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.
Since then, the term 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?
What is build to rent?
Build to rent refers to a residential development in which all apartments are owned by the developer and leased out to tenants. This is opposed to the common build to buy 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 of build to rent
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 of build to rent
Many experts 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 buy developer can reclaim this GST tax from tenants, however a build to rent developer cannot.
Tenancy could also prove troublesome. Build to rent is 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 buy 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.
Build to rent tax rules became an election issue in May 2019, when the Labor party proposed to halve the withholding taxes placed on managed investment trusts (MIT) fund payments to foreign investors, specifically where income is coming from build to rent assets. The proposal came less than twelve months after the Morrison government increased the withholding tax rate on MIT from 15 per cent to 30 per cent in September 2018.
The increased 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
Depreciation for build to rent investments rely heavily on the ownership structure of the development. Depending on the ownership structure and operation of the build to rent development, the developer may be outside the scope of the 2017 budget changes if they were to fall into this category.
The 2017 legislation changes do not apply if the entity is:
- a corporate tax entity
- a superannuation plan that is not a self-managed superannuation fund
- a public unit trust within the meaning of section 102P of the ITAA 1936
- a managed investment trust
To find out more about depreciation, visit our website at bmtqs.com.au.