Tenants are attracted by the prospect of affordable, high-quality accommodation in convenient central locations, near to public transport, shops and other local conveniences. With available land at a premium however, finding suitable locations of sufficient size is becoming challenging for developers.

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Investors in the sector have come to realise that the BTR sector can provide them with a steady income whilst being seen to achieve social goals, such as making more housing units available in prime city centre locations. The sector encompasses affordable housing, social housing and retirement accommodation. This only adds to the attractiveness of the Australian property market which has historically been seen as low-risk for foreign investment.

Much of the current development is taking place in Australia with the completion of projects in Richmond, Southbank, Caulfield and Queen Victoria Markets. Brisbane has also seen activity with plans to build a 443-unit tower at Brisbane Showgrounds, as has Sydney with Urban Property Group’s (UPG) latest project set to commence in March in Granville joining UPG’s other projects in Penrith, Edmondson Park and Parramatta.

Sovereign wealth funds and pension funds are able to invest in residential real estate and affordable housing through a Managed Investment Trust (MIT). Governments across Australia in 2023 introduced new tax changes to boost investment.

On 28 April 2023, the Australian government announced it would provide incentives to increase the supply of housing, by reducing the withholding tax rate for eligible fund payments from MITs attributable to residential BTR projects from 30 to 15 per cent. The measure will apply from 1 July 2024 onwards in relation to income attributable to newly-built BTR projects.

The capital works tax deduction depreciation rate for eligible new BTR projects will also increase from 2.5 per cent to 4 per cent per year. The measure applies to projects where construction began after the day of the budget (9 May 2023) and will reduce the period that construction costs of eligible buildings are depreciated from 40 to 25 years.

Governments in Queensland, New South Wales, South Australia, Western Australia and Victoria have also introduced similar tax incentives in recent months. The Queensland government, for example, recently announced land tax discounts of up to 50 per cent for projects consisting of at least 10 per cent affordable housing.

There are opportunities for institutional investors in providing financing to new projects. In the United Kingdom, non-bank lenders are particularly active in the equivalent Private Rented Sector market suggesting that if Australia follows a similar path as the sector develops, there will be interest from Australia’s superannuation funds and insurance companies to participate by contributing debt or equity.

Part of the reason for the recent interest includes growing tenant demand where a shortfall of housing supply combined with a lack of good quality rental accommodation is driving demand for longer-term rental options. There are also a variety of tax and planning incentives available to developers. Investors should be aware of the possibility of additional taxes and duties.

Partnerships are also on offer bringing together housing developers and community housing providers.

Tenants are attracted by the prospect of affordable, high-quality accommodation in convenient central locations, near to public transport, shops and other local conveniences. With available land at a premium however, finding suitable locations of sufficient size is becoming challenging for developers.

BTR is a relatively new asset class in Australia and many investors may not even realise that it is an option available to them. As awareness increases, so will confidence in the market and opportunities grow for investors.

Foreign investment fees

The Federal Government announced in December 2023 that the foreign investment application fees for BTR projects would be set to the "lowest commercial level – no matter the kind of land involved", effective as of 14 December 2023. We expect investors will welcome this change, as residential land will no longer be subject to higher application fees when seeking Foreign Investment Review Board (FIRB) approval. At the same time, application fees for the purchase of existing homes will triple for foreign investors, while vacancy fees for foreign-owned dwellings purchased after 9 May 2017 will double, effective as of 14 December 2023.

Japan interest

Japan’s largest home builder Daiwa House has said it sees Australia as a “big target” for growth. In July 2023, it announced it would invest AU$250 million in a BTR joint venture with Lendlease. Japanese property companies are looking to increase revenue generated offshore at a time when economic constraints and an ageing population are restricting opportunities in their home market.

In an interview, Chief Executive Keiichi Yoshii was reported as saying, “We believe that we can be in the Australian market and work with the people here and work in this country, and be of use to Australia.” He added that “whether the population is growing or decreasing in a country makes a huge difference.”

Travel restrictions during the pandemic made visiting and inspecting sites difficult leading to a pause in Japanese investment. That trend now appears have gone into reverse with Japanese investors sizing up the Australian market for potential gains.

The sustainability dimension

Developers targeting the sector have a mission to create sustainable buildings that will serve the needs of local populations long into the future. There is a clear link between sustainability and value. Recent modelling cites the cost of energy used in common areas of a BTR building, such as corridors and foyers, at 2 percent of gross revenue. Buildings constructed to European standards can achieve a 50 percent reduction in such costs according to developer and investor Model.

Buildings constructed under the scheme must hold their value for the next 40 years or they could be left with unsold or unrented stock. Many developers may struggle to get out of the practice of trying to minimise costs during construction.

Global investors will be looking to benchmark construction standards with the most advanced around the world and will look particularly to the United States, the EU and the United Kingdom for comparators.

Hogan Lovells in Australia is able to support you in virtually every aspect and type of real estate project across multiple jurisdictions and sectors. From real estate investments, developments and how to finance them, to places to work and live.