The Australian Government is planning to enhance foreign investment in the housing market through levelling the playing field for build-to-rent projects.
Experts in the industry predict that this move could lead to the construction of up to 150,000 apartments in the emerging build-to-rent sector over the next ten years.
At the National Cabinet with state and territory leaders last week, the government said it will be reducing the withholding tax rate for eligible fund payments from managed investment trusts to foreign residents on income from newly constructed residential build-to-rent properties after 1 July 2024 from 30 to 15 per cent, subject to further consultation on eligibility criteria.
The government also said it will be increasing the depreciation rate from 2.5 per cent to 4 per cent per year for eligible new build-to-rent projects where construction commences after 9 May 2023.
A recent study by EY, commissioned by the Property Council, showed levelling the withholding tax rate, in line with investment in other property asset classes, could create an extra 150,000 Australian homes over the next decade.
Property Council Chief Executive Mike Zorbas said the move will breathe life into this vital asset class, unlocking desperately needed supply through a new form of housing.
“Today’s announcement is a strong step toward addressing and reversing Australia’s growing housing shortage,” Mr Zorbas said.
“More supply means downward pressure on the cost of renting and buying homes and will offer more housing choices and affordable options at a time when we desperately need them.
“Build-to-rent housing, like purpose-built student accommodation and retirement living, is a positive part of the national housing equation and provides tenants with long-term security of tenure, superior amenities and professionally managed properties,” he said.
Mr Zorbas said the earlier these changes come into force the earlier additional investment can commence.
“[We] look forward to future consultation with the government to bring forward these arrangements with states and territories as efficiently as possible,” he said.
According to high-level financial modelling undertaken as part of the EY study, if the managed investment trust withholding tax was halved to 15 per cent, in line with other property asset classes, three times as many build-to-rent projects would go ahead compared to a business-as-usual approach. The Australian Government would also receive a 30 per cent increase in tax receipts over a 10-year period.
Compared to other countries, Australia’s build-to-rent market is new and small.
EY estimates that the current size of the build-to-rent sector in Australia is $16.87 billion (just 0.2 per cent of the total value of the residential housing sector) with only 11 operating build-to-rent projects, and another 72 projects in the pipeline. If the sector grew to just 3 per cent of Australia’s residential stock, it could be worth $290 billion.
In the US there are more than 20 million build-to-rent housing units, representing 12 per cent of the country’s total housing stock. In the UK, the build-to-rent sector has grown exponentially in recent years from 47,000 units in 2016 to over 240,000 in 2022.
Also coming out of the National Cabinet, Housing Ministers agreed to develop a proposal for National Cabinet in the second half of 2023 outlining reforms to strengthen renters’ rights across the country.
Planning ministers agreed to, within the next six months, develop a proposal for National Cabinet outlining reforms to increase housing supply and affordability, working with the Australian Local Government Association.