How build-to-rent models will fare in
Australia’s property market
Housing needs are evolving in Victoria due to affordability concerns, seeing a quarter of Victorians renting homes and 20% renting for over 5 years.
The Victorian Government has announced a suite of measures supporting a viable build-to-rent model in response to the market shift.
The government will clarify tax arrangements, facilitate planning assessment, financially support build-to-rent in community housing, and establish an industry working group. It is also set to fast-track permit applications for build-to-rent projects.
Tax changes are also planned, including amending guidelines for the foreign investor stamp duty surcharge and the vacancy tax rate so that build-to-rent developments qualify for an exemption.
Other recent reforms to the Residential Tenancies Act which aim to shift mindsets about renting as a secure, long term lifestyle choice and an attractive alternative to buying will also stimulate interest in build-to-rent projects.
Build-to-rent is a response to evolving housing needs where more people are either needing or wanting to rent and are doing so for longer.
In the US, build-to-rent’s financial success is made possible partly because of the financial system, particularly its banking and debt systems. The financial market is primarily driven by private capital. The US build-to-rent market has delivered projects aimed at tenants across all income levels given more flexible private funding options and longer term return hurdles.
Comparatively, in Australia, current market conditions mean that a large-scale build-to-rent model will only work if it caters primarily to high-end rentals. Our stringent and highly regulated banking sector also does not have the evidence base to support funding this type of asset. Moreover, Australia hasn’t had the level of low rental supply that has underpinned its success in overseas markets.
Up until the recently announced changes, the taxation landscape for build-to-rent assets was unfavourable to institutional investors looking to invest in this asset class, creating a lack of patient, low-cost capital for developers. This meant investing in build-to-rent assets would be taxed at the company rate between 27.5% and 30% instead of 15% under a Managed Investment Trust (MIT) ownership structure.
In July this year then-Treasurer Scott Morrison announced reforms to the legislative framework that govern how build-to-rent projects are treated by the Federal Government from a MIT perspective.
This has enabled significant opportunity for developers to develop out and retain these assets which provide not only a recurring income but longer term annualised return on capital with much lower risk.
Not having to sell completed product eliminates investment risk – particularly in a political environment where sudden and unplanned legislative decisions, such as removing offshore investment in Australia and APRA’s lending changes, have had significant negative impacts on the development market.
The first build-to-rent approval in Victoria is for a 60-level apartment block on City Road, Southbank, which is being developed by Grocon. The developer is actively looking for more opportunities across Melbourne and Sydney.
Information for this article was sourced from original stories published in The Urban Developer on 14 August and 2 October 2018.