An aspiration for home ownership has long been a sacred cow in Australia, as it has been in the UK, but the introduction of the Build to Rent (BTR) asset class is providing a compelling alternative to traditional housing models.
BTR as an asset class has been at the forefront of the UK’s housing delivery in recent years, with a boom in the number of units delivered since 2014 policy changes. There are approximately 110,000 units currently in the development pipeline. Although BTR in the UK has yet to achieve the same level of market penetration as its equivalent in the United States, it is roughly five years ahead of Australia.
The UK example is one of increased housing supply, job creation, and economic stimulus – three drivers in high demand as we negotiate the COVID-19 recovery.
The UK provides a successful roadmap for growing the BTR sector that policy makers here can learn from. Both fiscal policy initiatives and bespoke market interventions have been essential in enabling the asset class to flourish and grow in the UK.
Early fiscal policy initiatives in Australia
At this early stage of the BTR life cycle in Australia, there are still questions about the viability of the asset class in the Australian market. This is in part due to the existing taxation regime at both a state and federal level, which acts to preclude investment in the sector.
This not only makes it a challenging environment for Australian based developers, but crucially and more damagingly, acts as a barrier to the introduction of foreign investment and expertise, which is essential for BTR to take off given local industry is predominantly still wedded to the build-to-sell model.
There are currently a range of tax impediments to BTR that are holding back the growth of the sector. The most significant of these are the Australian government’s 30 per cent Managed Investment Trust (MIT) withholding rate (a tax applied on fund payments made to foreign investors) and Land Tax Surcharges (a tax applied to foreign purchasers of land in Australia).
BTR as a product is not eligible for the 15 per cent MIT withholding rate, which does apply for foreign investors in other property asset classes.
The NSW government has recently taken some positive steps on BTR with the announcement of a package of taxation and planning reforms designed to support the growth of the sector. Importantly, these include a 50 per cent reduction in land tax applied to BTR developments until 2040 and an exemption from the Foreign Investor Surcharge on Land Tax and Stamp Duty.
NSW Treasurer Dominic Perrottet and Planning and Public Spaces Minister Rob Stokes noted that the 50 per cent land tax cut “would encourage” BTR developments “by ensuring they were subject to similar overall amounts of state tax as comparable build-to-sell developments”.
These reforms will bring the overall tax paid on the product closer in line with other asset classes. But this is not enough, with the NSW government specifically calling on the Australian Federal government to address the MIT withholding tax issue.
More initiatives like the announcement from the NSW government on a nationwide basis and targeted at foreign investors would help address the viability concerns raised by developers and investors by ensuring that the taxation framework welcomes BTR developments and is internationally competitive.
These tax impediments have not existed to the same extent in the UK context, which hosts one of the world’s most competitive and transparent tax regimes, with no specific laws on foreign investment. With minimal exceptions, foreign controlled companies are treated in law in the same way as UK based businesses and there are minimal barriers when it comes to international property investment in all asset classes.
Bespoke market interventions
Along with its taxation regime, what has further underpinned the success of the BTR market in the UK has been its establishment as a separate asset class.
Australia could learn from the UK on wider, more bespoke market interventions relating to BTR as a product. Building on previous initiatives such as the 2010 Housing Stimulus Package, 2012 Montague Review and 2012 PRS Task Force, in February 2017, the UK government launched the consultation on the Planning and Affordable Housing for Built to Rent aimed at improving the viability of new BTR developments and attract more institutional investment.
The proposals ultimately resulted in changes to the UK’s National Planning Policy Framework (NPPF), which outlines the government’s planning policy. It is designed to break down barriers to the growth of the sector across several variables, including the acquisition of land, the speed and predictability of planning decisions and negotiations of planning obligations for affordable housing. It also put forward the Affordable Private Rent (APR) mechanism used as an alternative to meeting other affordable public housing requirements, and while this was already possible under existing policy, the amendment to the NPPF has resulted in an easier process for developers to navigate and execute.
These changes in planning policy defined BTR as a separate asset class and forced policy makers to consider it separate from build-to-sell. These measures taken in the UK, demonstrate that Australia needs a change in mindset to create a framework which enables BTR to thrive as an asset class.
We are starting to see the beginning of this process in Australia, with NSW leading the way. Complimenting the announced tax cuts, the NSW government announced that it is exhibiting a new “streamlined” Housing Diversity State Environmental Planning Policy (SEPP) that includes specific “BTR design guidance, alongside proposed development standards”.
The outlook moving forward
With sky-high house prices, home ownership decreasing and almost one third of Australians currently renting, the large-scale investment opportunities provided by the BTR sector are not yet being recognised as a way of catering for demand.
Australia does not necessarily need the same rules as the UK immediately as it is a much more mature asset class there. The concept is in its infancy here. For example, if current UK affordable housing percentages were to be ascribed in Australia, they would likely add to the already challenging viability difficulties faced by developers and counteract positive fiscal policy interventions.
What should be considered is a similarly interventionist approach to the specific barriers that exist across a range of variables for BTR in the sector with bespoke solutions and guidance unique to it as a product, delineating it as a distinct asset class. Combined with fiscal policy interventions, this would not only help to make the product more viable but a more attractive proposition for developers and investors by streamlining processes.
BTR has held up strongly during the COVID-19 pandemic in economies where it is already well established. It is also becoming a more attractive product for current investors given its status as a more “shovel ready” asset class than traditional build-to-sell products due to the lower number of pre-requisites required to gain financing.
This may well be the time for this BTR to develop its own identity as an asset class in Australia and move from its infancy to a mainstream product.
Will Hamill is from Engage Communicate Facilitate, a boutique engagement and advisory company working in the property sector both in the UK and Australia.