A $500 million residential planned by Lendlease at its Melbourne Quarter project could become one of the early winners of a Victorian tax break designed to stimulate build-to-rent developments.
As part of a package of budget measures to boost the housing sector, Victoria will halve the land tax levied on build-to-rent developments from 2022 through to 2040. The Victorian move follows a similar land tax cut for BTR projects adopted by NSW in July this year.
UBS analysts said the Victorian tax cut could deliver an even greater boost to in that state, given that more than half of mooted BTR projects are based in the southern state.
“We estimate that this will add 5 per cent to income,” UBS analysts wrote in a client note following the budget this week.
That uplift represents a yield on cost of around 5 per cent. Given the UBS expectation that BTR projects will transact on a less than a 4 per cent cap rate, they wrote, “this is a significant uplift to the end value of projects”.
“This change will make more projects viable as BTR and enable groups like Lendlease to achieve a development profit (e.g. 15 per cent margin on cost) for Victorian build to sell (BTS) projects, which are re-purposed as BTR.”
Lendlease chief Steve McCann signalled in August that the global property giant was actively considering the Melbourne Quarter and Brisbane Showgrounds projects for their potential to become build-to-rent housing
“We do believe there is capacity for conversion of some product. We are already focused on how we might tweak the design aspects to maximise their value as rental products,” he said at the time.
One of the strongest prospects such conversion is the second apartment tower, an 800-unit proposal, which Lendlease has on the drawing board at its $3 billion urban regeneration site in Melbourne’s Docklands.
Diversified developer Mirvac is an early leader in the emerging BTR sector as well, completing a project in Sydney and with at least three more in the pipeline in Melbourne.
“We welcome the land tax concession from the Victorian Government which will help facilitate a successful and scalable BTR sector in Victoria, as it allows BTR developments to be subject to similar amounts of state tax as build to sell,” Mirvac chief Susan Lloyd-Hurwitz told The Australian Financial Review.
“We are keen to work closely with government to ensure that the details of the scheme work to assist the sector. Experiences in other states has shown the need for industry and governments to work closely together to ensure the best outcomes.”
UBS analysts said that investors were underestimating the potential of the sector and the ability of operators, including Mirvac and Lendlease, to achieve development returns once BTR projects are completed and sold down.