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A Federal Government policy concession has paved the way for institutional investment into Australia’s emerging build-to-rent sector.

A revision of draft legislation initially tabled in the 2017/18 federal budget means that institutional investors can now acquire residential property built for long-term rental through a managed investment trust (MIT) structure.

Previously it was proposed that only property meeting affordability criteria could be included within the preferred MIT structure, but the concession now allows property at market-rents to also be included.

The relaxation of the government’s position has been “warmly welcomed” by the Property Council of Australia, which felt the draft legislation would hamper the rise of the build to rent industry.

However, the reversal has stopped short of reducing a 30 percent withholding tax on overseas investors for income earned on build-to-rent assets at market rent. A concessional 15 percent applies to developments that meet the affordable housing requirements, and developments in other asset classes.

“We are concerned that the package sets up an imbalance in the investment playing field, with international investment in build-to-rent MITs to be taxed at twice the rate of those in office buildings or shopping centres,” the Property Council of Australia said in a statement.

Build-to-rent is viewed as an attractive option for investors looking outside core real estate markets to capture value and diversify portfolios.

The sector thrives in the U.S. and parts of Europe, but it has been slow to take off in Australia, partly because of tax considerations – including GST and land tax, as well as the MIT issue – and low rental yields.

“Longer-term, the forces driving interest in the sector in Australia are strong and will eventually help overcome some of the challenges,” says Leigh Warner, from JLL’s Strategic Research team.

Lower capital growth prospects and reduced tax benefits could put private individuals off funding rental stock, increasing the need for institutional investment. This will ultimately justify removing current barriers, Warner adds.

Investors UBS and Grocon pioneered the build to rent movement in Australia, backing the country’s first institutional-grade build-to-rent housing, including 1200 homes as part of the Parklands precinct on the former site of the Gold Coast Commonwealth Games.

Major residential investor Mirvac has followed with its Indigo development, a block of 258 apartments within its Pavilions project at Sydney Olympic Park.

Broad market forces including an ageing population, greater urban density and population growth, decreasing housing affordability and technology, will see the momentum in Australia continue, according to the JLL report Capital’s Shift into Alternative Real Estate in Australia.

Low rental vacancy rates in Brisbane, Sydney and Melbourne, in spite of significant supply in these markets, bodes well for the nascent sector on the demand side, but it needs to be matched by financial viability, says Troy Linnane, Head of Institutional and Middle Markets – Residential Development at JLL.

“Low returns against the cost of debt as well as taxation imposts across all levels of government, must be addressed,” he says.

A study tour to the U.S. by the Urban Development Institute of Australia found that build-to-rent is a successful model for specific tenants, be it through student housing, retirement rental housing or key worker housing, close to employment hubs.

But institutional investment must coexists with private investment to increase stock, provide rental diversity and reduce risk, UDI president Michael Corcoran wrote in the Financial Review.

Click to read about how Australia is bidding to be top for Chinese investment.

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Leigh Warner

Head of Residential Research - Australia

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