Build-to-rent hits roadblock

Build-to-rent hits roadblock

22 September 2017

Treasurer Scott Morrison has unexpectedly announced limits on managed investment trusts that industry figures say will block literally billions of dollars in investment in mainstream rental dwellings, reports the AFR.

Property developers were left aghast when the Treasurer announced that Managed Investment Trusts (MITs) would no longer be able to buy residential property other than affordable housing.

The government announcement accompanied draft legislation of its affordable housing scheme announced in the May budget, which includes giving investors a 60 per cent capital gains discount for low-income rental housing.

The draft legislation states:

1. From 1 January 2018, investors will be able to obtain a 60 per cent capital gains discount in affordable rental housing, provided they hold the property for “at least three years”. The standard discount is 50 per cent.

2. Managed investment trusts (MITs) would be able to invest in affordable housing “for the purpose of deriving long-term rent”. MITs are defined by the Australian Taxation Office as a type of trust in which members of the public can collectively invest in passive income activities like shares, property or fixed interest assets.

3. As of 14 September, MITs are only able to acquire residential property classed as affordable housing. However, MITs will be able to develop or construct affordable housing property within the MIT.

The government said the restrictions were an “integrity measure” to prevent trusts from investing in houses, units, and apartments to hold for long-term rent.

“This change provides legislative clarification of the long-standing convention that the primary purpose of the MIT concessional tax treatment is to apply to passive investment income,” the Treasurer said in a statement.

“This change is crucial to maintaining the integrity of the tax base and will help direct foreign investment to where it’s needed most.”

The legislation also appears to target up-market projects that feature swimming pools, gyms, or other communal facilities. MITs would be limited to investing in basic housing that cash-strapped people can afford.

But Ken Morrison, chief executive of the Property Council of Australia, said the government had with “one stroke of a pen put build-to-rent at risk.”

“The practical effect of this announcement is that it would—if enacted—kill off build to rent in Australia before it can take hold,” he said.

Shadow treasurer Chris Bowen also slammed the announcement saying it had completely ambushed the property and construction sector.

“This shock move could kill the fast emerging ‘build-to-rent’ movement that has already taken off in the US and more recently in the United Kingdom. It’s a potential new billion dollar addition to the Australian real estate market,” Mr Bowen said.

Mirvac called late last month for interested parties to form a “club” of build-to-rent investors and commit up to $1 billion for long-term rental apartments with an expected yield of 4.5 per cent, said the AFR.

A CBRE report last week labelled build-to-rent as a “game changer for the Australian housing market” worth an estimated $300 billion over the next couple of decades, said The Sydney Morning Herald.

Note: Several build-to-rent models are presented this week at The Fifth Estate.