Build-to-rent: a field of dreams or renters' nightmare?
Build-to-rent (BTR) has increasingly been touted as a potential panacea for the Australian housing crisis but whether it shapes as the long-term saviour or short-term sugar hit is yet to be seen.
In the ever-evolving landscape of Australian real estate, the concept of build-to-rent (BTR) has garnered significant attention.
BTR, often likened to the iconic American baseball movie Field of Dreams, is reshaping the housing market, attracting a diverse range of investors, and offering tenants an alternative to traditional homeownership.
However, the question raised in the movie remains: “if you build it, will they come?”
So why is BTR captivating investors and tenants alike, and how impactful will recent tax reforms be in driving foreign investment and helping address Australia’s housing challenges.
BTR in Australia: a new standard in housing?
BTR, as opposed to the conventional build-to-sell approach that dominates the Australian property landscape, is gaining traction as an innovative solution that provides steady income for investors and offers renters security of tenure and improved living conditions.
This shift in focus comes in response to a significant transformation in Australia’s housing dynamics.
Currently, a substantial 32 per cent of Australian households are renters, a considerable rise from two decades ago when renters comprised just a quarter of households.
This demographic shift underscores the urgent need for alternative housing solutions, and BTR emerges as a timely response, aiming to create a win-for-all scenario for investors seeking stable income streams and renters in pursuit of secure and quality housing options.
Knight Frank’s newly released Build-To-Rent Report noted that in coming months and years, the pipeline of potential development is likely to expand further as developers seek to position themselves to benefit from the current surge in rental growth, although the actual quantum of schemes under construction may be slower to accelerate until construction cost pressures ease.
BTR’s double-edged sword for renters
The introduction of BTR projects in response to the current rental crisis in Australia can have both positive and negative impacts on tenants. BTR properties promise a sense of stability and prolonged security for tenants, a welcome departure from the volatility of the traditional rental market.
With a commitment to improved amenities, efficient management, and maintenance, BTR projects aim to elevate the living experience for tenants, potentially creating a more favourable renting environment.
The mandated three-year lease terms also bring a sense of predictability, soothing the anxieties caused by the rollercoaster ride of the rental market.
Still, it’s important to examine this situation closely, because the notion that “if you create it, they’ll arrive” has its limitations.
While BTR properties hold promise in terms of living standards, affordability remains a key concern. Rental rates in these developments are often market-driven, potentially leaving affordability challenges unaddressed.
Moreover, the surge in larger, high-density BTR projects may inadvertently overshadow the pressing need for smaller, affordable housing options, leaving low-income tenants still grappling for viable choices.
If BTR gains more traction and competition intensifies, it could put upward pressure on rental prices within the existing market, further constricting choices for those who don’t qualify for BTR properties.
Therefore, while BTR projects offer a glimmer of hope for enhancing rental conditions, they might not serve as a comprehensive panacea to the overarching rental crisis without supplementary measures to tackle affordability and accessibility issues head-on.
Tax reforms to spur foreign investment
The BTR market is most advanced in Melbourne, which leads the way among the major cities with 4,920 under construction and 8,250 approved, according to Knight Frank. Brisbane is next with 1,743 under construction and 2,567 approved, followed by Sydney with 1,529 and 965 apartments respectively.
To date, development has focused on one- and two-bedroom apartments, representing 36 per cent and 44 per cent of overall apartments respectively
Recognising the potential of BTR to address housing challenges, the Australian government has introduced pivotal tax reforms to incentivise foreign investment in the BTR sector.
For eligible new BTR projects, where construction commences after the budget release, the government is increasing the rate for the capital works tax deduction (depreciation) to 4 per cent annually over a 25-year period (it was previously 2.5 per cent over a 40-year period).
This change is expected to boost the attractiveness of BTR projects to both local and foreign investors by enhancing the returns on their investments.
Additionally, the government is reducing the final withholding tax rate on eligible fund payments from managed investment trust investments from 30 per cent to 15 per cent starting from 1 July next year. These tax changes, while not overly popular, are poised to reduce the tax burden on foreign investors, making BTR an even more enticing prospect.
API Magazine’s recent Property Sentiment Report Q2 2023 found that 46 per cent of our respondents disagreed (compared to 36 per cent in favour) with the policy that favours overseas multinationals responsible for much of the BTR development in Australia.
Furthermore, for construction projects that are build-to-rent accommodations beginning after 9 May 2023, the owners of these accommodations will be entitled to a capital works deduction of 4 per cent per annum.
This change, along with the reduced withholding tax, will make BTR projects significantly more appealing to foreign investors, aligning with Australia’s goal of attracting international capital to address housing shortages.
These tax reforms are a crucial step in facilitating foreign investment in the BTR sector, providing a win-win situation for investors and addressing housing pressures across Australia.
The reduction in withholding tax for many foreign investors in BTR projects will complement an existing concession introduced in 2019 for dwellings used to provide affordable housing.
To further sweeten the deal for foreign investors, eligible BTR properties will receive a 50 per cent reduction in land value for land tax purposes.
This substantial reduction in land tax will make BTR developments more financially appealing to investors. Moreover, BTR developments will enjoy an exemption from foreign investor duty and land tax surcharges, or a refund of surcharges paid.
These changes serve as a testament to Australia’s commitment to attracting foreign capital and alleviating housing pressures.