Build-to-rent transforming housing landscape

The build-to-rent (BTR) market is set to boom in Australia as the model that is already massively popular overseas takes hold through added tax incentives and an influx of international developers seeing the housing crisis as an investment opportunity.

Melbourne was home to more than half of all BTR projects completed in Australia last year and 83 per cent of the total number of units built – 1,600 in total – but Brisbane is now emerging as a hotspot too.

In the face of a housing crisis going from bad to worse and Government plans to build an extra million homes this decade already faltering at the foot a struggling building industry and persistent labour shortages, BTR is emerging as a potential knight in shining armour for the housing sector.

According to a recent report by Colliers International, approximately 85 per cent of Australia’s BTR market is being driven by international investors. These investors are partnering with local developers to create purpose-built, high-quality rental properties in prime locations across the country.

Brian Washbourne, Director, Conjunction Realty, said the rise in demand for affordable housing and the ongoing trend towards urbanisation meant BTR developments were becoming increasingly popular in Australia and delivering dual benefits.

“Not only are these developments providing much-needed housing to a growing population, but they are also attracting foreign investment,” he said.

“The rise of BTR developments is only going to continue in the coming years.

“International investors are able to diversify their portfolios and access attractive returns in a low interest environment, while local developers are able to secure funding for their projects and access new markets.”

Mr Washbourne said that despite uncertainty about foreign investment in Australia’s residential property market, BTR developments are likely to continue to attract international attention.

“With a shortage of affordable housing and a growing demand for rental properties, these developments are filling an important gap in the market and providing much-needed assistance to those looking for a place to call home.”

BTR finally taken seriously by policymakers

Reforms adopted by the Albanese Government in last month’s Federal Budget reverse 2019 legislation that doubled the Managed Investments Trust withholding tax rate from 15 per cent to 30 per cent on payments to foreign investors from residential housing income. Overseas investors are the BTR industry’s primary funding source.

Victorian Treasurer Tim Pallas has recently stressed the importance of the BTR sector in addressing the rental crisis and said it was already playing a massive part in keeping rents from soaring further.

In Victoria, eligible BTR developments receive a 50 per cent reduction on the taxable land value for land tax and a full exemption from the Absentee Owner Surcharge for up to 30 years.

The number of BTR properties in Australia is set to reach 16,000 by 2027, which is a significant indicator of the changing mentality around property ownership.

After years of neglect, the Federal Government was finally taking BTR and the wider housing crisis seriously, according to Steve Douglas, Executive Chairman, SMATS Group.

“We need housing supply incentives and finally they are doing something – increasing the rental allowance for investment in BTR to 4 per cent (from 2.5 per cent) and that’s important because we need to give encouragement to investors,” Mr Douglas said.

“For the last 15 years all the Government has done is make it harder for investors, with more taxes, less deductions, and what have they got – a rental crisis – because people say I’ve got one or two investment properties but I’ll sell or not get another, so we’ve ended up with a shortage of rented investment properties.

“Also on the supply side, the Government is also going to give a reduction on the withholding tax rate if a managed fund from overseas buys the apartment block and rents it out.”

“It’s great they’re addressing supply side issues as that’s what we need but we’re going to make a big corporation richer than it already is, so I don’t like this model essentially, but it will be good for investment at least and if it puts more houses on the deck then it’s not a bad thing.

“There’s also $2 billion boost to the Social Housing Guarantee Fund, so if you are a developer and you’re going to build social housing you’re going to get loan support guarantees, not cash, but they will underwrite your borrowing, and that is on top of $7 billion in November, so that’s a big start and they’re heading in the right direction in terms of doing stuff for housing.”

Brisbane a build-to-rent hotspot

Benson Zhou - Judge, PropertyGuru Asia Property Awards and Director, Savills Melbourne, told API Magazine that Sydney remained a more difficult BTR market from a feasibility perspective but Brisbane loomed as the next hotspot.

“From a more national perspective, we are seeing interest increasing in Brisbane.

“Recent data from the federal government shows that Queensland’s population is forecast to grow more than 16 per cent, most likely in the Brisbane area, by the time Brisbane hosts the Olympic Games.”

Mr Zhou said build-to-sell units were becoming increasingly difficult to complete and there was a massive pipeline of BTR projects in place that could total $91 billion.

“BTR is becoming more of a quick fix to get units up faster, which is why we’re seeing a lot more developers investing in these types of builds.

“The short of it is the population is growing faster than the current stock, coupled with many people not being able to afford a house because of rising inflation and interest rates – in fact, the average age of first home buyers in Australia has jumped up to 36.”

The surge in the BTR sector was no longer limited to inner city areas either.

“There is an influx of international students in inner cities and suburbs close to universities but people are being driven to more outer city limits due to capital city property price rises and we’re seeing more BTR builds in those types of areas.”

Emulating UK’s growth of build-to-rent

BTR has grown exponentially in the United Kingdom over the past couple of years, although a slowdown this year has shown the sector is not immune to headwinds facing the wider construction sector.

The UK’s BTR stock now stands at 82,500 completed homes, with a further 49,500 homes under construction. There are a further 119,300 homes in the pipeline, including those in the pre-application stage. The total size of the sector is 251,200 homes completed or in the potential pipeline.

BTR expert and i2C Associate Architect and Residential Lead for i2C Architects, Marcus Greening, recently undertook a tour to study the developing nature of BTR projects in London, Brighton, Manchester, Leeds and Glasgow, where this type of development model has been prevalent for the past decade.

“BTR is responsible for housing an incredibly large number of people in the UK. The most successful schemes we saw were ones that integrated the BTR community with the wider social fabric, which in part is understanding the diverse types of demographics that go into creating a community.

BTR development Paloma House will be managed by Pellicano Living.

“These projects actually utilised the wider neighbourhood for their amenities, allowing the community to participate in the overall success of these BTR projects, creating a ‘village-like’ feel, that is often lost in traditional multi-residential developments,” he said.

“As inflation and cost of living continues to chip away at the ability of regular Australians to become homeowners, BTR challenges the traditional notion of buying your own home and setting down roots.

“It’s a model which eradicates the expense of home ownership and mortgages, but still offers the ideation of community that resonates so well with Australians,” Mr Greening said.

Reinforcing the perception of Victoria and Queensland as the biggest magnets of BTR investment, Pellicano’s Managing Director, Nando Pellicano, said the company has a further 410 build-to-rent apartments under construction, which will be progressively completed over the next 15 months, in Woolloongabba, Fortitude Valley and Kangaroo Point in Brisbane, and Geelong in Victoria.

The diversified developer has lodged plans with council for the latest addition to its growing 2,000 apartment build-to-rent pipeline, a $225 million precinct in Robina set to include 418 residences.

“Build-to-rent will continue to be a key area of focus for Pellicano – we will continue to seek out well-located sites across both Victoria and Queensland, where we can deliver high-quality residences to growing populations,” he said.

With the BTR model of living now firmly in the spotlight and earmarked as part of the solution to Australia’s housing crisis, Mr Greening said now is the perfect time to examine the best practices for introducing the model into the areas set to receive new BTR projects.

“The success of the BTR model is defined by the overarching objectives of the developer, who will retain ownership of the building for 30-plus years, placing a greater emphasis on longevity - of both common spaces and apartment fixtures and finishes. Essentially the most intuitively designed projects that prioritised resident wellness and lifestyle quality, were the projects that excelled in the UK.

“This goes hand in hand with more sustainable practices, which in turn can minimise outgoings and running costs.”