By Kylee Anastasi and Ann Cho
BTR and the Housing Crisis
Australia is experiencing a housing crisis on multiple fronts.
Homeownership is increasingly out of reach with PropTrack Housing Affordability Index showing housing affordability at its lowest level in at least three decades as of June 2023.
Tenants are struggling to keep up with rents as residential vacancy rates across Australia hovered around 1.3 per cent while asking rents for Sydney and Melbourne grew ~20 per cent annually[1]. Vulnerable people are waiting too long for secure housing with over 170,000 households on public housing waiting lists[2]. How can the emerging build-to-rent (BTR) sector play a role in our housing crisis?
In recent years, the BTR sector has attracted a lot of attention, however it is still a small piece in our broader, fragmented housing sector, making up a fraction of the total residential housing sector value.
BTR addresses a clear gap in our rental market by providing security and certainty for both tenants and investors. It provides a long-term alternative to home ownership and provides flexibility for Australians who move through different life stages.
When the model works well, BTR offers a customer-oriented service that improves convenience, fosters a sense of community and introduces a professional level of property management with flow-on benefits for others.
The best BTR developers understand the importance of sustainability – building high-quality properties that are energy efficient and exceed benchmark standards (e.g. NatHERS and Green Star Design and As Built Rating).
In the US and UK, the BTR sector provides diverse housing typologies and mixed tenure developments that comprise market, affordable and social housing tenants. Unfortunately, attempts to develop the BTR sector to the scale seen overseas has been hampered by the tax, planning and regulatory environment of the residential property market in Australia.
Why do we need BTR?
BTR is disrupting traditional rental markets by supporting more quality homes and diverse housing options. This supply boost currently requires above-market rents to be feasible in the current market.
Unfortunately, the housing crisis is very acute for affordable and key worker housing (with an estimated shortfall of 173,000 (AHURI 2021)). At present larger scale BTR developments balance a proportion of affordable rental units without government subsidy, with a greater proportion of homes at above market-rents.
It is this link that will support the delivery of more affordable housing that is driving the state and federal governments to action.
Market BTR can function as a vehicle to deliver a substantial number of homes, particularly by utilising foreign and institutional capital. This will then allow governments to leverage this vehicle to deliver affordable housing and reduce their burden of funding and delivering new housing to address the housing crisis.
So why is BTR emerging now?
While the Community Housing Provider (CHP) sector in Australia has utilised the BTR model for social and affordable housing, the number of market BTR assets have grown in recent years in line with state government efforts to reduce land and other taxes as well as new planning reforms (e.g. design guidelines in NSW).
Encouragingly, the market has responded, with interest and activity from international developers and operators coming to Australia to establish operations including Sentinel, Oxford and Greystar. We have also seen partnerships between local developers and foreign investors (for example GIC/GFM) attracted to the sector’s demand fundamentals and annuity-like income streams.
Recently, additional government initiatives have been announced to address the obstacles that have stifled the sector’s growth including recent changes to the Managed Investment Trust (MIT) withholding tax rate from 30 to 15 per cent for newly constructed BTR projects and increased annual capital works depreciation rates applied to new BTR projects from 2.5 to 4.0 per cent in annual capital works.
State governments have introduced various measures to reduce land taxes on new BTR developments, for both local and foreign investors. Some concessions are tied to the inclusion of affordable housing in new BTR developments and aligns with recently announced planning reforms for affordable housing (e.g. a 30 per cent floor space and height bonus for developments over $75 million with a minimum of 15 per cent social and affordable housing announced recently by the NSW Government).
We are now hitting a critical juncture as pipeline and market expectations grow while meeting return hurdles can still be challenging. Land prices in capital cities continue to be expensive ($716,000 in Sydney compared to $382,000 in Melbourne [3]), building costs are soaring, while tax/planning frameworks continue to evolve.
The question then remains: how can we continue attracting institutional BTR investors without a supportive investment environment?
Where do we go?
For BTR to address greater levels of institutional capital, we need to continue addressing the obstacles facing the sector and leverage mixed tenure models with greater proportions of affordable housing.
While progress is being made (e.g. the Queensland Government’s BTR Pilot Projects in Fortitude Valley, Newstead and Brisbane), additional actions can help accelerate BTR supply, including:
- Addressing GST and other tax leakages that put BTR on a more even playing field with other property asset classes
- Providing improved certainty / consistency in planning reforms across the country and reducing the need for court action, with State / Local Governments working closer to support pathways that incentivise housing and density in high-demand areas
- Establishing a consistent, viable and institutional-grade asset class nationally that will improve community acceptance
- Leveraging BTR to address the chronic affordable housing shortage by providing rental subsidies, releasing new land parcels or incentives to close the gap for acceptable market returns.
As we continue establishing a clearer pathway for successful BTR development in Australia, we expect the sector may achieve a level of scale that will drive lower construction costs and operating efficiencies.
These benefits in turn will hopefully make BTR increasingly accessible for more Australians and drive meaningful improvements to our housing crisis.
[1] Source: SQM Research (July 2023)
[2] Source: Australian Institute of Health and Welfare (June 2022)
[3] Source: 2023 UDIA State of the Land
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