as well.
We were set up in around about 2006 by the former head of alternatives at Macquarie Bank,
Sam Armstrong, and the former head of real estate at AMP Capital, Rob Morrison, and joined
by their third partner, Peter Connors.
And so we've been investing on behalf of institutional grade groups.
So you know, predominantly super funds, other institutional groups and high net worths since
that time.
And today the business has got over 50 people and we managed over 3 billion of capital on
behalf of our institutional or highly sophisticated clients.
We're wholesale or institutional only.
And I think that's quite important.
And we've been investing particularly in healthcare real estate for around about 10 years.
So we've got two funds in that space.
We've got an institutional healthcare fund and that's for a number of super fund clients
across Australia.
So Australia has around 1.5 billion invested in healthcare assets across Australia.
And that's your predominantly larger tertiary or larger secondary style assets.
So think large private hospitals.
And then we've also got a fund which is more for our high net worth and sophisticated clients,
which is around about 500 million.
And that invests in predominantly GP clinics and allied health clinics and maybe smaller
day hospitals, things like that.
So we've been investing heavily and directly in property for over a decade and we've got
around about 2 billion invested in that space.
And with that, we've got probably one of the largest dedicated asset management teams in
the country to managing those real estate properties.
So I mean, that's, you know, everyone kind of, some people think that real estate is
a passive game.
No, it's very much an active management game.
And so from that experience in healthcare, we had a lot of our healthcare providers talking
to us and saying, hey, you know, we've got a large number of people with disability,
you know, stuck in our hospitals or some of these healthcare groups would have disability
care provider arms.
And they'd say, hey, have Barwon heard about this new sector called specialist disability
accommodation?
Because it actually really needs an institutional grade manager to come to it and actually do
this properly.
Because, you know, like what you just mentioned, a lot of us were seeing, you know, groups
and Facebook ads and all kinds of things promising, you know, crazy 15 to 17% yields, you know,
with properties kind of in the middle of nowhere.
And people were really concerned that, you know, that wasn't that type of product actually
wasn't going to be the best outcome for participants.
You can most certainly look at the SDA price guide and see how you might quickly want to
derive a 15 to 17% return.
And that's because you can go and buy the land really, really cheap somewhere and build
a really, really cheap house.
And, you know, on the back of a spreadsheet, you can create a 17% return.
And a lot of that did happen, you know, like any good government scheme.
Unfortunately, there was a lot of people that came out and thought it was a bit of a get
rich quick scheme.
And they piled into the sector.
So when you think about, you know, what is that?
How's that, you know, impacted?
Well, if you look at Southeast Queensland, there's roughly twice the number of SDA beds
built than those with SDA funding, right?
So it's a massive oversupply.
And that's predominantly come from that property spruikers, you know, into the self-managed
superfund style of market.
If you double click on Southeast Queensland and you zoom in a little bit more on a micro
level, the majority of that supplies are coming in on Caboolture, Ipswich and Logan.
And what's the thing that kind of ties those areas together?
You know, fringe, really cheap land and a lot of people piled in.
So, you know, that was some unfortunate consequences that have come out to it.
You know, we think on a kind of diversified portfolio level, and it very much aligns with
the government calculations on this, which are published for everyone to see.
So the government really designed this scheme to have sensible, normal, kind of relatively
risk adjusted returns like you would see against other asset classes in real estate, you know,
kind of in that 8 to 10% total return with a distribution yield of kind of 5 to 7%.
That's broadly what the government has published of how they think about rent should be set,
not the kind of double digit returns that have been promised by some groups appealing
to that more of that retail type of investor.
And so that's, you know, what we've been building our fund to deliver.
A big focus for us is not trying to drive for yield or yield on cost, but actually solve
for occupancy and minimizing vacancy.
You know, a lot of that stock in Southeast Queensland is just not occupied because it's
just so much saturation.
Whereas fortunately in our portfolio, we've got 100% or near 100% occupation because we
make sure that we buy assets that are really close to amenity, have a good underlying land
value that are in areas deeply serviced by care, that are places they're going to attract
and retain tenants over the long term.
Because if you're solving for a 15 or 17% margin and you're choosing maybe an extra
5 or 6 kilometres out of town, then you probably should be.
Well, someone like ourselves who have a different type of approach that kind of solving for
the long term sustainability of the asset, where we're happy for that 8 to 10% total
return, we'll just go and buy a plot of land and work with the developer to develop an
asset right next to the shopping centre, right in town.
And that's going to be much more attractive to participants over the long term.
On the mechanics of that, you said a number of things, which are very interesting.
Can we just jump into the mechanics?
So you said target 8 to 10%.
What's the average return for the past 12 months?
What are you forecasting?
Yeah, so the fund is two years old.
So happy to talk around total return to date, but let's start on the last 12 months.
So the last 12 months, we had a total return of just over 14%.
And that was driven by around about a 4.8% income distribution yield.
So real cash distribution to our investors and a circa 9.5%, 9.5% capital return.
Now the capital return was greatly supported this year by the SDA price guide review that
we talked about earlier.
So for funding packages in the sector, we had an average of 18.5% rental increase this
year.
That was mostly against the lower funded categories, as I mentioned, so bringing those up towards
the higher funded categories.
So our portfolio benefited from that increase.
And also we bought some assets quite well.
If you look at the return to date, I think we're around about 7.5% total return.
But we've got to remember the first 12 months, we had lots of deposits out the door and things
not earning money, which kind of dragged the returns for the first 12 months.
We'd probably say the last 12 months is fantastic for existing investors, but not a guide going
forward.
We would expect, again, that 8% to 10% return as our outlook, with a 5% to 7% real cash
distribution yield.
So on the cash drag, we chatted about this at lunch the other day, which was very interesting.
How does, say you spot an opportunity, you want to pick up this fund, you want to work
with a developer.
Does the fund, do investors just allocate money to the fund, the cash builds up, then
you go find an asset?
Or do you go find an asset, then you open the fund up to invest?
How does it work?
Yeah, well, when we originally set up the fund, it was a capital call structure.
So investors would pledge a certain amount that they were willing to invest, and we called
that down progressively.
We've now deployed all that capital, and we recently put in a major bank facility, about
$40 million with ANZ.
So we're well supported from a debt perspective by Australian major banks.
We ran a process, and ANZ was the winner of that.
So going forward, a couple of acquisitions we've got in the pipeline at the moment, we're
using that available debt headroom to us, and making sure that all acquisitions are
distribution accretive.
And then for future capital raisings, which we've got a capital raising at the moment,
what we're looking to do is just immediately unitise our investors against acquisitions
coming into the fund, or pay down debt, small amounts of debt, but then use that dead headroom
to immediately then re-roll into new acquisitions.
So in terms of cash drag, there's a big focus on not having any cash drag in the fund.
And so we'll do that by really managing the debt profile, or raising in time and in line
with new acquisitions.
And how long does it take to get money into the fund, and what are the redemptions?
Yeah, so pretty quick to get money into the fund.
So we've got a capital raising at the moment.
We're looking at closing that around 8th of December, because these assets are-
What's she raising?
Looking to raise 10 to 15.
That's the target this time round.
But we imagine that going forward, we'll probably do more frequent but smaller style raises.
So around that 10 to 15 mark, these assets are generally quite small, an average ticket
size of 5 to 10 million.
So we want to be batching a few of those together before we do a raise.
And so we imagine we'll just be doing those in more frequent instalments.
So it's pretty easy to get the money in.
In terms of getting the money out, this is an open-ended fund, but with closed-ended
features.
So the liquidity profile is there's a redemption window every five years from the birth date
of the fund.
The birth date was May 2021.
So the next one will be in May 2026, so about two and a half years away from now, and then
every five years after that.
Of course, we do for really extenuating circumstances, divorce or death.
We'll try and help our investors if they need liquidity, but we can only offer that on really
a best endeavours basis by matching them off against other investors that want to come
in.
We do try and help our investors where we can, but we do offer those redemption windows
as well if they want to redeem larger amounts of their capital.
Okay, so talking about the opportunity of purchasing these assets, how does it work?
Does it like, I'm in Lancôpe.
I think Lancôpe just got voted like one of the most upcoming suburbs, right?
So assuming say you have families or loved ones, someone's got someone disabled, they
want to be close to home.
There's some assets around, but there's no real complete knockdown buildings.
Let's throw up, I don't know, 10 in one particular place.
How would you go about exploring your product for Lancôpe as an example?
Yeah, so I think there is some SDA actually coming up in Lancôpe, not by us, but by others.
I was just out this morning looking at our new project in Macquarie Park actually, and
we've got 20 units coming up there.
Typically, we start off at a very macro level.
The NDIA publishes really good data.
It's not always the most reliable, but we take it as directional, and it's pretty good
from that perspective.
So they actually do post where all the new supply is coming online.
So there's a two-step process in registering an SDA dwelling within the NDIS, and as a
result of that two-step process, they have really good data about what's in the design
phase and what has been completed.
And then secondly, because they've got all the address data of all the SDA participants,
they've got a pretty good idea of generally where they live.
And so you can use that data to kind of at a macro directional level, first start to
identify where are the major pockets of oversupply and where the major pockets of undersupply.
So we would start kind of there, and you'd broadly say the North Shore or Lane Cove area
is probably very undersupplied by virtue of the fact that there's actually not a huge
amount of new stock coming on there generally in the residential market.
And if they do, the land price is very, very expensive.
So probably to date, it's been a bit exclusionary from SDA.
But if we did have a developer there that was looking to do a larger scale development,
say three or 400 units, we would either get in touch with them or they would get in touch
with us or one of our SDA providers or care providers might know that developer or whatnot.
And they might approach us with an opportunity to buy SDA units out of that particular development.
So we would work with that developer to understand what changes would need to be made to their
project.
All projects probably across Australia need to be DDA compliant or in line with the disability
design requirements.
But there's an additional level to get the SDA standard.
So we would work with them to figure out if we can get these SDA units into their building.
We would then work with them on the price point that we could afford to pay, run that
through our models.
And then basically we would contract with that developer or that builder to deliver
us those SDA units when they complete the project.
And so that particular project would first require an SDA design certificate where we
employ a specialist, sector specific SDA assessor or certifier to review the designs and sign
them off.
And then secondly, after a series of inspections through the build, that SDA assessor will
then sign off that has been built to the correct standard and then it's certified.
Once it's certified, that package and that documentation goes off to the NDIA itself
and they have a team in there that reviews the plans, reviews the certification and actually
then issues you a certificate of enrolment.
And once we receive that certificate of enrolment, that's when we acquire or settle on the property
and start to advertise it, to lease it up.
Well, in truth, we're actually advertising kind of six to nine months out, but that's
when we have an opportunity for participants to actually come through the premises.
And for this particular cohort or customer set, it was very similar to what I experienced
in the retirement living sector.
Moving is a really big life event for many of us, but much, even though it's as difficult
as it is being fully ably bodied for those who do have high degree of functional impairment,
who require very much on external service providers on a day to day basis, moving is
a really big deal.
So they want to look, touch and feel the product generally before committing to move in there.
So we'll often, if we can, negotiate a display suite to come forward so we can help those
participants understand what they'll be moving into.
But yeah, once we settle, we then advertise and start providing leases to our tenants.
And hopefully those moving in choose it as their forever home and are going to stay with
us for a very long time.
Hopefully.
So how does the relationship work with the developers?
Do you give them access just to lending or you provide the equity piece?
How does that work?
Yeah, different approaches for different types of developers and different types of products.
So that product I just spoke to where we might be buying 10 units out of a much, much larger
residential development, we'll just enter into a forward purchase agreement, much like
any person buying off the plan would enter into, that when that project is built, certified
and enrolled, we'll then settle on the property.
So whilst we don't give them finance, we do give them a contract, which they can then
take to the bank as part of their pre-sales commitment to go and get financing.
For other projects, we'll buy them as going concerns.
So a developer might have already built it, got it enrolled, and they've actually wanted
to extract as much value as possible from the deal.
So they've actually got it fully leased up.
And then we'll look to just buy that off them.
The third option we offer for our most trusted developers is what we call a fund through
agreement.
And effectively, that's a finance to own structure.
So a developer might have a project that we really, really like.
For some reason or another, they don't want to go with a third party bank.
They would prefer us to finance the entire development.
Maybe they don't have the 50% equity that would be required to do the development themselves,
but they've got a really good project.
They've got a good team around them.
They've got a good builder in place.
And we can go and review all this.
Well actually, when they achieve a certain milestone, which is usually linked to getting
the appropriate planning approvals in place, getting the as-built certificate, and getting
a building contract, lump sum building contract in place, so we have clarity on the feasibility
of that asset.
We'll actually then buy the land at that point and then finance through the rest of the
construction.
And so in that way, when they achieve enrollment and certification and leasing up of the property,
that's at the end of the project.
We actually pay them out a development profit, but we also get to charge a coupon on all
that money that we've provided for that project up until completion.
And so in that way, we're able to pass all the development risk and the leasing risk
to our counterparties, and we just get a smooth return for our investors.
Considering the rates currently, what would you charge on that money?
Yeah.
When you think about, we basically apply a similar way that you would look at the overall
debt and equity for a project.
So let's just make it for easy maths here, 50-50.
So we would say 50% would need to be equity.
Development equity at the moment can range anywhere from 15% to 20%, depending on who
you are or the type of project.
If it's a simpler single-story project with a guaranteed takeout, maybe equity is a bit
cheaper.
And then if you're going to get debt, you might have 50% at anywhere between 7% and
10%, depending whether you can get a major bank to sponsor you or whether you need to
go to a private lender.
And so you multiply those two together and you look at an all-in cost of capital, maybe
circa 10% to 13%, somewhere in that range.
Cost of capital is 10% to 13%, and then you take ownership of the asset and then lease
that asset out to the users within the SDA scheme.
Yeah.
So we'll charge a coupon somewhere in that 10% to 13% range for finance.
So all of the capital remembering in that fund through structure, the developer at that
point has been paid back for the land.
So they've got all their money back out of the project.
So it's all their now money going into the project.
Now we do have obviously overview and oversight and audit requirements on how that development's
going, but the developer then takes all those construction time leasing risks and we charge
our coupon in the background.
And then at the end, when it's fully complete, we pay out the remaining development profit.
And then we've got a leased asset, which is going concerned by that point.
And so we're just getting then the return that we've paid for the asset.
So once you have the asset and then you're managing the portfolio of these assets, what's
the hidden, the ongoing costs?
The number of these are strata buildings, right?
I think we had a conversation about a friend of ours who essentially got hit with a very
large bill because the balcony railings were what, 0.8 of a centimeter below what they
should have been.
So now everyone's up for a very, very large bill.
So who copps that cost?
Is it yourself or is it the tenant?
Well it depends.
So we've got different leasing structures in this sector.
So we would have what lots of real estate investors might be familiar with, which is
a triple net commercial lease style structure.
Under that structure, there may be provisions or carve outs that any capex is actually the
responsibility of the tenant, so not the responsibility of the fund or to our investors.
And then we do have other types of agreements which are called pass through agreements or
pass through leases.
They're effectively management agreements registered on title, which mean it's actually
the fund's responsibility if there was any capex or if there's any vacancy that we take
that responsibility.
If you look at kind of just an OPEX or ongoing operational kind of costs of particularly
the pass throughs, you might expect somewhere in the kind of sense of 20% of the income
does go to property outgoing.
So that's both the property and the SDA managers who charge anywhere from 5% to 15%, depending
on which group you're talking to.
And then the capex, we make allowances below the line for capex.
Of course, the majority of the assets that we're buying at the moment, the sector's only
five years old, particularly it started ramping up.
So you'd say the average age of an SDA is probably in the two to three year old kind
of bracket.
So these are all very new properties.
So investors in the early stages of this sector do actually benefit from depreciation and
tax deferred nature of the rents.
I think in our last quarter, 84 cents of every dollar returned was tax deferred status.
So you do have the depreciation benefits.
But yeah, going forward, there will be capex like for any kind of asset class or real estate
asset class.
And in some instances, that is for the fund.
And some instances, it's actually for our tenants.
But in all instances, we do actually model that all in and make sure we're still getting
our target return after consideration for capex.
So it sounds like you're running things quite well, but even for yourselves, there's always
risks even if you're doing the conservative side.
So where do you think the risks are for buy one strategy?
The biggest and most obvious risk, which we get feedback from our investors on is just
the government regulation risk around SDA and the NDIS.
As we talked about at the beginning of the call or podcast that the SDA component, we
feel comforted by the fact that SDA is such a small amount of the NDIS budget and SDA
caters towards the most people who need the NDIS, that from an overall regulatory perspective,
that SDA is protected.
But of course, we can't give absolute guarantees around that.
However, it's very much written into all of the information that's published about SDA
that it is here to stay.
And it has kind of at least a 20 year life on it, which is how we model our assets.
So they've kind of got a 20 year life and then they revert back to existing stock.
So that's probably the biggest and most obvious risk.
The next one is, which concerns me more broadly for the sector, is what I call product obsolescence.
So when you think about the iPhone, when you go to get a new iPhone, you're never going
back to the iPhone one.
You're always going to what's the latest, what's the last couple of generations I can
afford, or if you can't afford it and the budget, you know, in your personal budget
is unconstrained, then you go for the latest iPhone.
So there will be more supply that comes into this sector over time.
And so you want to make sure that the stock that you're buying and owning is going to
last the test of time.
So it's going to be attractive to participants now, and it's going to remain attractive over
the long term.
So it can't easily be usurped by someone building an asset closer to the shopping center, closer
to employment or education opportunities.
You want to make sure that your portfolios is safeguarded for that increased supply that
will inevitably come in over time.
Now the last one, which I was more concerned with, you know, prior to the price guard review
than I am today was the income reversion.
So what happens if you do have assets that are full of higher funded participants and
slowly over time, they unfortunately need to move on or move out and they're replaced
with lower funded participants.
Whilst we did factor into our modeling income reversion occurring over the first five or
six years of an asset to what we deemed a more sustainable tenant mix, much of that
has been offset by this SDA price guard review.
So that doesn't worry me as much anymore.
So those would probably, what we hear from investors is, you know, the regulatory risk,
which, you know, is there, but we don't think it's so present for SDA, but also the making
sure that we've got the right assets that stand for the test of time.
That's probably the biggest thing that we're focused on.
Well, unfortunately, no one's been able to recreate Roman concrete.
So you know, things like concrete cancer and you know, the age of a building and the maintenance
of that building, what happens, you know, as this is building built for 20 years, these
are all new dwellings being purchased, right?
But you know, you just look at any, every single suburb, you know, beautiful houses
30 years ago, they get old, you know, tired.
Does that keep you up at night?
You know, considering, yes, there's changes to the regulatory scheme, but you know, the
dwellings will need in your portfolio, rejuvenation in time.
Like, how does that get factored in?
Yeah, I mean, this is the very reason why we have, you know, the house view that that
real estate is not a passive asset and why we have built in Barwon a significant asset
management team to help maintain and improve our assets across all our funds.
So across the healthcare funds, it's very much the same thing.
So how do you make sure your assets remain attractive to the existing operators or, you
know, GPs who are there at the moment?
And how do we make sure that, you know, those existing, those operators expand with us over
time instead of moving into bigger premises?
How can we increase their footprint on the same piece of land?
Is a very similar mentality to how do we maintain our assets so that they're attractive to our
NDIS participant clients over the long term.
So of course, they're going to need, you know, upgrade and rejuvenation, but we factor that
in.
Each asset, you know, how it works in SDA is they actually enrolled for what's called
the new build funding for 20 years and then they revert to existing stock funding.
And so, you know, when we think about that, we look at a few different scenarios.
One is that they do return to existing stock funding and that rent drops by about 70%.
Two, we look at, you know, maybe that asset is tied by that point and it would be better
for residents.
There may be new product that sprung up locally and they might want to move across to that
new product.
So then we have a certain amount of refurbishment to take it back to residential and then sell
it on the market.
And then the last option, which we include in our analysis, but we don't rely on in terms
of our performance or underwriting of the assets ahead of acquiring them is actually
refurbing them and then getting another 20 year life out of them.
So as at today, there's no mechanism in place to basically recertify a new build dwelling
and get another 20 years.
It can only revert to existing stock.
My sense is that that will probably change over time.
The government, you know, in 10 years time may say, hey, we're facing a bit of a cliff
here where, you know, five to 10,000 residents are going to have to move out of their homes
potentially over the next 10 or so years.
Do we really want to rebuild a whole asset class again from scratch?
And then maybe a scenario where you actually do a larger style refurbishment and then release
it out again for another 20 years as new build stock.
So yeah, you know, like any other real estate asset class, it's not immune from having to
do upgrade works, but it's fairly low touch, you know, kind of in keeping with what you
would see in other residential properties.
So with the coming year and the coming years, as you said, you look at macro as in where
you're going first, you've got to raise on as well with those assets you're looking to
pick up.
How do you see the opportunity currently in the market?
Yeah, I mean, there's a little bit of the magic that we don't give too much away and
tell everyone all of our ideas, but there's definitely places we want to be very careful
on and then very other places that we're very bullish on.
You know, broadly, there seems to be a real push if you talk to the underlying customers
that they want to have, you know, where possible sole occupancy as opposed to shared.
So they would prefer to live in a one bed villa or apartment than necessarily have to
share with other people.
Now the tension there is that the NDIA, because it's more cost effective to do so, would prefer
to provide shared accommodation funding.
So that's kind of the kind of one balance that we think about.
The next is that supply demand dynamic.
So, you know, northern parts of Adelaide, southern parts of Adelaide, you know, lots
of parts of WA, stretches of Victoria we really like, whereas also all across New South Wales,
anywhere that's kind of really structurally undersupplied.
And then there's these pockets of extreme oversupplied.
So northwestern suburbs of Melbourne has a significant amount of SDA units.
That's somewhere where, you know, we have the amber or orange light on.
And also, you know, that South East Queensland example that I spoke to earlier, not that
we wouldn't go anywhere in South East Queensland, but particularly places in like Caboolture,
Logan and Ipswich.
You know, we still remain very cautious in areas like that.
So Joss, with all that being said, what keeps you up at night and what gets you out of the
bed in the morning?
Great question.
What keeps me up at night?
Not too much at the moment.
I mean, to date, the sector's been fairly well buffeted from interest rate rises, you
know, against say other core asset classes that, you know, 12, 18, 24 months ago, you
were seeing really core Australian real estate trade in the kind of four and a half to five
and a half range.
You know, we were buying assets in this sector at a substantial spread to those core asset
classes, so anywhere from six and three quarters seven up to seven and a half to eight percent.
So, you know, with our cap rates substantially above the risk free rate, we've been a bit
protected from that, you know, that support of cap rate expansion that we've seen in other
sectors, which has been good for SDA.
However, you know, if central banks continue to have to fight the inflation fight and keep,
you know, ratcheting up further, you know, there will be at some level or at some point
that will start affecting SDA.
Today, we've been buffeted, but you never know what might come down the line.
The second is making sure, which is probably is the answer to both questions, is making
sure that we've got the right property that's going to keep our tenants happy.
And we've got the right care provider partners and the right SDA or property manager partners
to keep make sure that our tenants are happy and want to stay with us.
And so that's both what keeps me up at night.
You know, we are dealing with a really vulnerable part of our society.
We want to make sure that we're setting up real estate and agreements and systems and
processes that those people are being taken care of.
But also that's what gets me up in the day because it's really nice to be able to go
to work.
And, you know, whilst we work in this fairly esoteric world of finance, sometime at the
end of the day, the product that is actually being delivered on the ground is making a
pretty substantial difference to not only that resident or that participant's life,
but also to their family.
You know, we went to an opening of our High Wycombe asset, which is in Perth earlier this
year.
And it was just fantastic to meet with the residents that were coming into that property,
meet with the families.
You know, you've got to remind yourself that many people with disability are kind of in
that 40 or 50, maybe late 30s to 50 kind of age bracket, meaning their parents are in
their kind of their 80s and very much are concerned about when they're not around, how
their children are going to live and where they're going to live.
And so it was really lovely to hear some of the relief in the voices and the commentary
around some of these parents that their child is actually going to live in a really nice
brand new property that they can be proud that their child is living in.
So, you know, a big focus on making sure that we've got happy participants is both what
keeps me up at night, but also gets me up in the morning.
You just jogged my memory.
One of the questions we discussed at lunch was I found quite interesting.
Is it correct that there is no financial limitations on what someone can access as a property?
You don't require a minimum income or your family doesn't need to be incredibly wealthy
to be able to apply for one of these dwellings?
Yeah, correct.
There's no means testing.
Yeah, no means testing.
It's very much a system set up around your level of disability or level of impairment
rather than your economic means or that of your family.
I mean, the majority of people who have a family member with a disability, you know,
it's quite, it used to be quite a large financial impact.
Today it's been much, much, it made much, much easier by the NDIS and financial impact
not only for maybe the specialist equipment they needed, but the time of work that was,
well, time out of work that was required to be able to care for that loved one has a quite
a large impact on the family.
So it's great to see that the NDIS can actually help support those families as best as possible
and reduce that economic burden.
But no, it's not means tested.
Yeah, look, it's been great having you on and listening to your thoughts because, you
know, as we discussed earlier, this has been running for a while and this, you know, obviously
with any scheme, there's a whole lot of people that want to come in and, excuse my French,
take the piss, but it's good to see that good operators like yourself are literally giving,
you know, hope and comfort to families, you know, where essentially they can live close
to loved ones, right?
It's a very good scheme, which is what's occurring.
If anyone was to learn more about Barwon or, you know, the opportunity you currently have
right now to access the investments you're looking to pick up, how are they best to find
you and learn more about what's happening?
Yeah, look, I mean, there's a few different ways.
The most obvious one is our website, which is www.barwon.net.au, a simple Google searches
of Barwon Investment Partners or, you know, Barwon Disability Accommodation Fund.
We also have some videos on YouTube, you know, detailing our quarterly updates as well as
some tours of some of our assets and even some industry style podcasts and kind of webinars
that we've hosted as well, where people can do a little bit of self-learning before getting
in touch with one of our business development teams.
So either Kate Haywood or Brett Scallon, there'll be an opportunity to either get in touch throughout
our phone line, which is on the website or on Google, or there'll be an inquiry form
there as well.
And one of our business development representatives will be able to get in touch with them.
Well, Joss, it's been really good having you on.
I've really enjoyed this conversation.
I really appreciate it and I hope you have a great day.
Thank you very much Murdoch.
It's great to connect and chat here and thanks very much for having me and all the best with
this great podcast of yours.
Thanks Joss.
Have a great one.
Bye.
Thank you.
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