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, 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 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 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.