Build-to-rent's housing potential runs into Australia’s construction cost wall

Australia’s build-to-rent sector could play a much larger role in easing the housing shortage, but rising construction costs, tax disadvantages and increasingly challenging project economics are holding back its expansion.

The sector has attracted growing institutional interest, with investors looking for long-term rental income from professionally managed residential buildings. Yet a combination of expensive construction, financing hurdles and policy settings has left a substantial pipeline of approved projects waiting to get underway.

Research commissioned by property developer Freecity and conducted by the University of Melbourne argues that Australia could deliver rental housing faster by pairing build-to-rent (BTR) with volumetric modular construction (VMC), in which apartments are manufactured and fitted out in a factory before being transported to the site for installation.

The report, Enabling Volumetric Modular Construction in Australia’s Build-to-Rent Sector – International Policy and Governance Recommendations, compares Australia’s approach with those of the UK, Canada, Singapore and the US.

It finds the two models have natural synergies. BTR buildings typically contain hundreds of apartments with repeated layouts, while a single institutional owner retains the property over the long term. Those characteristics suit modular construction, which can reduce construction timelines by 25 to 50 per cent, according to the research.

But the report argues that Australia’s tax, planning, finance and certification systems have not kept pace with the model’s potential.

BTR accounts for just 0.2 per cent of Australia’s residential market value, compared with 5.4 per cent in the UK and 12 per cent in the US.

Freecity chief strategy officer and report co-author Steven Mann said the sector was still in its early stages locally.

“It’s rare for a country to have the chance to grow a new type of housing,” Mr Mann said.

“BTR is already one of the largest property investment markets in the world and Australia only started delivering it this decade.”

Mr Mann said modular construction could support the delivery of large numbers of high-quality rental homes, potentially allowing Australia to deliver more than 10,000 such homes annually by the next decade if it matched the growth rates recorded in the US and UK.

The report also argues that expanding BTR need not come at the expense of home ownership. Rather, it could address the growing need for rental housing as demographics and household preferences change.

Thousands of apartments remain stalled

The challenge is getting projects out of the feasibility stage and into construction.

Apartment construction costs have increased by about 80 per cent over the past decade, from around $2,500 to $4,500 per square metre. More than 26,500 BTR apartments approved since 2023 have yet to start construction, representing 64 per cent of the approved pipeline.

The report identifies six areas requiring reform: tax, finance, modular construction incentives, planning, certification and insurance, and logistics.

GST is one of the central issues.

Developers building apartments for sale generally pass GST on to purchasers, while hotel and serviced-apartment operators can claim back GST in circumstances where the relevant rules permit it. BTR owners, however, cannot recover GST on construction costs because residential rent is input-taxed, leaving the full 10 per cent as an unrecoverable cost.

The report points to Canada, which introduced a 100 per cent GST rebate for new purpose-built rental housing in 2023, and the UK, which applies zero-rated VAT treatment to the construction of new homes.

Other recommendations include establishing a national modular-building certification scheme, introducing a clear legal definition of BTR in state planning rules where one is absent, providing design guidance for modular projects and considering government incentives.

The report also recommends clearer investment pathways for institutional investors, including superannuation funds.

University of Melbourne lead author Dr Xiao Ma said overseas experience showed how policy certainty could help establish the sector.

“Modular construction is well proven overseas,” Dr Ma said.

“In the countries we studied, BTR and modular construction grew quickly where governments provided pipeline certainty through enabling policies such as tax, government-backed finance, planning recognition or guaranteed demand on public land.”

Dr Ma said many of the Australian barriers emerged at the beginning of a project, when investors were deciding whether it was financially viable to proceed.

Private credit presents a second risk

Even if policy settings improve, funding conditions remain an obstacle.

Separate analysis from Cushman & Wakefield suggests Australia’s institutional BTR sector is relatively insulated from the stress emerging in private credit markets, but warns that tighter lending conditions could still make new developments harder to deliver.

Institutional developments generally have substantial long-term equity backing and access to senior debt from banks and non-bank lenders. Traditional build-to-sell developers are more likely to rely on private credit when they need greater flexibility around presales, leverage or project complexity.

Cushman & Wakefield director of living research for APAC Josh Rose-Nokes said BTR was not impervious to wider market pressures, but its funding model provided some protection.

“BTR is not immune to what is happening in private credit, but its funding profile is quite different to much of the traditional residential development market,” Mr Rose-Nokes said.

The bigger concern is whether stress in private credit spreads into the wider lending market.

If lenders demand more equity, reduce leverage or impose more conservative conditions, developers could face a higher funding hurdle. Projects that already struggle to meet feasibility requirements could then be delayed or abandoned.

Cushman & Wakefield has seen little tangible evidence of a broad deterioration in BTR funding conditions to now, with competition among banks remaining healthy and well-capitalised groups continuing to secure competitive terms, but feasibility is already a major hurdle.

The firm’s 2026 APAC Living Investor Survey found 56 per cent of investors targeting Australia were pursuing private rented sector or BTR opportunities. At the same time, 40 per cent identified scheme feasibility as the main barrier to increasing their exposure to Australian living assets.

Its modelling shows just how tight the numbers have become. To support development costs at prevailing yields, BTR rents would need to grow by approximately 6 per cent annually in Sydney and 6.5 per cent in Melbourne through to 2030.

That compares with rental growth of 5.2 per cent in Sydney and 6.4 per cent in Melbourne in FY2026.

Mr Rose-Nokes said even relatively modest changes in lending conditions could influence which projects proceeded.

“If risk is repriced across the broader debt market, leverage falls or lenders require more equity, that can move the feasibility hurdle again,” he said.

“In a sector already working hard to make projects stack up, relatively small changes to financing assumptions can influence whether new housing proceeds.”

Construction partners still carry risk

BTR’s access to institutional capital does not remove the risks associated with construction itself.

Contractors often work across both build-to-sell and BTR projects. Losses on fixed-price contracts, delayed payments or financial problems elsewhere in a contractor’s business can weaken its working capital and affect its ability to complete a project, even where the development has sound funding.

That makes due diligence on construction partners increasingly important.

Cushman & Wakefield international director and head of living APAC Conal Newland said investors needed to look beyond the funding structure of the development.

“Investors need to look beyond the funding structure of the BTR project itself and understand the financial position and workload of the contractors delivering it,” Mr Newland said.

“Strong due diligence, realistic construction pricing, contractual protections and ongoing monitoring are increasingly important when the broader development market is under pressure.”

Could BTR pick up stalled projects?

The squeeze on traditional development finance could also create openings for institutional BTR investors.

Where a build-to-sell project stalls because its developer cannot secure presales, refinance or obtain development finance on workable terms, a well-capitalised rental housing operator may be able to acquire the site and adapt the scheme for long-term rental.

Mr Newland said those opportunities were most promising at sites or early-stage projects where there was still scope to change the apartment mix, amenity, operating model and capital structure.

“If viable build-to-sell projects stall because developers cannot achieve presales, refinance or secure development debt on workable terms, there is an opportunity for institutional BTR capital to step in,” he said.

Such acquisitions would not resolve the sector’s broader feasibility problems, but they could keep some housing projects moving rather than allowing them to remain stalled.

A more established BTR sector could provide another source of professionally managed housing to boost rental market supply, while modular construction offers a way to shorten delivery times and improve productivity.