Build to rent a double affordability dividend
There has been a somewhat "glass half empty" perspective on build to rent – the potential new asset class that has the property industry sharpening its pencils and is turning heads in governments.
But let's cast a more positive eye over this opportunity.
Why should policy makers, the community or the property industry care about build to rent? After all, does it really matter if the residential private rental market is exclusively the domain of mum and dad investors or whether it also has large-scale institutional investment?
As it turns out, there are quite a few very good reasons to care.
The first and most fundamental is the customer proposition. Build to rent can provide a much better experience for the tenant than many experience now.
Purpose-built premises, concierge and other shared services, professional management, longer term tenure options, and an ownership environment where the landlord is not going to kick you out because their kids are moving in.
With housing affordability reaching acute levels – particularly in Sydney and Melbourne – more people are making a rational decision to rent for longer, or indeed for the rest of their lives.
So there is a deeper pool of people who see rental housing as more than a short-term transitional phase in their lives.
Second, build to rent offers a potentially significant extra source of housing supply.
Build to sell construction markets are highly cyclical. Booms are followed by construction busts, which means housing supply surges and slows, despite the steady march of population growth. It is the same right around the world.
Encouraging new forms of housing supply can take the pressure off prices in our growing big cities.
Because build to rent taps into a less cyclical rental demand, this form of housing supply can flow even when other housing construction is down. In the US, multi-family developments actually lifted during the global financial crisis.
This also creates opportunities for developers looking to work through construction downturns or when delivering a multi-phase development which will straddle more than one cycle – delivering jobs and economic prosperity.
Importantly, build to rent not only can add more overall supply, it can increase the diversity of housing stock in our cities.
Thirdly, for governments interested in solutions to housing affordability, a viable build to rent sector also provides a platform to create a stronger pipeline of affordable rental stock.
It's a double affordability dividend: more supply of housing, and a platform to support targeted affordable housing.
Treasurer Scott Morrison made this a key government objective in the last federal budget.
To achieve affordable rental housing at scale, we will need both an effective regime of government incentives and a viable at-market build to rent sector as the delivery platform.
For the property industry, the opportunity is very significant. With a growing wall of local and international capital looking for quality investment product, the opportunity is to create a whole new asset class with strong underlying return fundamentals.
We are seeing a growing interest in the potential for build to rent in Australia.
The Property Council earlier this year formed a Build to Rent Roundtable to foster the establishment of this asset classes.
The federal government has led the charge with budget measures designed to foster affordable rental housing. The NSW and Victorian governments are both looking at this sector extremely closely.
The objective needs to be to support a viable at-market build to rent sector at scale with the right incentive framework to also unlock a pipeline of affordable rental stock.
There are some challenges. GST rules don't do build to rent any favours.
Build to rent buildings would also be subject to high commercial rates of land tax, as opposed to the much lower land taxes of normal residential apartments. Not every design guideline will work for this sector. And governments will need to put powerful incentives on the table to really open up a volume of investment into affordable rental stock.
The experience of the UK is that this will take some time, lots of collaboration between government and industry, and that it will take some support to establish.
The other big lesson from the UK is that it's worth the effort. That country began fostering this sector during the depths of the GFC, but now has 16,000 build to rent units in place, a further 20,000 under construction and another 47,000 with planning permission. It's gone from a trickle to a flow in under a decade.
First published in the Australian Financial Review on 12 September 2017.
Build to sell is likely to always be the dominant form of housing supply in Australia. Many everyday Australians will also continue to invest in property to build their own financial security and provide a vital supply of rental accommodation to the community.
But build to rent offers big benefits to renters, governments and housing affordability.