Build-to-rent ‘loophole’ robs communities of millions for new parks

Thousands of apartments are being built without contributing to new public parks, as build-to-rent developers take advantage of a loophole that councils say has shortchanged them of tens of millions of dollars.

Inner-city mayors, including Lord Mayor Nick Reece, are demanding the state government reform its legislation to force build-to-rent developers to pay the green space levy that usually applies to new apartment buildings in Victoria.

New data from Charter Keck Cramer analysts shows Melbourne has 6001 completed build-to-rent apartments and another 18,885 approved or under construction, making it the runaway capital of the sector in Australia. The boom has been fanned by land tax discounts, cheaper property than Sydney and higher rents than Brisbane.

Long-time Kensington resident Simon Harvey stands near some of the Macaulay Road build-to-rent projects.Credit: Penny Stephens

Build-to-rent developers pay a standard contribution to councils for community infrastructure, but they are not forced to pay a separate levy specifically for public open space because, under Victoria’s planning laws, it is collected only when a property is subdivided. Build-to-rent developments usually retain one owner.

The public open space levy is as high as almost 9 per cent of a property’s value in some council areas, and up to 7.06 per cent in the City of Melbourne.

Kensington resident Simon Harvey lives close to where almost 1300 build-to-rent apartments will soon stand across three side-by-side developments in the once-industrial Macaulay urban renewal precinct. He is appalled they have avoided the public open space levy.

“It’s an extraordinary loophole. I don’t see any logic in it at all,” Harvey said. “With such concentrated high-rise development, it’s paramount that [public open space] is prioritised.”

Melbourne City Council is the epicentre for build-to-rent, with 1903 finished apartments and 4805 on the way.

Reece said while build-to-rent was a welcome addition to the development mix to help alleviate housing pressures, reform was needed to ensure all developers contributed to new public open space.

“We want to preserve that important revenue stream because it funds a vital service,” Reece said. “The current policy settings cannot remain in place.”

The lord mayor said this was particularly important in precincts that were being transformed from industrial to residential, such as Macaulay, Arden and Fishermans Bend.

“Macaulay provides you with an acute example of the policy challenge. The new development along Macaulay Road is very high-quality, but it’s going to mean thousands more residents moving in, and they would rightly expect the same access to public open space as everyone else,” he said.

“We have the difficult and very expensive job of now trying to retrofit open space and parks into that area.

“If we’re not getting those contributions from developers when they’re building new homes, it makes it very hard.”

Large build-to-sell developments can pay millions in public open space contributions. In the Macaulay precinct, a subdivided Assemble development on Stubbs Street with 199 apartments paid $1.12 million, while a 299-apartment development by CBD Group paid $2.12 million for the levy.

Melbourne City Council’s public open space contributions fund is forecast to contain $84 million at the end of June, which will go directly into delivering new parks next financial year.

Reece said many build-to-rent apartments had luxury prices, and he wanted to see affordable housing quotas introduced in the state’s planning code.

“I absolutely believe that build-to-rent has to do more heavy lifting on that front,” he said.

Yarra Mayor Stephen Jolly warned that residents faced denser suburbs without enough open space if the legislation was not changed. The municipality has an 8.65 per cent public open space levy in most areas.

Jolly is putting forward a motion at the council meeting next week to write to the Victorian government about the matter, also flagging concerns with premium prices of build-to-rent homes.

“If there were hundreds of people on low incomes in these apartments because of this, I would be up for it, but there doesn’t seem to be any pluses here,” Jolly said.

Port Phillip Mayor Louise Crawford said the municipality had three finished build-to-rent developments and 10 on the way, representing more than 2000 apartments.

“Our inability to collect open space contributions from build-to-rent developments is putting pressure on our city’s public spaces,” she said. “Open space contributions, often worth millions of dollars annually, are a vital source for us.”

Stonnington Mayor Melina Sehr and Merri-bek Mayor Helen Davidson also stressed that the rise in build-to-rent meant the policy gap around the public open space levy warranted urgent attention from the Victorian government to force all developers to contribute.

Dan McLennan is co-founder of Local, a build-to-rent company that has at least 10 per cent affordable housing in its buildings. He said projects in the sector made multimillion-dollar development contributions to council infrastructure.

“While some build-to-rent projects may not pay public open space contributions directly, viewing this in isolation misses the broader financial picture,” he said.

“Our primary concern with expanding these contribution requirements is economic impact. Additional costs will either flow through to tenants as higher rents, or render projects financially unviable, reducing overall housing supply.”

He added that some build-to-rent projects paid an open space levy if subdivided, such as his mixed-use project in Box Hill.

Christian Grahame, head of build-to-rent developer Home, said the sector already contributed significantly to state and local government revenues through other taxes and payments.

“While the current public open space levy framework does not fully recognise the unique nature of build-to-rent, we believe there is a reasonable case for regulatory reform that reflects the sector’s growing role in delivering high-quality housing.”

A spokeswoman for developer Mirvac said its Docklands build-to-rent with 474 homes was almost fully occupied and had 20 affordable apartments.

“A build to rent community is different to build-to-sell – it creates purpose-built, long-term rental accommodation and shared resident facilities, and typically includes affordable housing,” she said.

Build-to-rent developers receive tax concessions including a 50 per cent cut on taxable land value for up to 30 years in Victoria, and a new federal reduction on income tax if buildings offer minimum five-year leases and 10 per cent affordable housing.

“By working together with all levels of government, we can ensure more affordable rental accommodation is delivered in the future,” said Mirvac’s spokeswoman.

Developers Assemble and Greystar declined to comment when contacted by The Age.

Property Council state executive director Cath Evans said that in a challenging property market, build-to-rent was one of few sources of meaningful housing delivery in inner Melbourne.

“It’s keeping cranes in the air, jobs flowing, and renters housed,” she said.

“It’s important to understand build-to-rent’s existing contributions. These are large, long-term assets that pay significant land tax, other local developer contributions, stamp duty, and operational taxes.”

Evans said that as the sector matured, more developers were starting to include affordable housing. She said a new developer contribution framework, tailored to the build-to-rent sector, should be considered.

A spokeswoman for Planning Minister Sonya Kilkenny said the Victorian government was in the process of designing a new model of developer infrastructure contributions, using advice from a working group it formed comprising industry and council representatives.

“As part of our bold housing reforms, we are fast-tracking eligible developments that offer at a minimum 10 per cent affordable housing – this includes build-to-rent properties.”