Federal Budget 2023: Is this new tax concession enough to lure investors back into the rental property game?

Changes to depreciation and foreign investment tax for those in the major property investment sector might still not be enough to encourage more homes for rent.

In the budget, the Albanese government has taken the first steps to develop and restore a major property investment sector – building dwellings to rent.

The measures in the budget are a good first start, but Australia’s biggest apartment developer, Meriton’s Harry Triguboff, says that a much more extensive regulation overhaul will be required to achieve the objective.

Nevertheless, the new tax on superannuation unrealised capital gains – albeit currently limited to people with more than $3m in superannuation – is causing savers to lose confidence in superannuation, and they are again looking at negative geared residential property.

The biggest building “dwellings to rent” measure in the budget is that if a person starts building a dwelling for rent on May 10 then they will be able to depreciate it at a four per cent rate rather than the previous rate of 2.5 per cent. The new measure does not cover dwellings where construction has already started.

The government wants the big superannuation funds to embrace the sector given the housing shortage. Building for rent is a large area overseas, but not in Australia.

It also wants to restore foreign investment, so has reduced the withholding tax levied on foreign investors from 30 per cent to 15 per cent.

The government wants to make the building of apartment blocks economic again. Picture: Thinkstock.

The problem facing the government is that the costs of development and construction are too high, and it makes more economic sense to buy existing bricks and mortar than to build. The National Cabinet has appointed a committee including planning ministers and local governments to look at ways to reduce costs and make building dwellings – particularly apartment blocks – once again economic.

At the weekend, the Treasurer personally “leaked” to readers of the Barefoot investor, Scott Pape, that he planned to help landlords. Accordingly, just before entering the budget lock up I phoned Australia’s biggest apartment developer (and owner) Triguboff what he believes would be required to develop a “build to rent” sector.

In simple terms, he says government charges are too high, especially for foreign investors.

“The Prime Minister wanted to build one million homes and nobody volunteered to build because of insufficient profit.

“I have been building units to rent for the last 60 years. I must have built to rent at least 40,000 apartments. And I built constantly and only in Australia. However, even with recent higher rents very few apartments are now being built for rent because of the costs”, he says

“Meriton keep building as usual because we take a long term view, and we are certain that rents will rise considerably”.

Real Estate mogul Harry Triguboff at his home in Vaucluse, Sydney. Picture: Nick Cubbin

Triguboff lists a series of measures that in NSW would take about $200,000 from the cost of a $1.1m apartment. Similar figures apply to other states, although Queensland may have the lowest costs.

*Garages must be built above ground, that will save $50,000 for each apartment in NSW. Victoria allows garages above ground.

*Approvals must be given within six months. They take now two to three years. That will save another $50,000. To achieve speed, planning panels and design panels should be immediately removed because they cause delays and uncertainty. Advertising all the plans needs to stop. Currently, only objectors are heard, while the millions of tenants and future residents are ignored.

*Nationally planning department and councils, rather than trying to approve, try to protect the authorities and take no interest in the demand for accommodation.

*The NSW government charges of GST, development contributions, council rates, land tax, water rates, payroll tax and stamp duty for purchasers amount to $200,000 per unit which sells for $1.1m. That’s too high and should be halved.

Triguboff believes that governments and planning departments around Australia know how to fix the problems, but do not have the courage to take action.

Treasurer Jim Chalmers speaks to reporters at Parliament House in Canberra. Picture: NCA NewsWire / Martin Ollman

But there is a second set of problems in developing a national “build for rent” market.

State governments led by Victoria and Queensland have set up a set of tenant rules after listening to tenants groups’ demands rather than discussing those demands with the Australian Landlords Association.

There is no doubt the old tenant rules were too harsh on tenants, but the new rules went too far the other way. As a result, many “mum and dad” landlords sold out.

Others switched their properties to short term tenants via Airbnb.

At the same time, the Greens get regular publicity for their demands for a freeze on rents and an end to negative gearing, which makes those investing in the sector very nervous.

The Government also wants to attract capital for social housing using subsidised rents. Unless government guaranteed, these represent much more dangerous investments because there is a danger of a ghetto developing.