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Build-to-rent needs ‘major tax changes’ for take-off: UNSW

11 July 2019 Hafizah Osman

Build-to-rent is a relatively new residential product in Australia, but the model needs some “major tax changes” for take-off, according to a UNSW associate director. 

Hal Pawson, housing policy and practice professor and associate director at the university’s  City Futures Research Centre, said the model has the potential to bring about several important policy objectives, only if Australia’s tax settings are adjusted.

“Build-to-rent won’t be a silver bullet solution for Australia’s housing affordability stress, but it does have potential to tick the box on several important public policy objectives. These include widened housing diversity, enhanced build standards, and a better-managed, more secure form of private rental housing,” he said.

“But for this to happen, Australia’s tax settings need adjustment.”

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Build-to-rent involves apartment blocks to be built specifically to be rented, usually at market rates, and held in single ownership by an enduring owner, such as a building developer or insurance company, as long-term income-generating assets.

According to Mr Pawson, the model creates an incentive for higher, more enduring quality than the build-to-sell apartment development approach and is a long-run investment that caters for rental demand.

“Optimistically, some have claimed build-to-rent could also provide an ‘affordable housing’ fix for many earners who are doing it tough in our existing private rental market. But this could be possible only with the aid of major government funding or planning concessions,” he said.

Mr Pawson further mentioned that comparing the cost of developing affordable housing by a for-profit company with development under a not-for-profit community housing provider has shown how tax advantages can impact housing.

“Thanks to that non-profit format, and the tax advantages that go along with it, community housing providers can, in fact, construct affordable rental housing at significantly lower cost than their for-profit counterparts. Less subsidy is therefore needed,” he said.

“Nonetheless, government help in some form will be essential to enable an affordable housing element. The most painless way for this to happen, from the government perspective, is through allocating sections of federal or state-owned redevelopment sites to community housing providers at discounted rates.”

This strategy, recently advocated by newly designated federal housing minister Michael Sukkar, was welcomed by Mr Pawson.

“Such designation of government-owned sites could, for instance, be factored into large-scale urban renewal projects like Sydney’s Central to Eveleigh and Rozelle Bays. When complete, it could fulfil the widely voiced demand that 30 per cent of these developments should be affordable housing,” he said.

Mr Pawson also identified that a range of government tax settings disadvantage build-to-rent, as compared to small-scale mum-and-dad investors and traditional build-to-sell developers.

“Under current conditions, even market-rate build-to-rent projects are barely viable — at least in Sydney. The inflated price of developable land in Australia’s urban housing markets is an important contributing constraint,” he said.

“Removing less favourable land tax and GST treatment could markedly improve build-to-rent feasibility.”

He added that from a housing policy perspective, there’s a case for the federal government to reconsider its recent “withholding tax” decision that treats overseas-based institutional investment in rental property less favourably than investment in commercial property.

“Since such global funds would likely lead the establishment of a new Australian build-to-rent asset class, revisiting the withholding tax changes could be a significant step in making build-to-rent a reality in Australia,” he mentioned.

These proposed changes could fulfil several important public policy objectives, according to Mr Pawson.

“How far it might do so in practice is something that governments rightly need to weigh up when considering industry-proposed tax and regulatory reforms,” he added.

Build-to-rent needs ‘major tax changes’ for take-off: UNSW
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