Against rising interest rates this year, home buyers may be looking for alternatives to traditional home ownership. One such option is the Build-to-Rent model.
The concept is popular in other countries, mainly Europe and the US, but is still relatively new to Australia. However, with the number of BTR developments on the rise, it’s a good idea to understand how this type of property ownership works.
Moreover, with States and Territories, for example, Victoria, NSW, South Australia, ACT and the Queensland government, endorsing them, it’s likely that this type of development will only grow in popularity.
What is Build-to-Rent?
Build-to-rent development (also known as multi-family housing) are large-scale residential developments where a single entity holds and manages the properties when they are complete.
The dwellings are rented out to tenants over the medium to long term rather than being sold.
Build-to-rent is a relatively new model of urban housing development in Australia, and institutional investors, including superannuation funds, back them. However, it’s also considered a mechanism that could be available to deliver affordable rental housing and more housing alternatives.
The format provides tenants with the flexibility of renting with greater security for tenants in the long term.
Why is the Build-to-Rent Sector Growing in Popularity?
In Australia, the typical institutional investor has traditionally shied away from residential properties because of comparatively low yields and favourable capital gains policies. However, as other commercial investment yields slow down, the build-to-rent model is starting to become popular.
According to a leading real estate services company, rents are likely to increase further as the current supply of Australian housing finds it challenging to absorb the anticipated demand. Also, tenants’ increased demand fuelled by population growth, increasing investor returns, and capital targeting housing indicates that the build-to-rent model in Australia is expected to take off over the next ten years.
Given the demand-supply situation in the rental market, build-to-rent developments are increasingly considered affordable housing options for low-to-medium-income renters.
In addition, some State governments have begun offering land tax concessions for eligible build-to-rent projects. Such incentives have further boosted the appetite for development and increased the popularity of the build-to-rent sector.
How Does Build-to-Rent Work?
With a build-to-rent project, the developer continues to have ownership of all the apartments and offers them on rent for a more extended period. The buildings are specifically designed to provide residents with enjoyment and livability through a high-amenity rental experience. The annual rent increases are generally locked when signing the agreement.
From a tenant’s viewpoint, a build-to-rent is unlike a standard apartment block, where different individuals own their respective units. However, many build-to-rents are pet-friendly and allow residents to paint walls, hang pictures and keep pets.
With build-to-rent developments, you can enjoy longer leases of up to three years, feel settled, and have greater security in your rental property. In addition, as living requirements change, better amenities like gyms, yoga rooms, co-working spaces and even dog-walking services make these rental properties more attractive to live in.
Benefits of Build-to-Rent
As the trend picks up, smaller private investors and larger listed entities are entering the build-to-rent market in Australia, each with its unique selling point.
While there are definite pluses for the investors and developers, it’s essential also to know what benefits this housing choice can offer tenants. After all, you’re the one that will be living on the property!
- Longer Lease: One of the prime advantages is the long leases tenants enjoy, as build-to-rent developers prefer longer leases, even up to 3 years in some cases. The longer lease helps you dodge a short leasing cycle, where in some instances, you have to scout for a new place every year.
- More Flexible Lease Arrangements: Lease agreements for build-to-rent developments differ from standard residential leases. Also, you may not require pre-approval to keep your pets, decorate and paint your home, or make other minor alterations.
- Access to Modern Amenities: Gyms, yoga rooms, spin studios, wellness and co-working spaces, convenient access to transport and employment nodes, and premium service delivery are standard inclusions in most build-to-rent developments.
- A Sense of Community: Build-to-rent developments foster the community element. Sharing spaces helps you create new friendships that can come in handy, especially if you’re new to an area.
- Properties Matching Your Lifestyle: Living in a build-to-rent project allows you to move to another apartment in the complex to match your circumstances. For example, you need more bedrooms for your growing family.
- Affordable Rental Housing: Government initiatives make the build-to-rent sector suitable for retirement rentals and those with moderate incomes.
- Regular Source of Income: Since investors in build-to-rent projects are typically large, long-term asset holders, the steady income source and the opportunity to diversify their investment portfolio is a significant advantage. In addition, residential assets tend to fare better than commercial and industrial assets in the event of economic downturns.
- Attractive Return on Investment: Build-to-rent amenities enable developers to charge more rent depending on the amenities. In most cases, their rental price is about 10% higher than that suburb’s median rent, except for the affordable housing component.
- Cost Efficient: Developers can minimise costs in the build and ongoing phases. For example, having maintenance facilities do bulk fit-out jobs on a retainer or wholesale rates.
Limitations of Build-to-Rent
As with any property, you should be aware of some potential drawbacks of build-to-rent before signing on the dotted line.
- High Costs: Build-to-rents usually charge a premium for security and amenities and tend to be more than the suburb’s median price. Even at a discounted price, it may be costly for some, especially those requiring social housing.
- Relatively New in Australia: Since build-to-rent is relatively new in Australia, as with any real estate project, there’s good and bad to be found. Therefore when considering these properties, research the building and understand the fine print.
- No Substitute for Home Ownership: While you may enjoy the amenities and facilities of build-to-rent developments, it still won’t equal home ownership. So, at retirement, you’ll likely have to pay rent still since you don’t own a fully paid-off home.
- Lack of Regulation: Other apartments in a complex generally have a corporate body to manage the overall site. However, with the buy-to-rent model, there usually is no committee since there is just one owner.
- Risky Investment: Though build-to-rent is somewhat common in other countries, it’s still a novel concept in Australia. As a result, developers usually have to incur high costs to undertake feasibility studies, market the projects, conduct pre-sales and build trust in the model.
- Stagnant Rent Rates: Longer lease terms mean developers could miss out on rental increases that often occur annually in the more traditional market. To account for this, developers need to ensure that they set building rents at a level that will cover all costs and still provide a return on investment, which could make some rental rates higher than in the traditional market.
- Potentially High Vacancy Rates: With build-to-rent apartments often being more than the median rent of the suburb, developers sometimes counter higher vacancy rates. Another potential issue facing the build-to-rent market is high vacancy rates.
In a nutshell, the evolving demographics of the communities and broader economic conditions impact the viability of build-to-rent projects.
How to Invest in Build-to-Rent?
Institutional investors primarily dominate the build-to-rent space.
However, small investors can gain exposure in the build-to-rent sector through real estate investment trusts, financial planners and superannuation funds. Nonetheless, this option should be approached cautiously after researching and seeking expert advice.
Are there Government Incentives for the Build-to-Rent Projects?
Yes, the Australian Government is supportive of build-to-rent projects and has introduced several initiatives to encourage their development.
To be eligible for any direct Government financial help in the ACT, the build-to-rent project would require an affordable rental component. Further, it shouldn’t sell any individual dwellings during the assistance period.
Additional benefits for eligible projects include Lease Variation Charge (LVC) remission and a land tax exemption.
The Queensland government will provide eligible developers with a targeted rental subsidy to deliver affordable and market rental housing in Brisbane build-to-rent developments.
The pilot project in Queensland, which previously targeted developments on private land at the risk and cost of the promoter, now includes an expression of interest on a site owned by the state.
The NSW Government has introduced a land tax discount for new build-to-rent housing development projects until 2040.
Per the scheme, all eligible build-to-rent properties will get a 50% reduction in land value for land tax, thereby reducing the land tax payable. Build-to-rent projects will also be exempt from land tax surcharges (or get a refund of paid surcharges) and foreign investor duty.
From 1 January 2022 to 31 December 2031, all eligible build-to-rent developments in Victoria will be entitled to a 50% land tax concession for up to 30 years. Further, there will be a full exemption from Absentee Owner Surcharge (AOS) during the same period.
In addition to these tax changes, the Government will support planning assessments, consultation with industry experts, and facilitate discussions related to the build-to-rent sector with the Federal Government.
A land tax reduction for eligible build-to-rent projects in South Australia, where construction began on or after 1 July 2021, was proposed in the 21-22 State Budget. It has become available from the 2022-23 financial year up to and includes the 2039-40 financial year.
Following the announcement, it will apply as a 50% reduction in the land value of parcels being used as an eligible build-to-rent project.
A new 50% land tax concession will be provided for eligible build-to-rent development projects from 1 July 2023. This tax relief aims to provide growth impetus for the build-to-rent sector in Western Australia by minimising investment barriers and increasing the supply of rental properties in future.
Essential Considerations with Build-to-Rent Developments
When considering investing in build-to-rent investments in Australia, it’s essential to be aware of a few key things:
The build-to-rent sector’s taxes varies from other residential properties. As per ATO, you cannot claim GST credits on construction and additional ongoing costs of your build-to-rent project. Also, GST does not apply to your rental income.
Further, there is no need to register for GST if you only supply residential rent and are not conducting any other business enterprise. This means you may need additional funding to construct the development.
However, suppose you are registered or have to be registered for GST. In that case, you can’t claim GST credits for construction or other costs to the extent your acquisitions pertain to the residential premises’ leasing.
Also, in most States and Territories, the stamp duty and land tax are higher on residential land, including build-to-rents, compared to commercial land. In addition, build-to-rent projects that foreign investors back typically attract higher income tax costs as they are ineligible for Managed Investment Trust (MIT) tax concession.
The ATO allows owners of an income-producing property to claim depreciation on the natural wear and tear that happens to a building and its assets over time. These deductions can be claimed as capital works deductions and plant and equipment depreciation.
You can claim a deduction for the capital works on your rental properties only if they are built after 17 July 1985 and are rented out or genuinely available for rent. The rate of deduction for capital works is usually 2.5% spread over a period of 40 years or 4% per year spread over 25 years.
Suppose you are unsure of your build-to-rent property development’s depreciation and tax treatment.
Future Outcomes for the Build-to-Rent Sector
As they come in different sizes and budgets, build-to-rent housing offers affordable rental options for various demographics, including young professionals, families and retirees. In addition to more rental housing choices, build-to-rent projects support construction jobs and help drive economic recovery.
Most state governments in Australia have begun acknowledging build-to-rent developments as a necessary means of affordable housing.
According to industry experts, the build-to-rent sector is expected to see continued investment. This includes institutional investors and large global investors, like sovereign wealth funds and pension funds, as well as local superannuation funds.
How Joust Can Assist Investors
With investors looking to invest in additional properties, the build-to-rent space prospects looks exciting.
Nonetheless, as an investor, it’s essential to consider the tax and other implications before investing in a build-to-rent project to ensure it suits your personal and financial goals.
If you’re looking for home loans for an investment property, our Live Auction may be able to help. This reverse auction gives you greater power and control over the loan process, and it can also save you time and money by putting reputed Aussie lenders and banks in competition for your business.
The information in this article is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.