Next big thing?

Now the ‘build to rent’ housing model has arrived in Australia, the potential for the sector may be huge. So, will the foundations of Australia’s private rental market change?

Author

Geordan Murray: HIA Executive Director – Industry Policy

Over the past few years, the enthusiasm about the potential of Australia’s ‘build to rent’ (BTR) market has been growing. Unlike many other countries, Australia has little institutional ownership of residential property. The majority of our housing stock is owned by private households who either owner-occupy or supply the private rental market. This may all be about to change. 

What is ‘build to rent’?

In the conventional ‘build to sell’ housing model, each dwelling is sold to an owner-occupier or investor. In contrast, the ‘build to rent’ model sees the dwellings owned by a single entity and offered as long-term managed rental stock. 

BTR developments are not entirely new. Community housing providers operate using this model across Australia and supply subsidised rental housing stock, filling the gap between the private rental market and social housing. The BTR model has also operated in niche markets such as student housing and retirement living. 

Who’s building BTR?

Today in Australia there’s a large number of BTR projects in the pipeline and there is a seemingly long queue of investors willing to provide the capital. Investors are always keen to make strategic investments in an asset class expected to deliver strong growth over the long term. 

Mirvac completed its LIV Indigo development at Sydney Olympic Park last year which was the nation’s first major BTR development. The challenges of 2020 seemed to do little to slow the sector with several more BTR projects under construction around the country. 

The business case for some projects already stacks up but the viability of others appears to hinge on favourable policy reform.

Some hold the view that if the business case stacks up, the sector will grow organically under the current policy settings. The volume of projects that are already under construction is evidence that this may be the case. 

Others hold the view that the absence of a mature BTR sector in Australia is evidence of a market failure. They point to aspects of the federal tax system, state taxes and planning systems that combine to deter investment. 

 

IN THE CONVENTIONAL ‘BUILD TO SELL’ HOUSING MODEL, EACH DWELLING IS SOLD TO AN OWNER-OCCUPIER OR INVESTOR

 

Is intervention needed?

Reforms to reduce these barriers could kick-start a BTR boom in Australia. This was the experience in the US and the UK over the past decade. Aided by support from their respective governments, both countries have seen strong growth in the BTR sector. This raises the question of what role Australian governments should play in the BTR market, or if they should play any role at all. 

It is clear that governments have a role in ensuring all Australian households are able to access appropriate housing, but policymakers have been cautious about whether backing BTR is a worthy intervention.

Today there appears to be little appetite for reforms to boost the BTR market at the federal level. Recent housing policy has focused on supporting home ownership along with the delivery of social and community housing solutions. The 2017 federal budget introduced a concession for managed investment trusts that provide rentals at below-market rates. However at this time the government is unwilling to extend the concession to trusts providing market-rate rentals. 

Several states are progressing their own reforms. New South Wales and Victoria appear to be moving along a similar path but variations may still play out. Both announced a 50 per cent discount on land tax for the next 20 years and both have provisions to exempt BTR owners from foreign investor surcharges. 

New South Wales is further advanced having passed legislation in early 2021 to introduce market-rate BTR into the state’s planning framework. NSW also has supporting guidelines that set out a minimum requirement that 50 dwellings must be held in single ownership structure, a requirement for on-site management, and allowing at-market rental rates with the offer of longer lease terms.

Victoria is currently considering the definitional aspects of BTR and is expected to provide more details during 2021. 

Queensland has taken a different approach. The state is undertaking a pilot program that aims to encourage market-rate BTR developments that include a share of homes that are available for rent at below market rates.

 

THE BTR MODEL HAS OPERATED IN NICHE MARKETS SUCH AS RETIREMENT LIVING

Can BTR deliver on the promise?

The BTR sector promises a lot. It promises to improve the supply of housing, improve the quality of construction, provide better services for tenants, and better on-site amenities. It also promises to give tenants better security of tenure and flexible long-term leases. 

Proponents also claim that establishing a BTR market will improve affordability. If a BTR market can deliver more rental stock, the increase in supply may take pressure off rental prices. But an extra supply of housing is not guaranteed. Growth of the BTR market may simply shift ownership from individuals to institutions. 

There is no guarantee that dwellings within new BTR developments are going to be more affordable than existing rental stock. Supply and demand principles still apply. Institutional owners will seek to maximise the yield on their investment. 

Demand will be strongest for rental properties that offer the greatest amenity and these will be priced accordingly. In overseas markets, rents in BTR developments attract a large premium to comparable properties. So creating a high-end rental market in Australia may do little to support rental affordability in the remainder of the market.

The other side of BTR

BTR developments will only deliver properties at below-market-rate rents if it is financially viable to do so. This would need a firm commitment to a program of subsidies. The extent of government support will determine if the BTR market provides affordable housing. 

The amount of government support will be dependent on the government’s vision for the role of BTR within the broader housing market. To date, the vision has not been well articulated. The Queensland example seeks to deliver subsidised housing with a public benefit. The NSW and Victorian programs remain unclear on this front. 

A BTR market that provides subsidised housing on a large scale is very different to one that supplies market-rate or premium rentals. 

A subsidised BTR market and a market-rate BTR market are not mutually exclusive. It is possible to have them both but each is likely to require different forms of policy reform to reach an efficient scale. The diversity of housing stock would be improved if this could be achieved.

Australia has a growing population and home ownership trends imply that an increasing share will never own their own home. Inviting large-scale investment in residential property may be a pragmatic policy response.

Getting policy settings right as the BTR market grows and evolves will be a difficult balancing act. Most Australian households still aspire to own their own homes. Incentivising institutional investment while homeownership is falling will not sit well with everyone. 

 

Not an HIA member yet? By joining Australia’s largest national association for the residential building industry, you’ll get access to a range of member benefits, as well as industry products and business services designed to help you manage, operate and grow.

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