One stroke of a pen puts build to rent at risk

The Turnbull Government’s surprise announcement about potentially limiting how managed investment trusts can invest in residential property represents a real risk to the supply of new dwellings and threatens millions in build to rent construction.

Last Thursday, the Turnbull Government released draft legislation for its affordable housing package, announced in the May Federal Budget. This includes a 60 per cent capital gains tax (CGT) discount for low-income rental housing.

The announcement also included a surprise announcement regarding managed investment trusts (MITs) and limiting potential future investment in residential housing.

Specifically, Treasurer Scott Morrison says the draft legislation “clarifies that, from today, MITs cannot acquire investments in residential property, except where it is affordable housing. This will prevent MITs from investing in houses, units and apartments to hold for long term rent other than affordable housing.”

Until last week, property groups could apply for a tax ruling to confirm that build to rent satisfies MIT arrangements, which are the typical vehicle of choice for collective investment in shares, property or other fixed interest assets.

“We understand the government’s desire to ensure the capital gains tax concessions announced in the Budget are targeted towards affordable housing,” says the Property Council’s chief executive Ken Morrison.

“But the draft legislation risks stalling the emerging new build to rent housing sector before it gets off the ground.

“The government’s objective to incentivise investment in affordable housing will be better advanced if it can leverage a healthy build to rent sector.”

The unintended consequences of the draft legislation will be to “completely close down the capacity for managed investment trusts to invest in build to rent accommodation”.

Morrison says build to rent – which refers to multi-unit residential buildings owned by a single entity – is a “potential game changer” in resolving Australia’s housing affordability challenge.

Many of Australia’s largest property companies have been looking at the emerging asset class, which accounts for up to a quarter of the AUD$2.5 trillion in institutional property investment in the United States.

“It’s important to clarify that institutional investors, such as super funds, are the target source of capital to underpin the build to rent sector. Build to rent isn’t about mum and dad investment. It’s about accessing institutional-grade finance to tackle housing affordability.”

Morrison says the answer to Australia’s housing problem is not to hamper the build-to-rent sector, but to enable more supply.

“Build to rent has the potential to harness new investment that could deliver tens of thousands of new homes and provide a greater diversity of choice for renters.

“If the government is concerned about the scope of MIT investment in housing, or about how MITs interact with the property market, then the industry is willing to work through those details.

“We must ensure CGT concessions for affordable housing go where they are intended, but without preventing the emergence of genuine choice for renters via build to rent.”