Will build-to-rent revolutionise Australia’s housing market?

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By Leith van Onselen

Domainfax has published a boosterish report on the so-called ‘build-to-rent’ revolution coming to Australia:

The number of homes built explicitly to rent out is set to take off in Australia over the next five years, housing industry experts have predicted.

They’ll be nothing like we’ve seen before, either, with building managers looking after apartments, staff to look after leases and run “community” events, and onsite cafes, shops and work spaces. There will also be long-term rolling leases with the potential for tenants to transfer to other allied blocks in different areas if their jobs or circumstances change…

“There are currently 2.5 million rental homes in Australia and we see that growing in the next few years with purpose-built apartment buildings for the rental market. It’s well-established overseas but, in Australia, it’s a new form of housing and there’s a lot of excitement around it.”

Such homes will also create a new asset class, often for large institutional investors like super funds, as well as for overseas capital, with some degree of government involvement and support paving the way forward…

Currently 31 per cent of households in Australia rent, of whom nearly 30 per cent are millennials… Of those Millennials, Ernst & Young Australia research has found that 66 per cent believe they will never own their own home…

With sharply increasing demand for good quality rental accommodation with more security of tenure, the only real hurdle is the cost for developers to build such homes, believes JLL regional director, institutional and middle markets Tyrone Hodge. They need to receive incentives to forego the quick and easy profits of build-to-sell apartments in favour of the longer-term rewards of build-to-rent with quality long leases and low vacancy rates…

Red tape could also be cut, the planning process speeded up, minimum apartment sizes negotiated, tax credits given, lower rates of land tax set, and extra density allowed in return for build to rent projects are some of the other inducements being discussed.

The time has never been riper for an expansion of build to rent with unaffordable house prices, people staying in education longer, a more mobile labour market and the Millennial embrace of the sharing economy, says Mr Hirst…

While so-called ‘build-to-rent’ sounds attractive, the practical application has been less than perfect in the United States, where hedge funds and private equity groups have been replacing individuals and small businesses in the rental market.

Here’s some of the results via the Huffington Post:

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Most rental houses in the U.S. are owned by individuals, or small, local businesses. Culpepper’s landlord is part of a new breed: a Wall Street-backed investment company with billions of dollars at its disposal. Over the past two years, Colony American and its two biggest competitors, Invitation Homes and American Homes 4 Rent, have spent more than $12 billion buying and renovating at least 75,000 homes in order to rent them out.

This new incursion by hedge funds and private equity groups into the American single-family home rental market is unprecedented, and is proving disastrous for many of the tens of thousands of families who are moving into these newly converted rental homes. In recent weeks, HuffPost spoke with more than a dozen current tenants, along with former employees who recently left the real estate companies. Though it’s not uncommon for tenants to complain about their landlords, many who had rented before described their current experience as the worst they’ve ever had.

“I’ve been renting homes for 15 years and I’ve never had a landlord be this ridiculous about getting stuff repaired,” said Henry Cecil, who moved into a four-bedroom house in Winter Haven, Fla., owned by Invitation Homes in March. Invitation Homes is an arm of Blackstone, the largest private equity firm in the world. The firm booked more than $4 billion in revenue in 2012.

There are some legitimate questions that need to be asked before launching into build-to-rent. First, will corporatising the rental market actually result in lower rents? Second, would a listed corporation charge any less than a regular landlord, especially so when its pricing power will obviously be higher? Third, would they be more or less accountable for maintenance and costs?

The jury is out on all these questions.

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Moreover, are we supposed to believe that adding such a cabal of profit-dependent corporations to the housing “market” will reduce its already monsterous lobbying power?

More likely, this is yet another policy favoured by the rent-seekers for the rent-seekers and aimed at sucking more lifeblood from the catastrophic market failure of Australian housing (read Australia’s youth).

If our policy makers genuinely want to ‘fix’ the housing market, they should instead tackle the following demand and supply-side distortions:

  • Normalise Australia’s immigration program by returning the permanent intake back to the level that existed before John Howard ramped-up it up in the early-2000s – i.e. below 100,000 from 200,000 currently [reduces demand];
  • Undertake tax reforms like unwinding negative gearing and the CGT discount [reduces speculative demand];
  • Tighten rules and enforcement on foreign ownership [reduces foreign demand];
  • Extend anti-money laundering rules to real estate gatekeepers [reduces foreign demand]; and
  • Provide the states with incentive payments to:
    • undertake land-use and planning reforms [boosts supply];
    • swap stamp duties for land taxes [boosts effective supply]; and
    • reform rental tenancy laws to give greater security of tenure [reduces demand for home ownership and reduces rental turnover].
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These are genuine policy solutions, not policy band aids designed as a new profit centre for the property industry.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.