House prices in both New Zealand and Australia are now well off their pandemic peaks. However, housing affordability remains a significant social (and political) problem. Increasing numbers of people, particularly but not only the young, view home ownership as unattainable.
That situation looks set to deteriorate further in Australia as, contrary to most predictions, house prices appear to have already bottomed and are now on the rise again. Absent a return to falling house prices or a dramatic decline in interest rates, buying a house is not going to be an option for many Australians any time soon.
Unfortunately, renting is also becoming more difficult. Vacancy rates in most Australian capital cities are currently at near record lows and rents continue to climb.
Unsurprisingly, the Labor government of Anthony Albanese recognises the political risk of a housing crisis. It’s promoting a number of initiatives to facilitate more dwelling construction. These include two steps announced in the latest federal budget to encourage the ‘build-to-rent’ (BTR) market.
BTR, known in most jurisdictions as ‘multi-family residential’, refers to large-scale residential projects developed for rental to long term tenants. They are usually owned and funded by institutions and frequently offer a higher level of amenity for residents than most ‘build-to-sell’ (BTS) projects.
The BTR market is much more established in Europe, the US, and Japan than in Australia (or NZ). It has more acceptance in those countries as an institutional investment asset class.
What’s causing Australia’s housing crisis and will BTR be part of the solution?
According to the most recent report from the National Housing Finance and Investment Corporation (NHFIC), over the five years from 2023 to 2027 new household formation will exceed new supply of housing by 106,000.
Supply is being adversely affected by a range of factors including rising interest rates, rising construction costs, supply chain delays, long lead times for delivering new projects, planning restrictions, and NIMBYism.
Demand for housing is the result of strong population growth and an ongoing trend of smaller households. The former is being driven by a massive increase in net immigration – 400,000 plus in the current financial year, 315,000 next year, and a forecast total of 1.5 million over five years.
The key question is whether the BTR model has any specific features that can facilitate the supply of new dwellings and help close the housing gap.
Two stand out.
The first is scale. JLL’s report in March on the state of the BTR market identifies the operational BTR assets of ‘prime or institutional grade’ in Australia. The developments are predominantly large scale, the largest comprising 1,250 apartments.
The second, and perhaps the most beneficial feature in the current economy, is funding. Most BTR projects are backed by deep-pocketed institutions, many of them foreign. This has a number of advantages including a low cost of funds and a long-term investment perspective. Significantly, unlike BTS projects, commencement does not require the pre-selling of apartments to third party buyers.
The JLL report identifies some of the key BTR funds in the market, including six with a fund size in excess of $1 billion and eight with an initial target of more than 5,000 apartments. Key foreign institutions involved in these funds include GIC, the Singaporean sovereign wealth fund, PGGM, a giant Dutch pension fund, and Blackstone, the international asset manager.
The graph below shows the BTR supply pipeline at the end of last year.
That pipeline, already promising, is likely to increase significantly due to two substantive changes announced in the latest budget. To incentivise the supply of BTR housing, the federal government is
- increasing the depreciation rate for eligible BTR projects from 2.5% to 4%, and
- reducing the ‘managed investment trust’ withholding tax rate for eligible BTR projects from 30% to 15%.
A BTR project will qualify for these concessions if it involves at least 50 apartments, the apartments remain under single ownership for at least ten years, and tenants are offered a lease term of at least three years.
These targeted concessions will lift the after-tax return for BTR projects and were provided by the government in response to lobbying from the industry. The budget document specifically referenced industry estimates that ‘this could unlock 150,000 rental properties over 10 years, boosting the supply of high-quality, long-term rentals in the Australian market’.
The descriptor ‘high-quality’ reflects the desired positioning of most BTR projects. The concept is a high standard of apartment in a complex with generous amenities, often in sought-after inner-city suburbs. A key feature is long term leases to provide tenants with greater security of tenure.
The quid pro quo of ‘high-quality’ is of course a premium rental rate for the landlord. That’s the element that makes BTR attractive to institutional investors.
The rapid rise in rents currently occurring across the Australian housing market, and particularly in the capital cities, enhances the prospects for the BTR market. So too does the expectation that the current tight conditions are likely to continue for some time, in part because of the slowdown in BTS activity. The latter has the added advantage of suppressing prices for the type of large-scale sites needed to undertake BTR projects.
All things considered, the outlook for BTR in Australia looks promising. That perception is backed up by the regular stream of announcements from new international players entering the market here. Just this month, Canadian property powerhouse Brookfield has lodged an application for a 560-unit BTR development in Brisbane. Brookfield manages real estate assets worth US$270 billion worldwide, including tens of thousands of BTR units.
Presumably, investors of this calibre know what they’re doing. The only question is whether enough Australians will be able to afford the higher rents demanded by BTR.
*Ross Stitt is a freelance writer with a PhD in political science. He is a New Zealander based in Sydney. His articles are part of our 'Understanding Australia' series.
44 Comments
sure guys , let's make "build to rent" more clear: We BUILD for the expense of those who cannot afford to own (tax payers) so they can RENT something which was built for their money but they will OWN NOTHING because their money were used to BUILD something for them to RENT ... because they...
It's all logical , isn't it? Jasindaheads will love it !
Generally new build rentals aren't profitable from a cashflow perspective. Salespeople from OPES etc focus on making it EASY to buy and own. They harp on about maintenance and other things to spook people, and distract them from their poor cashflow, and even more to hide the fact that their business model (flood the market with new builds) actually works against the investor. Watch for a focus on overall ROI, because without an annual unrealized capital gain the numbers aren't good.
Now if you layer needing a corporate profit margin on top of that then I can't see where current ratios of build/land costs to rents makes sense for build to rent. Mix in the high lending rates and it's tough unless you're doing it at a large scale. Even then it ties up a lot of capital in a property and requires investors in your business to accept a lower return than just about any other form of large scale property investment.
In conclusion: No thanks. The government will have to heavily subsidize this if they expect it to fly and there is zero chance it grows at the scale needed to handle any kind of population growth.
Create cost efficiencies in land and construction outlays.
We know people who built multiple blocks of auckland units in the 60s and 70s which are still owned by the family. They weren't rich at the time but the young and old family members teamed up. Created great cashflow for decades.
Ridiculous.! Who and how do people qualify.
Is it for anyone or for a select few.?
Who misses out and why?
What areas are the available and why certain areas and not others
Build to rent to buy is rort with issues. Devisive/ fairness/ cut off/ race/ unemployed v enoloyed issues.
The institutions building these will want reasonable returns or they will not enter, I do not understand why Ma and Pa think they can enter the investment market at typical NZ rental yields and make money - who is the bag holder? National will have held conversations with Brookfield who as it says above manages US$270 billion worldwide, including tens of thousands of BTR units. This is the only way now not to run out of houses.... The migrants and NZ plebs cannot afford to buy so institutions rent to them forever.
Was reading about the post-war Japan situation the other day. Public housing was an absolute necessity. Don't see why NZ is any different. Expecting the private sector to be able to deliver doesn't make any sense. The pvte sector doesn't have the capacity or capability for the scale of the problem.
To address this issue, the government established the Japan Housing Corporation as the final of three housing policy pillars. The first gave loans to well-off citizens to build homes, while the second provided low-income housing. The JHC would exist somewhere in between — by providing public housing for the blue and white collar workers pouring into urban hubs like Tokyo, who would form the backbone of a new middle class.
Unfortunately, the NZ govt and bureaucracy are obviously nowhere near the caliber of what the Japanese obviously had at that time.
https://www.bloomberg.com/news/features/2021-04-07/the-design-history-o…
Maybe the RBNZ needs to print some money and then lend it to a NZ version of Fannie Mae etc, allowing them to buy 25 year loans off smaller mortgage brokers etc etc. We could have money available ONLY to owner occupiers.... at whatever rate we wanted..... instant affordability but limited DTI of 4.5, its no different to the 1% green loans that ASB and all the others are offering for green lending, no different at all.
Sure. Would not be a free market though. And would probably kill the bubble once and for all. Or at least until our economy was able to generate wealth outside trading houses.
By the way, you don't need the brokers or the Fannie Mae. Keep it simple. You need a to create some kind of govt dept for administration. In the case of Japan, I believe the construction of the properties was carried out by the private sector. Because we are so incompetent, we might need a construction company from China to deal with something of this scale.
I assume the institutions raise finance for the build via a bond type arrangement secured by the rental flows?
They run thus get a management fee and in 30 years time or perhaps sooner they own them... I assume they are then free to sell the complex to another operator , rinse and repeat...
this the profit is in the residual value of the assets plus a management fee along the way and a margin made in rent over costs, so its operating like a developer/bank/property management/land banker all at once.
Its smart, and I imagine quite low risk business?
If it was easy and profitable then the market would be flooded. When you pay 6.5% interest on something that costs 600k to build, owner pays rates, insurance, maintenance and whatever other levy the ticket clippers dream up, then you need to rent it out for a lot more than people can pay in order to turn a profit. Far easier to build a giant shed, lend it to Mitre10, and not be periodically painted in the media (and comments section) as a scourge on society.
Many often talk of Australia’s superiority over NZ. I include myself in that commentary, especially with regard to cost of living.
But boy they have some issues too. We think immigration is out of control here, well it ain’t anything compared to Aus.
It just seems ludicrous, a massive own goal that’s creating a diabolical housing situation there.
Aussie is becoming a failed state. Why the need to import people like it's going out of fashion?
1. Without the aggregate demand immigration provides, the Aussie ruling elite is terrified the economy will fall off a cliff. That means the bubble will pop and businesses will go under.
2. Aussie still needs an equivalent of indentured slavery for the economy to function (much like NZ). Too many high-cost structures exist. And that is also partly related to the over-reliance on the bubble as the backbone of the economy.
Aussie is a wealthy country but has been woefully mismanaged for quite some time.
Part of the reason is because unlike NZ, Australia sent all its temporary migrants home during Covid. Whereas here Jacinda guaranteed them all welfare benefits and permanent residency. Now Australia needs to replace those people, otherwise they face a wage price spiral that will exacerbate inflation. One reason their OCR is so much lower than ours is because the RBA is relying on immigration to take the heat out of the labour market, although they did not count on rental inflation being so widespread. But that will probably ease as more migrants buy houses, which is happening already as witnessed by the fact that house prices are rising again (Sydney up 4.5% since Feb).
According to the World Population Review Australia's homeless rate is four times that of New Zealand's.
https://worldpopulationreview.com/country-rankings/homelessness-by-coun…
Urgent need for Australia to generate creative future housing solutions
https://independentaustralia.net/politics/politics-display/urgent-need-…
I guess that's what happens when Social Housing Managed stock is reduced from 67k in 2015 to 63k by 2017. The people who cannot afford market rents need somewhere to live... Thankfully those numbers are now up to 69k in 2022.
- https://kaingaora.govt.nz/assets/Publications/Archive-Managed-and-Vacan…
- https://kaingaora.govt.nz/assets/Publications/Archive-Managed-and-Vacan…
- https://kaingaora.govt.nz/assets/Publications/Archive-Managed-and-Vacan…
BTR in NZ - taking away "tax breaks" from individual Kiwi investors who spend their rental income in the local economy; and giving four to five times the value of those "tax breaks" to large foreign corporates who then move all their profits offshore. Apparently this is #winning
Meanwhile people who can not afford to buy a house, will never be able to rent one either. Forced into high rise apartment buildings, battery farmed like chickens, and paying a higher rent for the privilege of having no backyard or garage. Kids will grow up never leaving their bedrooms.
Better return on BTR than many pension funds of today and all of the past. Very much a 'long investment' which are somewhat out of fashion in our get-rich-quick times. Use a spreadsheet and you'll get what I mean. Hint: debt is at todays dollars and rents just keep on going up.
Notice house prices are back rising in Aus again but why not NZ? I think its because off too much interferance with the market by Reserve bank lending settings and Minister of Finance capital gains tax and no interest deductibility on rental investment. So with these settings in NZ and rising population it will only be a matter of time before there is a rental shortage in NZ. So things need to change
Wonder how much the accommodation supplement is costing taxpayers weekly this year ,then theres emergency housing and other schemes/manipulations (OCR). Theres so much background distortion in the housing market and much of it is not conducive to creating stability. The 'haves' seem to think there life path is cut and dried because they 'have' when intrinsically its never as cut and dried as many assume (divorce/illness/death/unemployment/redundancy/kids getting married,etc,etc) . The 'STATE' looks somewhat favorably upon the landlord/investor/social providers for perhaps 'standing in the gap' by making available housing to those unable to themselves be 'owners' but in doing so creates a growing list of taxpayers that will most likely never be able to afford ownership. The latest value climb (some call the ponzi) has seen values rocket and mortgages shift from 20 to 30 years . Looking forward if similar growth repeats (double every 10 years) mortgages will likely need to shift to 50 year terms. Lets not mention intensification and the huge costs associated with such which further nudge values into the twilight zone. Lets forget those endless green paddocks of grass that lay within and out of the city borders but plan on upward more vulnerable pack them in like sardines structures type planning will likely not end well. Seems to me that someone needs to figure out a way to enable those that draw a steady income (even if it is low wage) to be able to own a house. Those that have no income or are 'feral' will always be of a certain % of the larger populace. Those that are consistent earners should not be classified the same . I should like too see the accommodation supplement erased as I feel that expenditure would be better spent on financing lower income earners into ownership. I feel also that it would discourage landlords from asking rents folk clearly cannot afford. It is a govt funded market distortion that needs to go. Waits for the howl of the Wolves....lol
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.