Policy and partnering: time to rethink our approach to build-to-rent
New investment models and more government support for build-to-rent developments are needed to address the rising inaccessibility and unaffordability of rental housing in Australia.
Ensuring a supply of affordable and accessible rental housing is a perpetual problem for governments of all stripes.
In Australia, there are currently more than 400,000 people on waiting lists for public housing across the country, and construction is struggling to keep up with demand.
Pressure on affordable rental stock has been further exacerbated by the end of the COVID-related moratorium on rent increases and evictions in recent weeks.
Developers are no slouches where it comes to identifying gaps in the market, and moving to plug them – and there’s no question that in any capital and regional cities nationwide, there’s a real gap for rentals that are affordable, offer longer tenures and can be built at scale.
One apparent solution that would go a long way to filling the gap is build-to-rent. In the US and UK markets, build-to-rent developments are well established and widely used. So why are we so far behind in Australia?
The answer comes down to a combination of factors. For starters, build-to-rent is a relatively new concept here, and a model that developers, policymakers and financiers alike aren’t necessarily familiar with or set up for.
Typically a large-scale apartment development, build-to-rent projects are specifically designed, constructed and managed with the goal of achieving returns from long-term rental income rather than off-the-plan sales or capital growth.
From a funding perspective, that can present a challenge. In order to be successful, any build-to-rent model needs long term, patient capital, and Australian banks don't currently offer a loan product for that type of long-term arrangement.
The development financing model is predicated on providing construction finance, usually on a fixed minimum number of pre-sales, and an exit for the financier on completion of the build.
Institutional investment, and in particular super funds, may present a financing solution – and certainly that plays a significant part in the build-to-rent sector in the US, where private social housing funds offer attractive yields for investors.
In Australia, however, our residential yields are low in comparison to other countries, so while the investment model is there, it’s more difficult for private capital to justify the returns.
Scale is also a hurdle to attracting institutional investment for Australian build-to-rent projects.
The sector now has a foothold here, led by global operators such as US giants Sentinel Real Estate and Greystar Real Estate Partners, as well as Canada's Oxford Properties, and is featured in the plans of local developers.
Mirvac has a number of projects either completed or in the pipeline in NSW and Victoria, and is shooting for 5,000 build-to-rent apartments under management within five years, and Lendlease is also reported to be weighing up converting some of its proposed projects from sale to build-to-rent – but as of mid-2020 Australia had just over 2,300 build-to-rent apartments available, according to Savills, which is a drop in the bucket.
So how to accelerate the process? The answer requires a combination of government support and some innovative thinking on the part of the private sector.
There are steps that could be taken at a State Government level to make the build-to-rent sector more attractive. These could include reducing the cost of land for the purpose of these types of projects, or making government-owned land available specifically for build-to-rent developments.
Another policy lever is changing the tax treatment, such as GST, land tax and stamp duty, for this type of asset.
Some states have already gone down this path, with NSW in July last year announcing a minimum 50 per cent land tax discount for build-to-rent projects through to 2040 and Victoria following suit in relation to projects from 2022-2040.
Other state governments, however, are yet to introduce similar concessions. The other lever available to governments is in the planning space, and considering ways to streamline or expedite approvals for build-to-rent projects.
An expedited approvals process allows developers to reduce holding costs and provides an incentive to proceed with these projects – but while planning policy and approvals processes differ across local government areas a lack of clarity impacts industry confidence.
On the other side of the equation, private developers should consider how they could partner with community housing providers.
These providers are able to access a faster approvals pathway through local government, and are also usually able to secure cheaper funding – meaning a partnership could offer developers expedited approvals and reduced financing costs.
The challenge for developers in this scenario is arriving at a commercially-viable model in terms of funding and profit-sharing.
While there’s currently a willingness to consider involvement in build-to-rent affordable housing projects from a community benefit perspective, landing on a genuine commercial driver is required for the sector to achieve any kind of real scale.
Whichever way you slice it, there’s no question that state governments have a critical role to play in getting the build-to-rent sector off the ground in Australia by providing the policy frameworks and pathways needed to secure traction.
In the meantime, the private sector – from investors through to developers – should also be doing its financial modelling and some of the innovative thinking required to find commercial solutions, drive take up and plug that gap.