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Housing Affordability - is Build to Rent the Answer?
If you believe the hype, build-to-rent is the answer to Australia’s affordable housing crisis. What is it, and does it really mean we can all rest easy?
Build to Rent – a Primer
Build-to-rent (BTR) involves the construction of dwellings specifically for the rental market, rather than the more traditional route in which developers build dwellings to sell, either to owner occupiers or investors.
Essentially, BTR is a long-term investment vehicle with the developer either holding the building and collecting the rental profit over a prolonged period, or selling shares in the project to institutional or private investors who collect the apportioned profit. This is a model potentially suitable for superannuation funds, both small and large.
The dilemma is that there is confusion with many people who assume that BTR will automatically provide affordable housing. In fact, whilst the build to rent model has the potential to be harnessed for affordable housing, and has been in the US, UK and Japan, it is at its core an investment vehicle. Accordingly, it does not inherently seek to provide affordable housing as a primary tenet.
Recent research undertaken by Development Finance Partners1 suggests that Australian financial sector regulations and tax hurdles (including capital gains tax regime and negative gearing) restrict the feasibility of the BTR model to high value rental properties. This means that whilst there may still be some broad benefits in increasing rental housing supply, this is unlikely to extend to the more affordable sector of the market.
This is consistent with the first BTR projects we are seeing in Australia, including:
- 256-266 City Road, Southbank (Grocon): Site with an existing approval, purchased in January with intention to develop BTR apartments aimed at executive tenants.
- Commonwealth Games Village, Gold Coast (UBS Asset Management and Grocon): 1200-home project which will be turned into long-term rentals after the Games.
- 2-28 Montague Street, South Melbourne (Gurner): has proposed 128 build-to-rent apartments within a $1.5 billion mixed-use luxury development in Fishermans Bend.
- 319 New South Head Road, Double Bay (Fortis): A boutique long-term rental development which will offer leases of up to five years.
- 393 Macaulay Road, Kensington (Make Ventures and Assemble): A hybrid built-to-rent-to-own model termed ‘The Assemble Model’. Prospective purchases sign a five-year lease with the option to purchase their home for an agreed fixed price at the end of the term, being today’s market price with fixed 1.75% increases per year for approximately 7 years.
These projects are commendable for their willingness to take a risk and test the BTR model in Australia, but will not, and are not intended to, deliver affordable housing. They may contribute to housing supply and hence soften prices at the upper end, but if we are looking to BTR to provide affordable housing (as defined in the Planning & Environment Act, 1987), we have some work to do!
Having said this, there are several benefits to supporting a build to rent model in Australia, including:
- Improved housing options by increasing supply of stable rental accommodation;
- Opportunity for longer-leases and security of tenure which facilitate connection to community and other social benefits; and
- Better quality construction and design of rental housing given the developer usually retains the property.
The housing affordability crisis is not just about home ownership and Australia’s rental sector is struggling with burgeoning demand, particularly for longer-term rentals2. There is scope for BTR to facilitate a fairer and more attractive rental market, and this should be supported.
What are the Impediments to BTR in Australia?
BTR is the second largest property sector in the U.S. Why isn’t it booming in Australia?
The critical hurdle is the tax environment in Australia, which is very different to in the US. Here in Australia, land tax, GST and withholding tax each erode potential profits and the viability of the BTR model.
These financial barriers have recently been addressed in the UK with tax reform and the BTR sector starting to take off, with over 120,000 rental units either complete or under construction3. Notably, developer Quintain has embarked on the UK’s biggest build-to-rent project with 5,000 build to rent homes proposed as part of the 7,600-home Wembley Park development, with 32% (2432) of the homes to be affordable. Whilst the development is still under construction, 16% of the tenants to date are key workers such as nurses, teachers, soldiers and police officers.4
The Property Council of Australia and Urban Development Institute of Australia (UDIA), amongst others, are presently lobbying the federal government to makes changes to the taxation and financial structures around BTR. Specifically, they are seeking the Federal Government to apply the same managed investment trust (MIT) rules and tax rates that apply to shopping centres and office buildings to BTR. This would make BTR attractive to the same group of investors, typically institutional investors, which are seeking low risk and moderate, steady returns.
However, we need the developers to see that the supply of affordable housing using the BTR model can be financially successful, given the current focus is all about high-end rental housing, such as Tim Gurner’s Montague Street project.
To some degree the tax environment in Australia already provides some incentive for the BTR model to incorporate affordable housing. Notably, where a MIT derives at least 80% of its income from affordable housing, it is subject to more favourable tax rates that apply for commercial projects.
However, despite this tax incentive, it would appear that it is not enough for the Australian market to use BTR to increase affordable rental housing supply. By comparison, in the U.S, where the BTR model is supplying affordable housing the private market is incentivised by significant government subsidies to the tune of approximately 60% of the construction cost5.
What’s the Australian Solution?
It is an opportune time to harness BTR for affordable housing in Australia. The BTR model is becoming more attractive to investors as the residential apartment market slows and confidence in the long-term rental market gains momentum. This change in circumstances, coupled with growing concern around housing affordability and budding interest in social impact investing, provide a strong foundation for the market to take the next step.
Financing is a key reform and Australia is making progress with the National Housing Finance and Investment Corporation (NHFIC) established as a bond aggregator to raise money at lower rates from the wholesale bond market for not-for-profit community housing providers.
This same model could be accessed by private investors who are developing BTR affordable housing. For example, developers may be allowed to secure funding for an entire BTR development through the aggregators where at least 30% of the development will be secured as permanent affordable housing.
On the taxation side, Launch Housing recently received a ruling which allows landlords who list their property with an agency at a discounted rental rate to claim the gap as a tax deduction6.
These reforms are a good start, but, given that rent for an affordable dwelling will need to be discounted to below market rate, there will still be a sizeable gap between the income generated by affordable dwellings and the cost of development and profit expectation. Based on the US model, the ‘gap’ will be approximately $175,0000 per affordable unit5.
Asking the government to fund a gap of $175,000 per unit may sound like a big ask, but equates to a cost of just $112 per week over the 30-year life of the unit. Given recent Victorian government announcement to grant $2 billion in social and affordable housing support, this could equate to nearly 11,500 affordable houses.
Notwithstanding this option, the funding of a meaningful number of affordable housing units will require a significant steady funding stream from a variety of sources.
For example, diverting some of the $11 billion per year that that funds capital gains tax deductions and negative gearing to subsiding BTR affordable housing, could be a possible solution. There is also potential for the donation of surplus government land for affordable BTR projects, as foreshadowed by Plan Melbourne and Homes for Victorians.
Other, more modest subsidies could be achieved by:
- GST waivers on construction, building maintenance and rental income.
- Stamp duty waivers or reductions.
- Land tax waivers or reductions.
- Planning mechanisms including:
- The relaxing of planning requirements (e.g. height and setback controls, garden areas etc as is being considered for residential aged care facilities7).
- Fast-tracked planning processes.
Build to rent may just turn out to be property investment by different means. It may not be the housing affordability answer that its advance reputation has suggested. However, the willingness of the development industry to try this model suggests that it has a future in the Australian market and we welcome the benefits it will offer to the supply of rental housing. There is clearly an opportunity for the model to deliver affordable housing and we urge the state and federal government to work with developers and housing associations to understand how this could be realised.
Author: Mia Zar, Senior Planner
1. https://www.dfpartners.com.au/the-reality-of-bringing-built-to-rent-to-australia/
2. http://research.knightfrank.com.au/KFInsightMultihousing.pdf
3. https://www.bpf.org.uk/what-we-do/bpf-build-rent-map-uk
6. http://www.homegroundrealestate.com.au/category/latest-news/
7. https://www.planning.vic.gov.au/__data/assets/pdf_file/0013/110146/RACF-Reforms-Draft-Provision.pdf
HOUSING AFFORDABILITY GLOSSARY
There are a number of terms used throughout our Housing Affordability series that have multiple interpretations. For the purposes of clarification, we've put together a glossary of terms as we've used them.
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