What is build-to-rent and why is government backing it?

Rents and property prices are rising strongly in much of Australia due to an undersupply of properties, leading some commentators to call for reforms that would stimulate the construction of a significant amount of new build-to-rent (BTR) housing.

Generally, developers sell all the new housing they build, often during the construction period. But with BTR, developers – who may be backed by institutional investors – retain the properties and rent them out, often with a much greater guarantee of rental security than with traditional rental properties.

The theory is that if a lot of quality BTR properties came onto the market, that would put downward pressure on rents. It would also put downward pressure on prices, by making renting a more attractive proposition and therefore reducing the number of active buyers.

Government announces BTR stimulus

The federal government recently unveiled draft legislation to introduce tax incentives to encourage investment and construction in the BTR sector.

The incentives apply to BTR projects that:

• Consist of 50 or more dwellings.
• Are made available for rent to the general public.
• Allocate at least 10% of the dwellings as affordable tenancies.
• Must be retained under single ownership for at least 15 years.

“Industry estimates that changes to promote build‑to‑rent investment will make an important contribution to achieving this national target and could see an extra 150,000 rental homes built over the next decade,” Treasurer Jim Chalmers said.

“We have a plan to kickstart the construction of more homes, to attract more institutional investment, to cut red tape and planning hurdles, to help more Australians into home ownership, to support renters, and to help those who need a safe home the most.”

BTR snapshot

A Real Estate Institute of Australia report on the BTR sector in Sydney, Melbourne and Brisbane found it was still in its infancy but poised for significant growth.

So far, fewer than 3,800 BTR dwellings have been built in those three cities.

“However, the pipeline of projects either under construction, planning-approved or proposed is enormous compared to current stock levels. There are 44,139 units at various stages of the development journey, with 29% of these under construction. A further 24% have planning approval and 42% are in the process of seeking planning approval,” according to the report.

The report said institutional investors might prefer to invest in residential BTR property over commercial property due, in part, to the stable and predictable returns.

“While fluctuations in residential vacancy rates do occur, the long-term average vacancy rate is far lower than that of office property. Generous incentives have also become ingrained in commercial property leases in Australia, with incentives offered to tenants as high as 40% of the lease value not uncommon in office leasing deals in the current market.”