Property Australia

Build-to-rent insights

Karen Jamal Karen Jamal October 5, 2021

Institutional build-to-rent projects could boost Australia’s GDP by $2.9 billion and support 17,000-plus jobs by 2025, according to a new report from EY. But a few things are holding the sector back…

 

  Three key takeaways:

  • The current pipeline of institutional build-to-rent, or Inst-BtR, projects could contribute $7.3 billion in total economic output between 2022 and 2025, boost GDP by $2.9 billion, and support around 17,610 jobs, says EY.
  • The asset class does, however, face significant regulatory and taxation barriers before it can reach this potential – most notably around land tax and managed investment trusts.
  • Victoria currently accounts for more than 60% of Inst-BtR projects, but uncertainty around land tax is a handbrake “holding the sector back,” says EY’s national lead for build-to-rent, Luke Mackintosh.

 

EY says institutional build-to-rent, or what it shortens to Inst-BtR, could comprise around five per cent of the residential rental pool within a decade. This would deliver more than 175,000 dwellings, $100 billion in value and create tens of thousands of jobs.

But to capture the full benefits, Australia needs tax reform and decisive state and federal government action.

Luke Mackintosh, EY partner and national lead for build-to-rent, says significant capital raising is underway “but there is little information out there on the size of the sector and the pipeline”.

EY has identified 14 platforms with 40 projects and 15,630 apartments at various stages that align with its definition of Inst-BtR. EY is also advising clients on another three platforms, Mackintosh notes, which include 3,800 apartments in Sydney, Melbourne and Brisbane.

Victoria currently accounts for more than 60 per cent of Inst-BtR projects. This amounts to 9,800 apartments with a capital works value of $4.74 billion.

“The majority of projects are in Victoria because Inst-BtR can work better there than in any other state,” says Mackintosh, pointing to Melbourne’s lower land costs than Sydney, faster planning and favourable demographics. “But uncertainty around land tax is holding the sector back.”

In last year’s budget, the Victorian Government announced its intention to introduce a 50 per cent land tax discount over 20 years for eligible projects. While it said the expected start date would be the 2022 land tax year, the industry is still waiting for eligibility criteria to be clarified.

The consequences of this are clear. Mirvac’s LIV project in Sydney’s Homebush, for example, is not eligible for the NSW Government’s land tax exemptions because it was already under construction when the announcement was made.

“All of the groups in Victoria – with 6,000 apartments ready to go – don’t want to break ground until this issue is resolved. In the meantime, it is delaying jobs.”

Mackintosh is a member of the Property Council’s Build-to-Rent Roundtable, which is charged with mounting a case for the new sector and resolving policy barriers that slow investment.

Another one of those impediments is the federal government’s treatment of managed investment trusts, or MITs.

Foreign institutional investors tend to invest in Australian real estate through MITs which can generally access a concessional withholding tax rate of 15 per cent. In 2017, however, the Australian Government increased withholding taxes on residential investment, other than affordable housing, to 30 per cent.

“Our industry needs this first generation of projects to be viable to demonstrate the potential to capital,” Mackintosh adds.

“Returns on build-to-rent assets are exceptionally lean – so a 50 per cent land tax concession, when coupled with federal concessions around managed investment trusts and GST, makes Inst-BtR comparable to other asset classes.”

Mackintosh says classifying Inst-BtR assets as “commercial residential” and providing the same land tax, stamp duty, GST and managed investment trust taxation as other institutional grade core assets will fuel the sector’s growth.

“Australia’s residential asset class is worth $8.8 trillion spread across $10.6 million properties – but we don’t have one dollar of institutional investment in the asset class. With the right settings, institutional build-to-rent could be a $100 billion asset class within a decade,” Mackintosh concludes.

Tags: RESIDENTIAL