Mooted caps on rental increases a risk to the surge of build-to-rent apartment projects

The push for a cap on rental increases has already halted one offshore sovereign fund from investing and could have a significant effect on the booming sector.

The build-to-rent complex “Realm Caulfield” near Monash University’s Caulfield campus in Melbourne.

The future of billions of dollars worth of apartment developments are hanging in the balance as global investors chasing a position in the build-to-rent industry face the spectre of rental caps hitting returns.

The country’s top local developers, including Mirvac and Lendlease, and top international players like Greystar and Hines have entered the sector but their plans to attract investors to back thousands of apartments could be hit if governments limit rental increases.

The concerns about the regulatory environment have contributed to a move by US private equity house Blackstone to push back a sale of two specialist blocks until next year but other players, such as Arklife, have won interest in their projects.

The national pipeline of build-to-rent apartments has picked up pace with about 45,000 units now planned. But the sector risks being hit by potential reforms to the rental market, according to a report by law firm Allens and consultancy Urbis.

While the national cabinet has rejected the imposition of caps on residential rents as a measure to deal with the housing crisis, the heated debate about the policy was enough to put some major transactions on hold, and The Australian is aware of one deal where an offshore sovereign fund pulled back from investing.

The report cautioned against taking a “two steps forward and one step back” approach to the sector at a time when housing supply was already stumbling.

“Not only will this hinder BTR’s potential, but it will also cause supply shortage and, consequently, increase rents even more in the long term at a time when we need solutions, not more problems,” the report said.

The report argues that build-to-rent has moved from a “nice-to-have” market that could fill a demand for premium rentals to a “must-have” product critical to alleviating Australia’s housing crisis and ensuring the future liveability of cities.

It found the sector was on an upswing on the back of recent efforts to support its growth, but the volume of investment to date would need to almost quadruple to supply even one year of Australia’s housing demand growth.

It argued that in what has become a global race for housing investment, it was imperative there were no brakes applied to the sector at a state or national level.

Allens partner Tim Chislett said there was now “reasonably good” planning and tax settings, although he said there were ”some nerves” about how thin capitalisation rules applied to the area.

Realm Caulfield in Melbourne has 437 built-to-rent apartments.

“There still is uncertainty about where policy settings are going,” he said. “The key one was the rent cap … it created so much uncertainty in the market.”

Mr Chislett said that concerns about rental caps were the prime concern, even after the national cabinet closed the door on the concept.

“I think there’s still a lingering uncertainty as to what policies, particularly from the Victorian government … are they going to introduce that could make investing in build-to-rent harder,” he said.

“We want to be really cautious that we don‘t have policies that could lead to less capital coming in,” Mr Chislett said.

Urbis director and housing expert Mark Dawson said the industry‘s progress looked good in isolation but noted the fall off in new housing supply. “You really do need to keep pushing this agenda and driving this market to maturity,” he said.

Mr Dawson said there was a global competition for capital. “There’s no guarantee that they will invest in Australia, there’s no guarantee that they will invest in residential real estate in Australia,” he said.

Mr Chislett said: “We’ve got to make sure we’re doing all we can to incentivise that capital to come to Australia and to invest in our housing.

“We need significant amounts of capital investing into Australia to help ease the crisis.”