Build to rent properties are gaining interest in Australia, buyers are back but listings are still down and the Sydney market continues to hold strong clearance rates.
In the US, build to rent is currently one of the biggest property asset classes, but it barely exists here. There are a lot of reasons why the sector is attracting interest.
Why Australia is interested in build to rent
Due to the fact that some developers are unable to rely so much on the build to sell model they are now looking at alternative ways to kick start projects.
Furthermore, there is a lot of money, particularly from overseas, interested in investing in the sector (e.g sovereign wealth funds, pension funds) in Australia.
Although the gap between rental yield is significant between investing in most commercial property types and build to rent, this gap is tightening.
Social and affordable housing providers are interested in build to rent as it has been a way to get significant amounts of this type of housing into the overseas markets.
For renters, living in a build to rent apartments can also be a positive experience for a few reasons. The ownership structure means that long term tenure is likelier, moving between developments owned by the same group can make moving easier, and the development of the project as a long term rental product can mean quality levels can be higher.
The tax issue
At this stage, there are 6,500 build to rent apartments in development approved areas in Australia, with most of them in Victoria (4,000 of the total). Although growing, the sector is minuscule compared to the number of rental properties in Australia (2.6 million) and although new projects are being announced more regularly, there are still a lot of reasons why projects are not going ahead.
A big reason is taxation – currently, the tax system is set up to encourage rental housing investment through mum and dad investors. This is done through negative gearing and capital gains tax concessions. For large scale ownership of rental housing, the tax issues are more complicated and far less accommodating to the growth of build to rent. The tax issues can be summarised as follows:
Developers of build to sell can claim back GST on development costs. For build to rent, this can’t be done. This is a difficult one to fix as renters of apartments don’t pay GST, but buyers of apartments do. This would be a difficult one to resolve without major changes to tax policy.
Most property investors wouldn’t be paying land tax as it only applies if the unimproved value of the property is over a certain amount. For owners of a build to rent project, large scale ownership of rental properties means the land tax bill is significant.
In other institutionally-owned property types, for example, office buildings, the land tax bill is passed on to office tenants. It wouldn’t be viable to pass land tax on to the renters – partly because it would be seen as unfair but also the market rent would be too high to be competitive with mum-and-dad-owned rental housing
These costs apply to every transfer of property. In Victoria, there is a reduction in the stamp duty foreign buyers pay if they purchase an apartment to rent out – this is one reason why build to rent has achieved so much traction in this state. In NSW, there are no such exemptions
The Managed Investment Trust (MIT) structure is the main way that overseas groups invest in commercial property. At present, there is a 15% tax rate on property types such as office, retail and industrial. For large scale residential investment (i.e., Build to Rent), this tax rate is 30%.
Search is surging on realestate.com.au but listings are still down
We are yet to see a big jump in pricing at a capital city level, but there is no denying that the level of interest in property at the moment is extremely high. We are now regularly tracking the difference between search and listings and, as a ratio, NSW is clearly leading the way in terms of recovery with search up by 29% year on year.
This is coming through in pricing (Sydney is seeing the highest quarterly price growth), as well as views per listing at a small area (Northern Beaches is topping the list). This is interesting but perhaps not surprising.
The one area that does seem to be showing a rapid change in sentiment is currently WA. Search is up by 30% year on year, listings are down and after NSW, this area is seeing the biggest imbalance between people looking to buy and the amount of property currently available.
Not surprisingly, it is inner Perth that is seeing the highest views per listing at a small area level. The difference between this part of Perth and the remainder of the city is stark. Views per listing are more than triple compared to most middle and outer suburban areas.
The toughest market in Australia at a state level continues to be the NT. Darwin is seeing around 300 views per listing making it one of the lowest demand areas in Australia.
There were 994 auctions in Melbourne and 646 auctions in Sydney (compared to 1,132 in Melbourne and 1,035 in Sydney at the same time last year). Auction clearance rates hit 78% in Sydney and 73% in Melbourne. Sydney is continuing to lead the recovery on all measures of performance (price growth, clearance rates, search).