Like many other countries, Australia is looking to create more affordable housing including wider rental options. The 2017 Federal Budget included measures to boost the supply of affordable rental housing.
These measures target both individual investors and will also encourage Managed Investment Trusts (MITs) to invest into affordable rental housing. This later policy relates to both resident and non-resident trusts.
The Property Council of Australia has established a Build-to-Rent Roundtable (of which I’m a member) to explore the role of MITs in Affordable Housing. This will be an ongoing issue as the policy develops and I’ll post up-dates starting with this brief industry overview, and then Thursday – looking at some key aspects from the tenant’s perspective.
The Federal Budget contained policy initiatives in three parts:
- From 1 January 2018, the Government will provide an additional 10% CGT discount to resident individuals investing in qualifying affordable housing. This means qualifying investors will be entitled to a 60% discount on capital gains tax.
- From 1 July 2017, resident investors, including superannuation funds, will have access to long-term investments in affordable housing through MITs. Income from capital gains will be eligible for the increased CGT discount of 60%, where applicable.
- From1 July 2017, the Government will encourage long-term foreign investment in affordable housing, enabling MITs to acquire, construct or re-develop property to hold as affordable housing. These investors will generally be subject to a 15% final withholding tax on investment returns. The proceeds of any capital gains where the property has been held, and available for rent, for less than 10 years will be subject to a 30% rate.
Some Key Industry Issues
There are well established vehicles for creating long-term affordable rental housing in other countries including parts of the UK and in the United States and I will return to these in future posts. However, in the local context, it is acknowledged by most major institutional investors that access to affordable housing has the potential to deliver many social and economic benefits.
The question remains as to what are the best policy settings to encourage a big jump in the supply of long-term affordable rental housing, and while this is a complex topic the main issues tend to be related to finance, planning policies, management, taxation and the scale of projects.
These are key topics starting with finance, and large scale investment must operate within suggested guidelines, including a requirement that 80% of the MIT income must be from affordable housing which is available for 10 years. The housing must also be provided to low and moderate-income tenants, and rents need to be discounted.
Some of the suggested policies do not look commercially viable and present barriers to both domestic super funds and international pension funds which would be logical investors in this MIT format.
Planning is another big issue, and national planning standards are a perquisite any policies in the area also need to be long-term and reflect a strong durable commitment for all levels of government. The structure of the MITs has a decade long tenancy at their core and so short-term shifts in policy will be inconsistent with many of the stated aims.
Finance and planning policies could also over-lap where, for example, public or crown land is made available for these projects, at reduced cost, no cost or via long-term leasehold.
Property management of large, long-term residential holdings with possibly many hundreds of housing units, will require skills. Not only will investors have to adjust to this model, but also some not-for-profit organisations or housing co-operatives who might be involved, will need new skill sets. Currently most residential investment is in the hands of individuals, and a larger scale of long-term development will create many new challenges.
However, and most importantly investors will be very keen to see that government policy commitments at all levels, are long term so that the large-scale projects that may well be necessary to meet the stated goals have a stable environment to help deliver affordable rentals. And large projects will be necessary, delivering possibly thousands of homes in different locations.
In my next post, I will look at the demand side of these policies and how existing schemes have meet the needs of tenants.