Controversial Tax Break Aims to Unlock 150,000 Build-to-Rent Apartments

Labor is pushing to increase foreign investment in housing supply by implementing a contentious tax break, which could potentially facilitate the construction of around 150,000 apartments in the emerging build-to-rent (BTR) sector over the next ten years. The tax break, previously rejected by the Coalition government and criticized by the Productivity Commission, has long been advocated for by local fund managers and offshore institutional investors, who believe it could significantly boost the supply of new housing amid the ongoing national rental crisis.

An EY report commissioned by the Property Council this month estimated that the number of new apartments in the BTR sector could triple from the current forecast of 50,000 if the withholding tax imposed on foreign investors in managed investment trusts were reduced to 15% from 30%. This would align it with the rate applied to student accommodation, hotels, and other commercial properties.

US BTR giant Greystar, which is building a $1.8 billion portfolio of 2,000 apartments in Australia, stated that cutting the tax on BTR projects would encourage further investment. Chris Key, its Asia Pacific Managing Director, said that the tax break would help address the acute housing shortage across Australian cities by unlocking a significant source of expedited housing supply.

Mirvac, an ASX-listed residential developer and an early adopter of the BTR sector, is planning to establish a BTR fund with capital partners by the end of the year. The company’s $1.8 billion 2,200-unit portfolio, comprising operational and developmental projects, aims to expand to 5,000 apartments in the medium term. Mirvac CEO Campbell Hanan highlighted the crucial role that the BTR sector plays in providing diverse, high-quality housing to communities across Australia.

Prime Minister Anthony Albanese announced that the upcoming budget would include incentives for investors, such as halving the withholding rate for foreign investors in managed investment trusts holding BTR projects to 15% starting July 1 next year, and raising the depreciation rate from 2.5% to 4% for constructions commencing after May 9 this year.

Albanese also revealed that the federal government’s push for new social and affordable housing would be accompanied by a national strategy to strengthen renters’ rights. This may involve restrictions on the frequency and size of rent increases. Although a completely uniform system for improved renter’s rights will not be implemented, a variety of measures will be considered to accommodate different states’ circumstances.

Critics argue that expanded tax breaks for foreign buy-to-rent developers could lead to smaller private investors being crowded out if institutional players dominate rental housing development. However, Property Council of Australia CEO Mike Zorbas believes there is room for both forms of investment and that the private rental market will continue to be the largest and most crucial component of the Australian rental market.

Zorbas stated that Labor’s tax break for BTR is a significant first step in addressing the nation’s growing housing supply deficit and that planning reform and ambitious national housing targets will ultimately reduce the cost of renting and buying new homes. Unlocking up to 150,000 new homes is seen as a major victory for public policy that has been years in the making.