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14 Apr 2023

It's touted as one solution to Australia's housing crisis, but what is build-to-rent? And can it live up to the hype?

It's touted as one solution to Australia's housing crisis, but what is build-to-rent? And can it live up to the hype?
Image: Caroline Cagnin

Australia is in the grip of a housing crisis, hit by rising rents and falling vacancy rates.

Built-to-Rent is a form of rental housing relatively new to Australia.

A newly released Ernest & Young report, commissioned by the Property Council of Australia, says that support for build-to-rent housing could result in an additional 150,000 homes over the next 10 years.

However, some experts are concerned over the accessibility of build-to-rent properties for middle- and low-income earners.

Here's what you need to know.

What is build-to-rent?

Build-to-rent housing is when a property is held in single ownership and professionally managed. As an example, the developer builds it and instead of selling off the units individually, keeps the property to rent out.

The idea is, it provides tenants with the flexibility of renting with the security of home ownership, because the property is held for the long term.

How it looks abroad

'This type of housing is common in the UK and other European countries, as well as in North America," Professor Hal Pawson from the UNSW City Futures Research Centre says.

More than 6.3 million apartments have been developed in the United States since 1992, although in the US it's known as "multi-family housing".

In the UK, more than 150,000 have been built or are under construction since 2012.

But it is still relatively new in Australia.

The nation's vacancy rate in February was a tight 1 per cent, CoreLogic figures show.

Rent values have increased 24.1 per cent since September 2020 to February this year.

This would be shocking for many if you consider rent values averaged an annual growth rate of just 2.1 per cent throughout the 2010s.

"The short-term challenges we have in Australia's housing market at the moment include very tight rental markets and sharp increases in rent values over the past couple of years that Australians really haven't been exposed to," Eliza Owen, CoreLogic Australia's Head of Research said.

"The overarching or longer-term issue that we've had in Australia is the declining rate of home ownership," she says.

Build-to-rent could provide thousands of extra homes, property council says

A report released on Thursday by Ernest and Young claims that levelling the investment playing field for build-to-rent could dramatically increase homes in Australia.

But they say there needs to be changes in how the schemes are taxed.

As build-to-rent schemes are more attractive to foreign investors, they currently attract a 30 per cent withholding tax rate – double the tax rate foreign investors are slugged with when building commercial sites.

The report recommends that halving that withholding tax rate to 15 per cent would attract more foreign investment in the short-to-medium term, which would help Australia reach its target of 1 million homes by 2029.

"To offer more housing choices and affordable options to Australians, we need to tap into institutional investment in build-to-rent housing from Australia and abroad," Property Council of Australia chief executive Mike Zorbas says.

"More supply means downward pressure on the cost of renting and buying, and people who live in build-to-rent housing will enjoy the benefits of professionally managed properties, good locations, superior amenities and long-term security of tenure."

The report says support for build-to-rent schemes could result in an extra 150,000 homes over the next 10 years.

“The potential to create 150,000 homes over the next 10 years with just one asset class shows build-to-rent is about as close to a housing policy silver bullet as they come," Mr Zorbas says.

However, Sydney University economist and housing supply expert Dr Cameron Murray is not convinced that build-to-rent tax breaks would benefit the average Aussie.

"Existing build-to-rent projects are predominantly high-end luxury apartments, and the owners of them report to investors how successful they are at charging more than the local market rent by bundling in premium features like fancy gyms, food services. Is this something that we should be providing subsidies to?" Dr Murray told ABC News.

"There is already a huge wave of build-to-rent projects under current tax rules, so it is not clear why more tax breaks are needed."

Dr Murray says changes to current GST systems could be an alternative solution.

"Build-to-rent developers don't charge tenants GST, which is why they don't get a GST refund on construction. This report selectively chooses to compare with build-to-sell residential," Dr Murray said.

"Admittedly, exempting housing from GST does create some uneven situations. But an equally valid way to level the playing field is to apply GST to residential rentals. Why don't they propose this instead?"

Not affordable housing 

Professor Pawson says build-to-rent is "sometimes oversold".

"Claiming that it's going to solve the affordable housing problem that everybody knows Australia has, is hype. So it doesn't do that," the professor of Housing Research and Policy and associate director says.

Build-to-rent units are typically targeted towards moderate- to high-income households and rented out at market rates, so it doesn't directly contribute to the supply of affordable housing, he explains. 

But "it can create stability in Australia's rental market."

"We know that Australia's housing construction output is fairly volatile and this makes our housing system both inefficient and wasteful," Professor Pawson says.

Adding to this, Australia's rental market is almost entirely owned by mum-and-dad investors, Owen says.

"So because of the different financial incentive strategy — private investors [who often cash in when the property goes up in value] versus a long-term build-to-rent investment strategy — it's good to have both players in the market because they're providing different kinds of housing for different needs."

Source: ABC News

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