Housing shortages, an Australian solution

The housing shortage in Australia has been widely publicized. The public and private sectors are very much alive to the issue: how do we address this demand, and quickly?

Alternatives to the traditional build to sell (BTS) model have been floated for several years. The build to rent or multi-family (BTR) models have gained the most attention and momentum recently.

The challenge for new products like BTR is the lack of a suitable legal and taxation infrastructure to support or incentivize developers and operators to invest. And it’s also difficult to access financing.

But we’re now seeing more BTR projects in the housing stock pipeline. The number of BTR units under construction with plans approved or going through planning between now and 2025 has reportedly doubled year on year from 2021 to 2022¹. In response to the housing shortage and the perceived difficulty with the BTR model, momentum is growing for other alternate models in the residential sector.

 

Some numbers and perspective

Some interesting metrics underpin the lack of residential supply:

• The estimated shortfall of homes needed to house new households will be nearly 165,000 by 2032 and we need an extra 20,000 dwellings a year to avoid that housing deficit.²
• In 2021, there were nearly 9.8 million households in Australia, of which 31% (2.9 million households) were renters.³ The Rent Affordability Index⁴ 4 report published in November 2022 suggests that rental affordability in Australia is at an historic low. And demand for rental accommodation has increased significantly since borders (both local and international) reopened after COVID-19.
• The home ownership rate of 30-34-year olds was 64% in 1971, decreasing 14 percentage points to 50% in 2021 (unpublished, AIHW analysis of Census data). For Australians aged 25–29, the difference was similar – 50% in 1971, compared with 36% in 2021.⁵

These figures tell us:

• there’s a clear need to support and encourage efficient development of residential housing; and
• action is required to ease pressure on housing affordability, both to own and to rent, and to facilitate long-term, sustainable accessibility to housing.

There are high hopes in the market for what increased investment in BTR projects will do to ease some of the pressure on the housing market by delivering quality, and ideally affordable residential stock to the Australian market.

 

BTR – where we stand now

The BTR model is relatively new in Australia, so much so that no Australian jurisdiction has defined what BTR is. This creates challenges for those looking to operate in the BTR space, as it means the legislative and taxation framework that BTR operates in is not fit for purpose, making efficient project structuring a complex task.

The recent surge in the BTR pipeline is largely because of low vacancy rates in residential property and the anticipated shortfall in pipeline in the next few years. Eliminating some of the continuing barriers to investment in BTR locally is necessary to support the continued growth of the BTR market, and consequently, the supply of additional residential stock to the market. This will make it easier to attract capital, investment by institutional investors (local and foreign) and improve accessibility to finance.

Perhaps the most pertinent barrier comes from classifying BTR as “residential property.” Large-scale real estate assets are often conducted through Managed Investment Trusts (MITs). And it’s predominantly non-resident investors who use this structure.

The main purpose of holding assets in an MIT is to take advantage of a lower tax rate – halved from 30% to 15%. This is a strong incentive to invest in Australian property. But under the changes introduced by the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019,⁶ income from residential property (other than for affordable housing) is categorized as non-concessional income and is taxed at 30%.

Treating BTR as residential premises under Australia’s Goods and Services Tax (GST) regime is less favorable than for BTS developments. Under a BTS developments, a sale to a buyer of a “new residential premises” (less than five years old) is a GST taxable sale. So the developer can claim credits for GST they’ve paid on development inputs. But as leasing residential premises is an “input-taxed” supply, as no GST is levied, no credits can be claimed for GST paid on development inputs. BTR developers therefore end up absorbing those costs. If BTR developments were instead classified as “commercial residential” developments or had some other similar classification, developers would be able to claim for GST paid on development inputs.

Other challenges in the BTR structure, include:

• Local planning issues and a need to educate local planning authorities on BTR to facilitate the approval process. The uncertainty in treatment of BTR applications can dissuade investors from pursuing BTR projects as development costs are affected by the certainty of planning approvals. In Victoria, the Build-to-rent Standing Advisory Committee has been established to address this to provide a consistent, timely and transparent process to assess the merits of planning permit applications for BTR developments.
• The calculation of land tax on the aggregate site value of land is a concern for BTR investors. Unlike with commercial premises, generally these costs cannot be passed on to tenants under residential tenancy laws. Recently land tax concessions have been provided in Victoria and New South Wales. For example, in Victoria “eligible BTR developments” are entitled to a 50% reduction on the taxable value of the land used for the BTR development for up to 30 years, if the development continues to satisfy the eligibility criteria for a continuous period of at least 15 years.

 

Alternatives to BTR – the disruptors

The combination of the stress on housing supply, affordability and the perceived challenges with BTR has encouraged stakeholders – including developers, operators and affordable housing advocates – to innovate in the industry. One of the more notable models is the “build to rent, to buy” model. Created by real estate developer Assemble, it provides quality housing while giving residents rent stability, transparency on price and, importantly, a path to home ownership. Residents have an option to buy the apartment after five years.

Some other models have focused on providing access to finance, including through crowdfunding (e.g. CrowdProperty) and “baugruppe” models (eg Property Collectives), both of which are delivering successful projects, albeit on a smaller scale than BTR projects so far.  

 

Thoughts to leave you with

The shortage of housing, escalating rent and the resultant decrease in housing affordability in Australia means we need intervention now. A national approach to BTR (or other model to deliver residential property), even on an interim basis may provide the incentive required to kickstart further investment. And it has to enable the private sector to deliver quality residential stock, for a return commensurate with other similar real assets. With traditional BTS development and the additional stock created by market innovators, BTR done right has the capacity to increase the supply of rental properties, sustainably.

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¹Build-to-rent Australia: Tight rental market helps increase pipeline of BTR projects from Grocon Move, Mirvac, Greystar (afr.com), read more here;
²Build-to-rent is seen as affordable, but it’s unlikely to help those most in need - The Fifth Estate, read more here;
³Home ownership and housing tenure - Australian Institute of Health and Welfare (aihw.gov.au), read more here;
⁴Renting across Australia became less affordable in 2022. See how much your state has changed - ABC News, read more here;
⁵Home ownership and housing tenure - Australian Institute of Health and Welfare (aihw.gov.au), read more here;
⁶Also known as the Stapled Structures Act.