Poll result bumps off build-to-rent critics

But the Albanese win has injected new confidence into build-to-rent by removing two of the sector’s leading opponents from federal parliament.

Late last year, after much delay and debate, the Senate reduced the withholding tax for managed investment trust offshore investors in build-to-rent from 30 per cent to 15 per cent – a big move for a sector dependent on offshore capital and one that brought the sector into line with the tax regime on all other commercial real estate.

The regulations on the legislation, released just before the election, require complying build-to-rent projects to offer five-year rental terms, prevent no-fault evictions and require a 10 per cent component of each project to be leased as an affordable home managed by a not-for-profit community housing organisation.

Property Council chief executive Mike Zorbas said the legislation would unlock 80,000 new rental homes over the next decade in the “largest ever federal effort to help relieve pressure on renters”.

But that was not enough for the Liberal Party. Former opposition housing spokesman Michael Sukkar described build-to-rent as a “warped model” that “relies on Australians renting forever rather than getting into home ownership”.

“By giving a tax cut to foreign fund managers for build-to-rent, Labor is taking Australia down the path of corporate housing, where corporate landlords own the Australian dream,” he said.

He was wrong, of course. Australia needs more supply of all types of housing.

Sukkar found an ally in Greens housing spokesman Max Chandler-Mather, who said Labor’s build-to-rent plan would see “property developers and foreign investors pocket tax handouts in exchange for building unaffordable apartments that will only make the crisis worse”.

Chandler-Mather demanded a federal freeze on rents – a sure-fire way to kill new investment in rental housing.

International investors in build-to-rent remained uncertain; would a Coalition government wind back the withholding tax? Or would a minority Labor government be forced to a rental freeze?

Saturday night removed the uncertainty when Sukkar and Chandler-Mather lost their seats.

“The recent changes are viewed very positively; certainty of policy is what capital wants to see,” Novus chief executive Adam Hirst says.

Novus, which has a 2000-apartment build-to-rent pipeline in various stages of development, is raising equity and debt to fund a $1 billion slice of the portfolio including a 10 per cent affordable housing component.

“Engagement (on the raising) has been strong,” Hirst says. “Australia from a macro perspective is a very attractive place to invest.”

Richard Temlett, a national executive director at consultancy Charter Keck Cramer, says investors are happy with the outcome of the federal election.

“They are happy that the MIT changes have finally been pushed through; they are less worried about rental caps; and they are more positive that the cash rate will be cut which will make their returns more accretive,” he said.

“I think more capital will come into the Australian market, particularly from Japan.”

According to Charter Keck Cramer, the build-to-rent sector remains small, with just over 65,000 apartments – and projects of more than 50 homes – built or in the pipeline.

But no one in the sector has any doubt about its potential. In the US the equivalent multi-family sector accounts for 12 per cent of all homes and in the UK, where build-to-rent started only this century, the sector provides 6 per cent of the housing stock.

“Build-to-rent has a massive role to play in meeting Australia’s target of 1.2 million new homes,” Temlett says.

Oxford Economics, in a briefing on the sector released last year, forecast build-to-rent to account for 20 per cent of all starts in the rise in high density housing later this decade.

“We are pretty optimistic,” says Dan McLennan, the founder and co-CEO of Local, which with the backing of Macquarie Asset Management aims to have a 10,000-plus apartment portfolio by 2030.

“The fundamentals are good; volatility in construction is settling a bit; we have stability from a government perspective; and the banks are very keen on the sector. ”

Moreover, sales and raisings are proving the investment thesis.

Deals are emerging on investment yields of under 4.5 per cent, which seems incredibly tight but parallels the US and UK experience and reflects the low vacancy rates, the regular mark-to-market rents, and the low cap ex requirements on build-to-rent investments.

Tim Holtsbaum, the head of alternatives in Australia for global agency Knight Frank, stresses that the operational performance of existing build-to-rent assets has been good and delivered on underwrites.

Mirvac recently reported that its third build-to-rent project, LIV Aston in Melbourne, had been leased and stabilised in just seven months and that its overall stabilised portfolio enjoyed a 97.2 per cent occupancy along with a 3.6 per cent increase in releasing spreads.

Of course the industry will always want more pro-investment settings.

In his post-election wrap, Zorbas mentioned tax, the Foreign Investment Review Board, the Australian Prudential Regulation Authority and the Australian Competition and Consumer Commission regulations, environmental approvals and – critical for build-to-rent – industrial relations reform in construction.

The build-to-rent wish list includes GST reform, to allow the developers to reclaim GST credits as do the developers of build-to-sell apartments and student accommodation, reform to the punitive stamp duty imposts on foreign buyers, and planning reform.

But the big hurdle was withholding tax, now removed. And the big challenge remaining is construction costs.

The sector actually aligns well with two of the signature themes of the Albanese government’s second term, housing and productivity.

In February, the Productivity Commission reported on the sorry state of housing construction, noting that one of the issues holding back innovation in the sector was the fragmented nature of an industry staffed, on average, by enterprises employing fewer than two people.

The scale of the build-to-rent projects should provide scope for increased innovation across development, design, construction and management, even allowing for the conservative nature of its investors.

Mirvac chief executive Campbell Hannan has picked up the theme, looking for improved design and buildability to speed the process till the tenant moves in. The lessons learned should improve productivity across the housing sector.