Build-to-rent increases pressure for law reform to underpin new housing

Build-to-rent developers and industry policymakers are applying the blowtorch on all layers of government to get legislative reform for the burgeoning sector strong enough to attract much-needed investment.

While the planned reforms are still being refined, build-to-rent projects are being touted as going a long way to help alleviate the housing shortage.

The multifamily sector, as it’s known overseas, is still in its infancy in Australia and has become a sought-after asset class globally. Developers such as Mirvac, Lendlease, Greystar and Novus are active in the Australian market where they build apartment towers and rent the units instead of selling.

Now including 1000 student rooms: Artist’s impression of Melbourne’s Gurrowa Place project at Queen Victoria Market, which will also include an office tower and build-to-rent housing.

Consulting firm EY estimates the current size of the build-to-rent sector in Australia is $16.87 billion – or about 0.2 per cent of the country’s total residential housing sector – with an expectation it will grow dramatically.

Commercial agency CBRE’s latest Investor Intentions survey reveals investors are upbeat about the sector despite persistently high interest rates and tight credit availability.

The findings coincide with new draft legislation released two weeks ago which proposes reducing the managed investment trust (MIT) withholding tax rate on build-to-rent projects from 30 to 15 per cent.

Modelling from EY, commissioned by the Property Council, shows implementing a 15 per cent MIT withholding rate could create about 150,000 apartments by 2033.

PCA chief executive Mike Zorbas said lowering the MIT withholding tax rate on build-to-rent projects that include an affordable housing component could accelerate delivery of 10,000 affordable homes over the next 10 years on top of those 150,000 rental homes.

“In lockstep with true planning reform, BTR policy settings will be the make-or-break policy decision in meeting the 2029 housing targets,” Zorbas said. “Left hand meet right hand. By the federal government’s own hand, the 1.2 million home target agreed with premiers swings in the Treasury wind as we speak.”

Of 1200 global investors surveyed by CBRE, close to half said they would invest in multifamily assets and increase their purchasing activity in 2024. For the first time in this survey’s eight-year history, multifamily was also the most preferred sector in all three main global regions: the Americas, Europe and Asia-Pacific.

‘Many of our investor clients have been eagerly awaiting the details of proposed changes and hope it puts BTR on a level playing field with other forms of housing such as student accommodation.’

Andrew Purdon CBRE Regional Director – Living Sectors Capital Markets

Andrew Purdon, CBRE’s regional director, living sectors capital markets, said enacting the legislation would “help spur greater offshore interest in Australia’s fledgling build-to-rent market while speeding up the delivery of much-needed new housing stock”.

But he said that while the property industry had engaged with Treasury to ensure the reforms were as impactful as possible in boosting supply, parts of the draft legislation fell short.

“Many of our investor clients have been eagerly awaiting the details of proposed changes and hope it puts BTR on a level playing field with other forms of housing such as student accommodation,” Purdon said.

“The lack of clarity on this issue since the intention to reform was announced in the federal budget nearly 12 months ago has undoubtedly affected investment decisions in BTR as many investors have taken a ‘wait and see’ approach before committing to new developments.”

Major developments include Lendlease’s plan to transform the southern site of the Queen Victoria Market precinct in Melbourne. Across three new buildings, Gurrowa Place will feature a 28-storey next-generation workplace, 560 build-to-rent units with 80 affordable homes, and 1100 student residences managed by Scape.

Developer Novus, which has a new project overlooking Melbourne’s Botanic Gardens, said there was more activity to come at its sites in Parramatta and Chatswood.

The proposed BTR Novus on Bowen in Melbourne.

Purdon said about 70 per cent of new migrants to Australia started their lives here as renters, so boosting rental supply was crucial to meeting existing and new demand while maintaining Australia’s attractiveness as a destination for talent.

“Now is the time for government to think bigger and longer term as this important tax reform is finalised. BTR is not a silver bullet to solve the underlying supply shortage, but it has an important role to play in rebalancing the market, particularly in the inner cities,” Purdon said.

Attracting capital to the asset class was essential to accelerate new project starts and Treasury should recognise that assistance was required in tax settings to offset other aspects of project costs which were less controllable, he said.

Ben Martin-Henry, head of real assets research, Pacific for MSCI, said the build-to-rent sector in Australia had seen limited transactional activity due to the scarcity of institutional-grade operational assets.

“However, with $2.4 billion in volumes, the BTR sector experienced its most active year to date and this could mark a watershed moment for the asset class,” he said.

Mark Molesworth, a tax partner at BDO, said it was unclear if the commercial reality of constructing and holding these developments was viable for developers. “The requirements to be an eligible BTR project are particularly detailed, and must be maintained for at least 15 years,” he said.

The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.