The build-to-rent industry is gaining strength in the United States and Europe, but it has a minimal footprint in Australia.
Also known as “multi-family” or private rental sector, where long-term residential leases of up to five and 10 years are made available to tenants, this sector could be about to have its role in the affordable housing debate made more prevalent.
The affordability of the owner-occupier market is becoming increasingly problematic. The AFR has reported that a third of Australian households rent and more than 40 per cent who are renters have been so for more than a decade. According to CoreLogic, there is a growing trend of people not being interested in buying a home. Employment mobility is likely to a significant reason for this situation.
The GST, stamp duty, land tax, sales commissions and other costs related to the acquisition and sale of residential properties are impediments to those who regularly relocate for employment reasons. Rent.com recently surveyed 2,000 renters regarding reasons for their choice to rent, finding that 20 per cent of them chose to rent as they are uninterested in real estate or they use their capital to invest in other investment classes.
In its recent report Unsettled: Life in Australia’s private rental market, research entity CHOICE indicates rental rights in Australia are deficient to those found in other developed countries, where renters can secure long-term arrangements with strict limits on rent increases, property management, and the rights of landlords to arbitrarily remove tenants.
Institutional investors have traditionally not considered this market due to the relatively poor yields of the residential property market. At a recent Australian Housing and Urban Research Institute event, Federal Treasurer Scott Morrison noted attention must be paid to increasing the availability of rental stock, and improving the structural arrangements of government and finance to provide more opportunities for institutional investors.
Superannuation funds are being encouraged to become active in the sector. Mirvac is investigating the opportunities. Salta Properties are developing a 260-unit, $330 million tower at Docklands in Melbourne for the build-to-rent market with leases up to 10 years in length. It is understood Frasers and Stockland are also investigating the sector. The UBS Grocon Real Estate managed fund will hold 1,250 Gold Coast rental apartments built for the 2018 Commonwealth Games.
The build-to-rent market in the United States is valued at US $163 billion per annum. In the US and Britain, this sector delivers returns of between four and seven per cent. In some city-focused markets such as New York, however, the product focus is high-end modern apartment towers with shared services, property management and often a community space, not “social/community housing dwellings.”
The high-end modern apartment market may be the focus of any future development of the Australian build-to-rent market. Despite the potential for existing developers to convert current and future projects from build-to-sell to build-to-rent models, Australia’s expensive build costs, costly and lengthy planning and development approval regimes, costly infrastructure charging regimes, and restrictive funding opportunities are likely to see “affordable housing” opportunities limited to only a few percentage points of the whole market.
Property developers have noted that the current negative gearing regime, capital gains tax concessions, the need to amend the Tax Act Division 6C property public trading trust definitions to classify apartments as assets for operating income and not capital growth, and changes to land tax arrangements are required to make the build-to-rent market a viable option for Australia. Land available at below market rates from government assets may need to be a precursor for success in the establishment and early years of this sector.
Affordable housing developers and practitioners need to consider partnering with larger developers, local or state government agencies to develop the build-to-rent market. Given the focus the federal government has placed on affordable housing prior to and since the federal election, the federal budget needs to bring the necessary policy settings in the areas noted above to help build the sector.