Build to Rent: How the US model is shaping Australia’s multi-residential market
The Great Australian dream of owning our own home is sliding out of view for many. A recent Australian Institute of Health and Welfare (AIHW) report showed that 67.5 percent of households owned their own home, which is a dip from 71.4 percent over the last two decades.
On top of that, renting has risen from 18.4 percent to 25.3 percent in the same period of time. It has left many Australians calling for more affordable housing options and the concept of Build to Rent has been touted as one means of salvation for those battling for basic accommodation.
It is a scheme that has worked well in the United States and the United Kingdom, where developers will hold onto large apartment buildings rather than pre-sell the units off the plan. The developers will hold all of the units on their balance sheet or rent them out to private renters.
It has worked because the developments can be in desirable locations, rents are lower and those who cannot afford to purchase are able to rent property in areas where they need to work.
These buildings are managed like office complexes or supermarkets, rather than a body corporate, which also means better resources and management for tenants. They are also able to lock into long-term leases of up to 10 years, offering them tenure and security.
But Build to Rent has not taken off in Australia. DesignBUILD 2018 hosted a panel including Adrian Harrington – Head of Funds Management, Folkstone, Cameron Kusher – Head of Research Australia, CoreLogic and Chris Kakoufas – General Manager Development, Cbus Property to find out why.
The challenges preventing Build to Rent from latching on in Australia
There are many hurdles that need to be overcome for Build to Rent to become a reality in Australia. The first is getting people to surrender their long-held view that you need to own your own home to be successful in this country.
Key workers at hospitals, universities etc, often need to live great distances away because they cannot afford to buy or rent in those desirable areas. Build to Rent would give them affordable long-term rental options, but Australians still might not want to take it up.
“The challenge there is these essential workers actually still aspire to own their own home. They probably don’t want a huge commute as they’ve got at the moment but they still want to have their own home,” Cameron said.
“For Build to Rent to be successful, there really needs to be a bit of a mindset shift in Australia that you don’t necessarily need to own your own home to be successful.”
The cost viability is perhaps the greatest challenge, though. Property values in Sydney and Melbourne are not dictated by the brick and mortar constructions, but rather the land they rest on.
In the US there is scope to build towering 500 apartment complexes on relatively cheap patches of land, but that is not the case in Australia and developers would have to take on considerable risk. There would be no pre-sales, no guarantee of filling the units and a range of other variables that Chris Kakoufas expresses concern about.
“I am taking a guess on what the rents are going to be, taking a guess on what my capital growth is going to be, how long it is going to take to get that, am I really ever going to capture that capital growth, am I really ever going to sell apartments later on, or whether in fact there is even the ability to break them up,” he said.
Developers are also wary of constructing one Build to Rent tower in a cluster of towers because it would have better management and hinder the ability of investors to get renters into the traditional buildings.
How townhouses could pave the way for Build to Rent in Australia
The challenges of Build to Rent apartment buildings in Australia have developers like Chris nervous.
The concept of Build to Rent housing estates has had some success in the UK but would have its own challenges in terms of management – especially as Australian estates are managed by local councils and real estate agencies.
Adrian believes the solution could lie in townhouses, which offer a happy medium between management and renters who prefer to live in larger properties than apartments.
“I think the biggest area, a growth area right across the board is in townhouse developments, the missing middle,” he said.
“If you look at the ABS numbers we are seeing a tick up in townhouse development here in Sydney and Melbourne. That could probably work in a Build to Rent model.”
Could Government intervention assist in sparking Build to Rent?
Adrian said the first steps towards Government reform had already taken place, with the 2017/18 Federal Budget putting provisions in place for affordable housing.
This makes subsidies available to developers who allocated a high percentage of their projects for affordable housing, which could pave the way for Build to Rent. Adrian said that phase two of this scheme, set to be rolled out in 2019, would see community housing groups enjoy lower borrowing rates and the scope to partner with developers to create Build to Rent structures.
The fly in the ointment is Labor’s proposed changes to negative gearing if elected at the next Federal poll which will limit negative gearing to new housing from a yet-to-be-determined date after the next election. All investments made before this date will not be affected by this change and will be grandfathered.
The panellists agreed that total tax reform was likely required for Build to Rent to work in Australia, as it has in the UK and US markets.
“We really need to revisit the whole tax system to get this to work,” Adrian said.
“There are a lot of challenges around tax and just tinkering with one little bit may have some unforeseen consequences down the track.”
Education at DesignBUILD
This session was one of the poignant topics covered at DesignBUILD 2018. This year’s event is set to once again tackle the industry’s most challenging and compelling issues. The Speaker Series program will be available mid-February, register to attend to be one of the first to be notified about the program.