Call Us NowSpecialist Disability Accommodation (SDA) has emerged as one of Australia’s most sought-after alternative property sectors. Backed by National Disability Insurance Scheme (NDIS) funding and attractive cash flows, SDA properties have attracted significant investor interest over the past decade.
However, one of the most critical and potentially contentious aspects of valuing SDA properties is often not the income during the Discounted Cash Flow (DCF) period, but rather the terminal value adopted at the end of the analysis period.
In some cases, the terminal value can account for more than 50% of the assessed value. If the terminal value assumptions are wrong, the valuation itself may be fundamentally flawed.
The challenge arises when determining what happens at the end of a 10-year or 20-year DCF period. One school of thought assumes SDA funding remains unchanged, SDA rents continue at current levels, and the income stream can be capitalised in perpetuity. While this approach may produce higher values, it assumes governments will continue to fund SDA accommodation at current levels indefinitely.
Our view is that this assumption requires careful scrutiny.
There is currently an estimated shortfall of approximately 14,000 SDA beds across Australia. The government’s objective has been to stimulate investment and encourage developers to deliver much-needed accommodation. The result has been rental streams that can be multiple times higher than conventional residential rents for comparable dwellings.
The critical question for valuers is whether this shortage will still exist in 10 or 20 years’ time.
As more developers enter the market and additional SDA stock is delivered, it is reasonable to expect that the current undersupply may eventually reduce. If supply catches up with demand, governments may have less need to provide the same level of rental incentives. Future policy settings may evolve, and funding levels could change.
Many SDA dwellings, particularly Independent Living and Improved Liveability designs, are fundamentally residential dwellings with enhanced accessibility features. At the conclusion of the DCF period, these assets may be capable of conversion to conventional residential use.
Accordingly, valuers should consider alternative terminal value scenarios, including:
• Sale of the property as a residential dwelling.
• Reversion to conventional residential rental income.
• Reduced SDA funding scenarios.
• Continued SDA operation under revised funding structures.
A residential reversion approach may provide a more realistic assessment of long-term value and better reflect the risks associated with a government-supported asset class.
The role of the valuer is not to predict government policy. However, it is necessary to assess risk and reflect market realities. A valuation that capitalises today’s SDA income stream into perpetuity assumes funding settings remain unchanged, supply shortages persist indefinitely, and future purchasers will pay for the same income stream decades into the future.
As the SDA market matures, prudent valuers should carefully consider whether the ultimate value of an SDA property is best reflected by ongoing government-supported income or by the underlying residential real estate that remains once the incentives that created the market have served their purpose.
In SDA valuation, the terminal value assumption may ultimately be the most important assumption in the entire valuation.
