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By Fiona Hamann
May 28, 2018
Developers are leading the push to bring Build to Rent (BTR) accommodation to Australia as they could help dealing with Australia’s housing crisis enormously. However, if one is hoping to see the kind of uptake the US is experiencing, the Australian tax system must adapt.BTR is a ‘developer as landlord’ system of housing where developers or investors retain control of a property instead of selling it to private investors.
In the US, BTR is called multi-family housing and the market is already well established. It is worth $163bn and boasts over 500,000 multi-family related companies in the sector. BTR is also fast growing in the UK. In Australia, on the other hand, the progress is slower.
In 2017, Mirvac announced its intention to enter the BTR market, with the backing from Super Funds. Since then Lendlease, Grocon, and Stocklands have also expressed a willingness to get into BTR housing. Fortis Development Group is already building a BTR complex at Sydney’s Double Bay, offering high-end fixtures and fittings and long-term lease agreements of two to three years. In truth, securing long-term tenants in the highly desirable Double Bay would not be a difficult task, and rental returns will be at market average. Nevertheless, the issues become more complicated when it comes to other regions, when factoring in lower income, affordable and social housing.
With 194,600 people currently on social housing lists, BTR doesn’t present a financially viable option for investors who are keen to see a return on their investment. Encourage government subsidies for rent might be an option, but JLL’s National Director of Research Australia, Leigh Warner, believes that there needs to be a more comprehensive approach to resolving the issues and concerns of investors and making BTR an attractive investment.
Jobsite spoke with Leigh Warner, who has recently overseen the publication of JLL’s report entitled Build to Rent Residential: Australia’s Missing Sector, to understand why BTR has not taken off in Australia until now.
“There many very real challenges to making BTR work in Australia. Ultimately, some powerful forces support the sector and help overcome the challenges, including demographic and social trends, a strong product offering that will eventually be attractive to tenants, and some very strong incentives for large institutional investors to add the sector to their portfolio,” Warner says.
He continues: “From a government perspective, I think they will eventually realise that it is no longer be so enticing for private households to fund our rental stock as it has been in the past. Tax benefits get squeezed, and capital growth slows.
“Therefore, they will need to encourage BTR to get institutional investors to replace private investment, or supply will fall, and rents will rise significantly. This ability to help control affordability issues, including by potentially offering planning uplift for BTR developments with social and affordable housing incorporated (in a development), should encourage all levels of government to support and eliminate some of the current barriers to the sector’s development.”
Currently, traditional private investors can benefit from investing in individual rental properties through capital growth and negative gearing. However, as these tax benefits get squeezed, there is likely to be fewer private investors, which will create a shortfall in people buying properties and eventually will result in rental increases.
Added to this, the GST incentives for developers favour those building to sell, as they can recover the costs on sale. For BTR developments, on the other hand, these costs need to be paid upfront. They present an issue, and the money need to be recouped via rents, in a competitive market, where they are not on-selling the property.
While BTR investment is currently allowed with a managed investment trust (MIT), draft Housing Affordability legislation specifically excludes BTR (except for affordable housing) from being held in an MIT as it deems the investment is primarily for capital growth rather than income.
Some of the incentives already offered to developers in the USA include faster building approvals for multi-family housing and more substantial development area incentives. They create the opportunity for more homes than would otherwise be allowed for build to sell accommodation. This way, social housing can be integrated into the BTR.
Says Warner: “The incentive to build more BTR properties provides a value uplift. While BTR for social housing alone is not so appealing to investors, as they would need to rely on government rental subsidies or accept below market rent, when integrated with other housing, the losses of below market rent are offset by the market value rental return of other homes.”
According to the JJL report (link above), there are a number of benefits to BTR over private rentals, including tenant amenity (e.g. pools, movie rooms, recreational space); high levels of tenant service and the opportunity for developers to make additional income from services like dry cleaning, concierge services, and discounted bundled bulk utilities; lease flexibility, especially where a developer may have multiple properties. Tenants could have the option to move to another developer-managed property.
So, what is now needed to grow the BTR sector and attract eager developers, create affordable housing, and address some of our social housing backlog? The Government needs to review and revise some of the tax implications around managed investment funds, GST, and other tax incentives.
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