Build to rent set to grow
Posted on January 08, 2024
The build to rent housing model has proven successful overseas and is gaining traction in Australia.
What is ‘build to rent’?
Most residential apartments in Australia are built to sell. Build to rent apartments are developed, held and operated by the owners, usually an institutional investor. They are purpose-built residential dwellings focused on providing long-term rental accommodation tailored to the needs of tenants.
Build to rent property investors are in the business of providing long-term rental services to tenants. This differs from typical landlord investors whose main income often comes from capital growth over time, realised when the property is sold.
In the interest of attracting and retaining quality tenants, build to rent property investors are incentivised to keep ongoing maintenance and operational costs down by designing and constructing better quality, more sustainable housing. This means tenants can expect more comfortable, energy efficient homes that are maintained to a better standard as the owners know they will be responsible for the building over the long-term. Tenants also benefit from long lease terms, meaning they have the stability and independence to live as they would in their own property.
Build to rent schemes are common across the US, UK and Europe but are still in their infancy in Australia. Build to rent is, however, on the rise in Australia and financial incentives are being offered to encourage further investment in this sector.
Government incentives to grow the sector
In April 2023, the Australian Government announced new tax incentives to encourage the supply of build to rent projects. First, the withholding tax rate for eligible fund payments from managed investment trusts to foreign residents will be reduced from 30% to 15%. This will apply to income attributable to newly constructed build to rent projects, from 1 July 2024.
Secondly, the capital works tax deduction depreciation rate for eligible new build to rent projects will increase from 2.5% to 4% per year. This will apply to projects where construction commences after 9 May 2023 and will shorten the period that construction costs of eligible buildings are depreciated from 40 to 25 years.
In South Australia, the 2023-24 State Budget introduced a 50% land tax reduction for eligible build to rent properties that commence construction after 1 July 2023. This incentive will be available until 2039-40.
Over the last three years, similar incentives have been brought in across other Australian states. A 50% reduction in land tax is also offered in Queensland, Western Australia, New South Wales and Victoria, along with exemptions from foreign investor surcharges.
The build to rent roll-out is accelerating
A total of 1,200 new dwellings, including 490 with subsidised rent, have commenced construction as part of three developments initiated by the Queensland Government’s Build-to-Rent Pilot Project. The first of the build to rent projects commenced construction in 2021 and will offer 395 apartments for renters. 25% of those apartments will be covered by a rent subsidy, providing more affordable options in the rental market.
Australian property group, Mirvac’s, LIV Indigo building in Sydney’s Olympic Park has been housing tenants since August 2020. The build to rent facility has proven popular with tenants who, in addition to long lease terms, have benefited from capped rent increases, no upfront bond, on-site maintenance teams and flexibility to make alterations to their apartments.
Bowden is the site for the first build to rent project in South Australia, announced in March 2023. US housing giant Sentinel will develop and operate 250 apartments, promoted as premium and sustainable. Sentinel has a growing presence in Australia since delivering the first build to rent project in Perth in 2019.
In Adelaide’s CBD, Renewal SA has announced plans for 196 build to rent apartments as part of a mixed-use development of the former bus depot site on Franklin Street. 35% of the total 392 apartments in the development, including apartments for sale, will be offered as affordable housing. Construction is expected to start in 2026, with tenants moving in by 2029.
Watch this space
The build to rent sector in Australia is young but rapidly on the rise. With the latest financial incentives announced at the federal and state levels, investors will be better placed to continue capitalising on build to rent projects, contributing to housing supply and leading to better long-term outcomes for many renters.
