Federal budget 2023: Tax breaks offer promise of 150,000 build-to-rent homes

Property developers say they can deliver an extra 150,000 units as a result of tax changes unveiled in the Albanese government’s second budget.

Investa Property Group CEO Peter Menegazzo at the site of an Indi build-to-rent development in Sydney on Wednesday. Picture: John Feder

Property developers say they can deliver an extra 150,000 units as a result of tax changes unveiled in the Albanese government’s second budget.

A change in tax rules has put specialist build-to-rent towers on a level playing field with commercial investments and is expected to open the floodgates to what is ­already a $17bn industry.

The towers directed solely at renters are mainly backed by big international investors and have the potential to overhaul the traditional apartment industry.

While property prices are making a comeback, build-to-sell units have been hampered by soaring costs and higher labour bills, making development harder and pushing builders to the brink. Banks are also clamping down on risky lending to developers.

The new style of apartment blocks are billed as part of the solution to the housing crisis, although they will not help lower rents in the short term because of the supply shortage.

The towers are expected to proliferate in coming years, providing more supply for an expected surge in migration.

Peter Menegazzo, chief executive of the Investa Property Group, which is building 5000 units in Sydney and Melbourne as part of the group’s Indi business, said the sector was booming.

“It’s an important lever to help ease housing supply issues in Australia and, as we can see, there’s a major crisis happening. It has a role to play given the future residential needs of the country,” he said.

Mr Menegazzo said developing sites would become more viable with the tax change. “What that will do is speed up supply, and that is exactly what we need if the government wants to hit its migration targets,” he said.

New incentives were confirmed in the budget aimed at ­encouraging investment in build-to-rent projects.

Following a national cabinet meeting in April, Anthony Albanese announced Labor had ­secured an agreement to reduce the managed investment trust withholding tax rate from 30 to 15 per cent for build-to-rent housing projects from July 1.

The budget confirmed that for new build-to-rent projects where construction commenced after 7.30pm on Tuesday, May 9, the government would increase the rate for the capital works tax deduction to 4 per cent per year.

It would also reduce the final withholding tax rate on eligible fund payments from managed ­investment trust investments from 30 per cent to 15 per cent.

“This measure will apply to build-to-rent projects consisting of 50 or more apartments or dwellings made available for rent to the general public,” the budget papers say.

“The dwellings must be retained under single ownership for at least 10 years before being able to be sold and landlords must offer a lease term of at least three years for each dwelling.”

The measure is already sparking activity. “We’ve had some ­really interesting … inquiries even since the announcement was made,” Mr Menegazzo said.

The Prime Minister, who has set out a goal of building one million homes over five years from 2024, said the build-to-rent budget measures would provide the private sector with “incentives to engage in housing supply.”

Mr Albanese also flagged he was willing to push Labor’s Housing Australia Future Fund, aimed at providing 30,000 additional ­social and affordable homes, to a vote in the Senate despite not having secured the support of the Greens or the Coalition.

Jim Chalmers said the tax breaks for build-to-rent would allow more rental properties to be built “near where the jobs are being created”.

Community Housing Industry Association chief executive Wendy Hayhurst welcomed the “budget initiative to make build-to-rent projects easier and more attractive through increased incentives for the industry”. “This also provides an opportunity to leverage this initiative to create more affordable housing,” she said.

Property Council chief executive Mike Zorbas also welcomed confirmation in the budget that the government was lowering the managed investment trust withholding tax rate to 15 per cent for build-to-rent housing investment.

“The government’s decision to level the tax playing field for build-to-rent projects is a significant one, unlocking up to 150,000 new homes to relieve pressure in the rental market,” Mr Zorbas said.

“Build-to-rent housing, like purpose-built student accommodation and retirement living, is an important part of the national housing equation.”