Governments in New South Wales and Victoria are looking at ways to encourage developers to invest in apartment blocks that would be entirely available for rent, as new research shows an increasing number of Australian families will rent, possibly for their entire lives.

The concept known as “build to rent” has taken off in expensive cities in the UK, US, Japan and parts of Europe because they offer a more secure and better rental experience.

But in Australia the concept is alien, partly because of a tax system which fosters investment in the residential sector by providing generous capital gains tax discounts and negative gearing.

“Perhaps it is the stronger ethos of home ownership,” says Matthew Palm, a research fellow at University of Melbourne. But he also says tax laws skew in favour of owner-occupiers and individual residential property investors.

There is also a lack of a coherent and stable subsidy programs for affordable housing in Australia compared with many other countries – an ingredient that can dramatically change the economics on such projects, says Palm.

With the residential property sector showing signs of cooling, and data showing the long-term rental market is growing, big developers are reconsidering the idea of build to rent.

Although Australia’s largest apartment developer, Meriton’s Harry Tribuoff, has pooh-poohed the idea and said there isn’t enough profit in it, the Property Council of Australia and several large developers, including Mirvac and Grocon, are talking to the NSW and Victorian governments. It would also probably require some concessions from the federal government.

“It’s a recognition that people are renting for longer or renting for their entire lives,” says the council’s chief executive, Ken Morrison.



“The institutional investors want continued income; the renter wants a stable place to live.”

With the record-breaking property boom showing signs of abating, the development industry would also like to see policies that might smooth the slowdown.

The UK embraced the concept of build to rent during the global financial crisis as part of its efforts to stimulate the economy and simultaneously address the rental crisis that had made living in inner-city London beyond the reach of key workers such as teachers, police and nurses.

Projects such as the 7,600-unit Wembley Park development near Wembley stadium will include longer term rentals and affordable housing, with about 15% saved for key workers.

About 32% of the project overall will be designated for affordable housing with rents below market or available for shared ownership. The UK government has put £65m towards the £3bn project, which it is also helping to finance.

Using government housing policy to help drive the development of a long-term rental sector seems to be taking root.

There are 95,918 build-to-rent units completed or planned across the UK: 17,001 completed; 24,012 under construction; 54,905 with planning permission.

Morrison says Australia can learn from overseas schemes.

He acknowledges that until now it has been the lack of returns from residential rents compared with commercial property, or developing property to sell.

But he says it is getting closer to the break-even point and changes to tax laws and with access to subsidies for affordable housing such projects could be a goer, especially for superannuation and offshore pension funds.

“Build-to-rent projects usually have to be built to scale and have at least 100 units to support the infrastructure needed, which would include an onsite manager, says Morrison.

Also being discussed with the state governments are changes to land tax – which militates against large-scale projects – and concessions to density under the planning laws.

But the most critical is a clear and stable long-term policy on affordable housing.

Morrison calls it the “salt and pepper”approach, where governments partner with developers to include affordable housing in buildings designed mainly for renters. This might include a rental subsidy or even shared ownership, where the government retains part of the equity in the home, making it easier for lower-income people to enter the market.

The NSW government has established an internal taskforce to work on options, and the Victorian treasurer, Tim Pallas, is also very interested, says Morrison.

But it will also likely require some federal buy-in. Adrian Pisarski, of National Shelter, says the main barrier is the capital gains tax regime and negative gearing. These popular tax concessions flow through predominantly to individual investors and self-managed super funds and have helped fuel Australia’s passion for property investment.

The capital gains tax concessions are so generous, that some investors choose to leave the properties vacant and make their money on the capital gain.

“The Grattan Institute recently estimated the cost to taxpayers at $11.7bn a year. We should be re-tasking some of those tax concessions towards affordable housing,” he says.

Pisarski says the federal government should look at reviving something similar to the national rental affordability scheme and use some of the funds to achieve a mix of housing in build-to-rent schemes, from social housing to affordable housing and even to owner-occupied.

At the federal level, there is probably little appetite to tackle the distorting effects of capital gains tax and negative gearing, but changes to the the tax treatment of property trusts to ensure they can invest in build-to-rent projects is an easier step.

One social housing company, Launch Housing, has also recently received a tax ruling which allows landlords who list their property with an agency at a discounted rental rate to claim the gap as a tax deduction.