Developers are facing reduced returns from build-to-rent projects which in turn is disenfranchising a sector that could be part of the affordable housing solution.
The sentiment toward the current tax regime has investors favouring office or build-to-sell projects over build-to-rent.
Research released by CBRE has underlined the three main taxes affecting apartments built for lease rather than for sale.
Land tax, goods and services tax and withholding tax all lowered the returns on build-to-rent projects by 25 per cent.
Furthermore, the internal rate of return for the build-to-rent projects would be 7.43 per cent under the current regime versus an internal rate of return in the vicinity of 12-14 per cent for a build-to-sell projects.
CBRE's head of capital markets and forecasting research Ben Martin Henry said there had been limited movement in the build-to-rent sector over the past 18 months following an initial flurry of interest
"Results would differ from development to development, the overarching results would be the same: land tax, GST and withholding tax all reduce returns on build-to-rent investments, yet these are not equally as punitive on other real estate asset classes," Martin Henry said.
“We hold the view that for the sector to flourish there needs to be deep buyer pools that would support investor demand and remove illiquidity risks.”
Last month, the federal government revealed it would change the rules to allow institutional investors to invest in build-to-rent residential projects through managed investment trusts.
Yet, non-resident investors face more disillusionment, having to pay the standard 30 per cent company tax rate which reduces their internal rate of return by another 54 basis points.
“Foreign investors would deepen these buyer pools, however doubling the price of admission would prevent many from putting a toe in the water,” Martin Henry said.
Last month, ASX-listed property group Mirvac announced the formation of the Australian Build-to-Rent “club”.
Mirvac’s first purpose-built build-to-rent asset in Australia, will be Indigo at Mirvac’s Pavilions project at Sydney Olympic Park.
UBS was financial adviser and lead manager on the creation of the club.
“We know the sector works otherwise it wouldn’t be the second largest property sector in the US, the largest real estate market in the world; it wouldn’t have the highest risk-adjusted returns; it wouldn’t attract capital from the largest funds in the world and it wouldn’t have generated the level of discussion in Australia that it has,” Martin Henry said.
CBRE’s Pacific president and chief executive Ray Pittman noted that a level playing field, rather than concessions, was required for the sector to flourish, so that preference wasn’t skewed towards one part of the market or another.