As the 2019 Federal Election approaches, Labor’s proposed bill for housing reform has come under increasing scrutiny. Among the proposed reforms, changes influencing negative gearing have been widely and thoroughly discussed.
Less known, however, is Labor’s shift toward build-to-rent, a ‘residential development in which all the units are retained by the developer and leased out, rather than sold off’.
Build-to-rent is an attractive option for several reasons. From a policy standpoint, encouraging build-to-rent creates a long-term, affordable alternative to the traditional build-to-buy models that can help combat Australia’s rising household debt. Institutional investors that require reliable funding will also be attracted to the growing market.
However, there are also significant barriers to the build-to-rent market, one of which is the high tax on income streams derived from build-to-rent investments. It is this that Labor hopes to tackle in their proposed housing bill. Specifically, Labor is intent on ‘lowering the managed investment trust withholding rate on tax distributions attributable to investments in build-to-rent housing from 30 per cent to 15 per cent'.
A managed investment trusts [MIT] is ‘a type of trust in which members of the public collectively invest in passive income activities, such as shares, property or fixed interest assets’. In other words, MITs allow money to be pooled from multiple individuals to purchase a build-to-rent property. This practice is more common in non-residential assets, especially since in recent years, the Morrison government has attempted to stifle MIT investment in residential real estate [outside of affordable and disability housing] by increasing MIT withholding rate from 15% to 30%. The proposed housing reform from Labor would see this increased tax undone.
Should Labor’s housing reform be successfully implemented, what does this mean, then, for the residential real estate market?
In the short term, housing affordability is unlikely to improve, especially since the build-to-rent model has yet to effectively establish itself in Australia’s residential real estate market. In fact, JLL research suggests that the short term will likely see rents rising, as evidence from UK’s build-to-rent market finds that on average, premiums on build-to-rent accommodation are approximately 11% higher than the respective local markets.
The long term may yet improve Australia’s housing affordability, however. This theory subscribes to the supply-demand principles of market prices—if build-to-rent successfully establishes itself in the residential market as well as positions itself as a viable long-term alternative to home-ownership, build-to-rent accommodation will increase housing supply and be able to compete with build-to-buy models for consumer demand.
This, in turn, will result in build-to-buy housing becoming more affordable as consumer demand for the build-to-buy model falls.
Hypotheticals aside, the current Australian stance on build-to-rent as a long-term housing alternative remains unconvinced. A recent HIA survey found that 92% of Australian tenants continue to aspire toward owning their home. The question, then, is whether the build-to-rent model is capable of positioning itself as an attractive alternative to home-ownership.
At this stage, it seems unlikely. Tenants continue to have less protection than homeowners in retirement. Rising rental costs have a diluted impact on homeowners, and home equity withdrawals help fund health and aged care. Tenants, on the other hand, are exposed to the risks of rising rental costs and left vulnerable due to a more limited access to retirement funds, which severely diminishes the attractiveness of the build-to-rent model as an option for long-term accommodation.
The road to firmly establishing build-to-rent accommodation on equal grounds with the build-to-buy model is rife with obstacles. Labor’s proposal only tackles one facet of it by making it more affordable for investors to enter the market. Other issues must be considered and addressed before build-to-rent can become a truly viable alternative. (ET)