Australia's Housing Future and the Build-To-Rent Approach

As housing affordability continues to sweep the headlines – a bipartisan catchcry for housing woes – incentivising an Australian build-to-rent market has been put forward as a solution.

Given that Australia's housing affordability issues show no signs of abating for the foreseeable future (apparently the next 40 years), the proposed build-to-rent market, if not a solution, will perhaps go part of the way to attempting one.

Build-to-rent properties are not sold to individual owners or investors after development is complete. Rather, developers or groups of investors with interests in the building maintain an ongoing interest in the property and later rent out the residences themselves.

The aim of the build-to-rent system is to attempt to provide more affordable living options, as well as longer-term leases, centralised building maintenance services on site (rather than having to call the real estate or landlord), and even greater flexibility for tenants to redecorate and feel more at home.

Recently, companies in Australia have been investigating the market more seriously with Mirvac looking to use the backing of superannuation funds to launch a build-to-rent development in Sydney. The New South Wales Government is running working groups to assess the viability of establishing a build-to-rent asset class in NSW.

Knight Frank Research & Consulting Director Paul Savitz said that in Australia, until recently, only state governments and social housing landlords in Australia built rental homes for people on low incomes.

“For those ineligible for affordable housing, or for those unable or unwilling to enter the owner-occupier market, there has been a reliance on small-scale, largely unregulated ‘amateur mum and dad landlords’ who either rent out their own former homes or accumulated portfolios of properties,” he said.

“The proportion of rented housing across Australia is increasing. This is due to multiple factors, including an increase in residential apartment construction; a favourable investor lending and tax environment; historically low interest rates; the rise of the overseas buyer; and the rapid increase in dwelling prices.”

Savitz, in a report he produced earlier this year, predicted NSW, VIC and QLD will have approximately 31%, 30% and 33% of all households privately rented from a landlord by 2019/20 – up approximately 5% on current levels. This is at the expense of owner-occupation.

“The appeal of rental accommodation is increasing due to factors including flexibility of tenure, whereby, for example, a young professional can live close to the amenity of the CBD; or the need to house families in more suburban locations close to schools and medical centres,” Savitz said.

So, Australia has almost everything it needs to kick-start this sector. These efforts could not come soon enough: failing to tackle the situation will cost us billions of dollars. However, state and local efforts cannot reach their full potential unless the federal government steps in with something only it has: cash.

This was a major point brought forward by Lendlease, who suggested Australia's approach to the build-to-rent scheme will not be successful if this element isn't properly addressed.

The federal government has attempted build-to-rent schemes before, with the National Rental Affordability Scheme. Built off a similar US model, the program rewarded investors in affordable housing with tax credits.

The program’s US counterpart, known as “tax credit housing”, is so popular that a bipartisan group of senators are working to expand its funding by 50%. Indeed, Australia’s super funds have even invested in US tax credit housing.

[Related reading: Australia's housing affordability crisis: What can be done?]

Australia abandoned the National Rental Affordability Scheme in 2013. The government is instead creating a “bond aggregator” agency to support build-to-rent affordable housing. This agency will issue government-backed bonds to provide cheap loans to housing associations to build affordable housing.

But truly affordable rents for Australia’s low-income households cannot cover the combined cost of building and operating apartment buildings, even with cheap loans. US housing experts call this problem the “housing finance gap”, and many of their Australian counterparts have called on the federal government to help fund it.

University of Melbourne Postdoctoral Research Fellow Matthew Palm believes it can be done.

"Asking the federal government to cover around $90,000 per affordable unit may sound like a lot. But a decent apartment can last for 30 years before requiring substantial rehabilitation. That translates to just $60 per week," he said.

"Although Australian construction costs are higher than in the US, even if we double it we are still spending only $120 per week. This amount is paltry compared to how much money the low-income family living in such an apartment will save if the apartment is located in inner Melbourne or Sydney.

"Add the long-term healthcare, social service and educational benefits and cost savings into the mix, and this is one smart investment."

Information courtesy Knight Frank & The Conversation.