» Property Development

What is build to rent and how does it work?

BMT team — Sun, 29 Sep 2019 23:20:06 +0000

Build to rent may be a growing global phenomenon but it’s still relatively new in Australia. The concept was thrust into the spotlight earlier this year when the Labor party put its policies under the microscope. As a part of the 2019 federal election campaign Labor proposed taxation reforms for build to rent in Australia. In this article we will look at the: Advantages Disadvantages Taxation rules for build to rent investors Depreciation for build to rent investments Build to rent has become a common thread in mainstream media reporting, with private real estate funds, developers and industry superannuation funds declaring their interest in the new housing asset class. So, what is build to rent and how does it work in Australia? Build to rent refers to a residential development in which all apartments are owned by the developer, often a managed investment trust, and leased out to tenants. This is opposed to the common build-to-sell method, where a developer builds a residential development and sells the apartments to individuals to either live in or rent out as an investment. Build to rent is part of a growing institutionalised housing market and is particularly attractive for institutions that want reliable, steady income. UniLodge and First State Super are just two examples of institutions to declare their interest in growing the build to rent market in Australia. Advantages Like any form of investment there are both risks and rewards involved in build to rent developments. One of the advantages is the potential to create a new form of property investing in expensive cities. Investing in trusts and funds that develop build to rent property can provide a reliable source of income at a lower entry point for the individual. The management and maintenance of a build to rent development could also be more efficient, given all units are in one ownership. In some instances, the fact that units are built to be owned rather than sold off means the quality of the building is enhanced. The housing class asset can also work well for the tenants. In Australia it presents further opportunity for retirement rentals, employment housing near amenities like airports or hospitals, and student accommodation. In cities like Hobart, where the University of Tasmania’s estimated 7,000 international students are adding to a tightening rental market, build to rent could help to alleviate housing affordability stress. Disadvantages Many experts concerned with the return on investment are adamant the government needs to pitch in in order to make build to rent work in Australia. This could be reflective of the American build to rent sector which relies heavily on government subsidies to operate. Unfavourable land tax and GST are also a concern for the build to rent market. GST is a tax passed down the supply chain and paid by the person receiving the final good or service. A build-to-sell developer can reclaim this GST tax from tenants, however a build to rent developer cannot. Tenancy could also prove troublesome. Build to rent projects are likely to attract young singles and couples whose occupancy could be short-lived. Dealing with frequent changes in occupants and covering the cost of periods of vacancy should be considered. Taxation rules for build to rent investors Taxation regulation and policy for build to rent developments vary greatly from build-to-sell property and other residential real estate. Of those who support the growth of build to rent in Australia, some believe current tax policies make the housing model less feasible. The 30 per cent withholding tax rate, high land taxes and GST concerns all play a part in the build to rent debate. Depreciation for build to rent investments Build to rent projects are likely to provide substantial weekly rental returns and significant taxation benefits including property depreciation. The Australian Taxation Office allows owners of income-producing property to claim depreciation deductions for the natural wear and tear that occurs to a building and its assets over time. These deductions can be claimed under two categories – capital works deductions and plant and equipment depreciation. While owners of any income-producing property are eligible to claim depreciation, brand new property for investment purposes will usually provide higher deductions. The easiest way to claim maximum depreciation deductions is to have a Quantity Surveyor such as BMT Tax Depreciation prepare a tax depreciation schedule for the property. A BMT Tax Depreciation Schedule covers all deductions available over the lifetime of a property to ensure investors maximise cash flow. To find out more about depreciation, visit our website at bmtqs.com.au.

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Is Australia’s apartment love affair like The Bachelor?

Simon Pressley — Mon, 21 May 2018 06:05:25 +0000

There’s an interesting relationship unfolding between the supply and demand of property markets in Australia’s biggest cities. I use the term ‘relationship’ loosely because what I’m referring to is about as scientific as that (un) reality TV show, The Bachelor. As we’ve seen over and over (make that ‘my wife has seen’ – I don’t watch the show), simply placing an attractive man and an attractive woman in a romantic hideaway is absolutely no guarantee that they’ll be compatible. It’s not that dissimilar in Australian property markets at the moment. It seems that developers and city councils are concocting their own version of The Bachelor. The plot goes something like this ‘… our population is growing, they all need to live somewhere, we’ll whack up as many high rises as we can, they’ll buy whatever we build.” They’ll all live happily ever after. Apparently! In Propertyology’s opinion, the enormous increase in the ratio of apartments to total new dwellings built in Melbourne, Canberra, Brisbane, and Darwin raises a big question mark over how these values might perform over the next decade. It’s one thing to question whether the total volume of new dwelling supply is equal to, above or below what is required to accommodate the increased population in different locations. It’s a completely different thing to evaluate whether what has been built is what the public actually want. There will always be an emotional connection between human beings, the style of dwelling that each household desires, and which part of town they want to live in. Developers don’t determine that, buyers do! According to official data, roughly 50 per cent of capital city households are families with children and, if anything, the average number of people living within each household is increasing. But for some inexplicable reason, the proportion of apartments to detached dwellings is increasing from three out of ten to almost one for one; in some cases, even higher. There’s no question that demand for apartments in Australia’s biggest cities is increasing however, the rate of apartment construction is occurring far too fast to be tested by those who they are being built for – the Australian public. For generations subsequent to the arrival of the First Fleet at Botany Bay in 1788, detached houses were the only style of dwelling built. Fast forward to 2016 (the last Census) and 43 per cent of Greater-Sydney’s 1,855,734 total dwelling stock were apartments and townhouses. And since the 2000 Sydney Olympic Games, six and a half out of every ten new dwellings approved were apartments. Evolution! Five consecutive years of record volumes of new (overall) supply may very well result in Sydney dwelling prices declining over these next couple of years. However, at least public demand for apartment living has been well and truly tested. Melbourne is a completely different story. The 2016 Census confirmed that 32 per cent of Greater-Melbourne’s total dwelling stock of 1,832,043 were apartments and townhouses. That’s quickly changing with the volume of apartments constructed over the last five years being three times higher than the long-range average. We already know about Melbourne’s population growth being phenomenal. We also know that supply of new dwellings has been at record high volumes for several years. But it seems that Melbourne developers and city councils have just rushed in and decided that they’ll marry the two together by assuming everyone has the same personality. From the start of 1985 to the end of 2017, Victoria’s average quarterly dwelling completions consisted of 7,281 houses and 2,711 apartments (9,992 total dwellings per quarter). In other words, for every ten dwellings completed, only 2.7 were apartments. From June 2012 to December 2017 (the largest residential construction boom in Australian history), the total quarterly volume of dwellings completed in Victoria increased significantly to 14,203. Detached houses represented 7,880 (much the same as the 33-year average) while 6,323 were apartments. For every new house built in Melbourne there’s now just shy of one new apartment built as well. The courting period for Melbourne’s growing population and the style of digs that they prefer to live in has not been long enough. While it’s clear that the property sector has a love affair with building apartments, the odds of a perfect match with the public is as scientific as The Bachelor. In contrast, Sydney dwelling completions during the five year residential construction boom produced a ratio of apartments to houses of slightly more than one (51.7 per cent). But the important difference is that Sydney is an extremely mature apartment market. Its relationship has been tested whereas Melbourne’s hasn’t. Melbourne’s median dwelling values have been consistently declining since January 2018; the large volume of supply of total dwellings has certainly played a part in this. But it’s the sudden structural change in dwelling style that Propertyology questions. 68 per cent of new dwellings completed in Canberra over the last five years were apartments and townhouses. And there’s more in the pipeline with 78 per cent of dwelling approvals over the last three years being for attached dwellings. That’s quite a step up from the 48 per cent three decade average. The proportion of attached dwellings completed in Brisbane (from 31.9 per cent to 42 per cent) and Darwin (41.7 per cent to 51.7 per cent) has also increased significantly. At the other end of the spectrum, only 15 per cent of Hobart’s dwellings are apartments and townhouses. Sure, apartments provide an affordable option for living closer to town. But suggesting that everyone wants to live in an apartment close to town is akin to only inviting six-foot tall brunettes on The Bachelor. Buying a property is the largest financial decision that most people ever make. People want to live in what they want to live in. It’s foolish to expect that thousands of people will fork out $600,000 plus on one asset that they’re not happy with. Maybe they’ll continue to rent. Maybe they’ll completely relocate to a different city where they […]

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How to make money out of property development

Chan Naylor Team — Tue, 11 Oct 2016 04:38:26 +0000

When I get clients wanting to see me to discuss how they can become a Property Developer you know the property market is doing ok. However, what I explain to them is that it is not as simple as just finding a site, then building and selling then finally sitting back and wait for the money. The risks are high and a lot of things can go wrong which may mean you could lose money. So it’s just not that simple. Let me share with you a model on how a Property Developer can make profits without having to construct the dwellings and then sell them. Although there is risk throughout, construction is where the majority of the risk lie. During the period it takes to construct property, prices could come down, delays in building due to weather and other building costs could go up, interest rates may go up… all of which can eat into your profit and potentially turn it into a loss. Six steps to profit by not developing I have a long standing client who follows a property formulae year in and year out through good and bad markets. I know it sounds obvious but too many Developers who believe that the profits are made when you sell the end product. It’s not… in fact it could be the opposite and if you structure the deal correctly the profits are made when you purchase. My client makes his profits when he buys the site. His formulae is not that complicated although it takes experience and know how 1/ He has a reverse agency arrangement with many local Real Estate Agents to incentivise them on referring opportunities before they go to market, similar to a Buyer’s Agent agreement where you pay the agent to source the property on your behalf. It’s all about filling the funnel with opportunities and eventually out of the funnel will spit a gem. When the market is strong there are plenty of buyers and you need to get a competitive edge by getting first bite of the cherry 2/ When he assesses the deal, it’s always done on the basis of taking the project right through to completion (construction and sale) even though his aim is to on-sell the site prior to construction 3/ The settlement of the land is always subject to a successful development application, he will always work with options on purchase or offer to pay the vendor more to incentivise him to stay around and share in the success… the trick here is the way the deal is structured as it reduces the risks of not getting a Development Application (DA) 4/ He is always looking for sites that have a twist… Perhaps council are negotiable on how many units can be built on the site, perhaps future transport links are planned, what he is looking is to maximise the potential of the site for the next person in the food chain. He only has a certain sized parcel of land if he can squeeze more units that improves profits for the next person this makes the land more valuable 5/ He invites like-minded investors to join his team and invest and these people can contribute in their own way for example he has an Architect, Builder, Accountant, Real Estate person. All these people bring something to the table. He then corporatises the process to ensure transparency and he has the sounding boards of experience 6/ Finally he generally on-sells the site once the DA is approved and understands that there has to be a margin available for the next person, I have seen him follow this strategy time and time again and although he doesn’t make or take the margins on construction he is quite comfortable to take less return but at the same time less risk. This also gives him the ability to move quickly into the next project. He has lower margin but higher turnover The above model has been simplified for this article and there is a lot more detail with each step but it’s just another example of a Property Development system (there are many systems) as with any property development there are still risks associated with this model but it’s an interesting concept to keep in mind, property development at this level requires specific skills and experience. My suggestion is if you are seeking to get into this type of business ensure you have the right people around you to advise and hold your hand through the process and always remember the success of the project is determined on purchase so take your time to ensure you strike and structure the right deal. Please always seek professional advice on your individual situation before embarking on such ventures. For further information about how Chan & Naylor can help assist you visit www.chan-naylor.com.au or phone 1300 250 122.

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