Build to rent: Why are Banks and Super Funds becoming large Corporate Landlords?

Welcome to Finance and Fury, 

Past few Monday eps on Share concentration – and the holdings and influence that super funds have

Today – talk about the legislation put into place and the plans going on now where you might end up renting an apartment from your super fund or bank

The plan to help increase apartment supply – decline in prices = lower incentive for developers as a build to sell model – from slumping demand for apartment building

New residential product: “build-to-rent”

Won’t help Australia’s housing affordability stress, may make it worse, but it helps to achieve public policy objectives –

1. widened housing diversity – for affordable housing close to city centres
2. enhanced build standards – Avoid develop to sell disasters like Opal towers
3. better-managed and secure form of rental housing – economies of scale from LCLs – which we will run through

Look into other areas this has been implemented to see how well objectives met

What is it? This refers to apartment blocks built specifically to be rented, at market rates or ‘affordable rates’, and held in single ownership as long-term income-generating assets

1. Policy came to public attention when Labor reforms to taxation around build-to-rent leading up to the election
2. Aim – to increase the supply of rental dwellings through developing a ‘build to rent’ and a large corporate landlord (LCL) sector –  While these two sectors may share similarities, there is a subtle difference between them.

Build to rent – developers and their financiers build multi-unit buildings and, instead of selling the units, retain them to rent to tenant households. Rents may be set at market rents or, for affordable housing, an appropriate discount to market rents could be offered with appropriate government support to make up the funding gap.

‘Build to rent’ is an established practice in both the UK and USA but it has not been taken up in Australia –  

1. Australia’s tax settings, which were designed for a ‘build to sell’ model, as a major impediment, in particular land taxes and the inability to defer GST costs on construction materials makes retaining dwellings unprofitable.
2. AHURI research identified a number of barriers for institutional investment in the Australian market, reducing the attractiveness of ‘build to rent’ for investment by the large banks, insurance companies and the superannuation funds. 
   1. In a nutshell – large financial companies will become the driver of investment in inner city apartments
   2. QLD – We have a program open for bids in May within 10km of CBD.
   3. Goldman Sachs is a major investor in one of the biggest build to rent companies in USA.

Large Corporate Landlords –

Buy to rent model – financial institutions that acquire large numbers of dwellings and make them available to the rental market, or potentially at a discount to market rents for low-income tenants if appropriate government support is provided.

1. LCLs don’t necessarily build new housing stock, they can purchase properties in the market or through mergers and amalgamations with other LCLs. Indeed the largest LCL in the USA, Mid-America Apartments, (99,939 apartments in 2017)
2. LCLs can merge with build to rent developers who can help manage rental dwellings

Proponents claim LCLs and ‘build to rent’ schemes offer greater supply of rental housing, greater security of tenure for tenants, and better professionalism in tenancy management than small scale ‘mum and dad’ landlords.

1. These models have also been criticised in other countries for maximising rent increases and for evicting tenants
2. In one case, 60 families were threatened with eviction in Ireland in 2016 when the LCL that owned the residential complex had to sell over 200 houses to an internationally based financial institution in order to repay debts
3. From an international flow of money – part of the profit shifting scheme which caused the Ireland property bubbe
   1. QLD – Deputy Premier and Treasurer Jackie Trad today invited industry to register their ideas on how to deliver a large-scale Build-to-Rent development within 10kms of the Brisbane CBD. “Delivering these affordable rentals will contribute to the Government’s Queensland Housing Strategy 2017-2027 target of over 1000 affordable homes by 2022” – says homes but means high-density high-rises

Why hasn’t it taken off here yet?

– the tax treatment and returns in Australia make build-to-rent less viable.

1. cost-effective variations of the build-to-rent model are being trialled, including student accommodation, co-living arrangements, or build-to-rent accommodation where the tenant has an option to buy their unit after a few years of renting – talked about in another ep
2. constant rental income from tenants is a particularly appealing investment for institutions that seek reliable income, like super funds

What do the people implementing this want:

1. under current conditions, even market-rate build-to-rent projects are barely viable – at least in Sydney. Australia’s urban housing markets are expensive to purchase land.
2. a housing policy perspective –
   1. limitations on foreign purchases of residential property
   2. “withholding tax” decision that treats overseas-based institutional investment in rental property less favourably than investment in commercial property – Morrison doubled
3. Since such global funds would likely lead the establishment of a new Australian build-to-rent asset class, revisiting the withholding tax changes could be a significant step in making build-to-rent a reality in Australia.

Will build-to-rent make housing more affordable?

1. No – at least not in the short term. While Labor has offered separate affordable housing initiatives, build-to-rent developments themselves will not necessarily deliver affordable housing.
2. evidence from existing build-to-rent developments suggest that rent will be more expensive than traditional renting arrangements.
   1. JLL research based in the UK found that on average, the premiums on build-to-rent accommodation were 11 percent over the respective local rental markets.

Who will be doing this –

The enduring owner might be, for instance, an insurance company, an Australian super fund, a foreign sovereign wealth fund, a private equity firm, or the building’s developer.

1. Although new in Australia, build-to-rent is quite common in many other countries. Under its North American name, “multi-family housing” – 6.3m new apartments since 1992
2. A scattering of build-to-rent schemes is already underway or completed, mainly in inner Sydney and Melbourne. And they may prove to be the forerunners of a new Australian residential property sector – but that is far from guaranteed.
3. In Australia, our private rental market is almost entirely owned by small-scale mum-and-dad investors, so this kind of housing would be a largely new departure from typical Australian real estate
4. Another property bubble – main access from massive financial companies – now you are competing for the property with financial institutions

Potential benefits –

1. Done to manage the economy and help stimulate economic growth, expand the money supply through borrowings to help keep rates low
2. May get better building standards – MAY – building to own long term versus build to sell – skip forward 100 years of this trend where companies own most buildings
3. Increase demand for buying high-density residential property – Australians long term don’t want this (80%)

Proposal for policy –

to enable an affordable housing element the government is looking at allocating sections of federal or state-owned redevelopment sites to community housing providers at discounted rates.

1. this strategy was recently advocated by newly designated federal housing minister Michael Sukkar.
2. urban renewal projects like Sydney’s Central-to-Eveleigh and Rozelle Bays – a pretty big chunk of Syd –
   1. fulfill the widely voiced demand that 30% of these developments should be affordable housing
3. Being implemented to fulfil several important public policy objectives.
4. This comes from recommendations/policies laid out in UNs SDG (sustainable development goal) 11.1 and 11.3, along with SDG9 and SDG17, which is about increasing global partnership of multinational companies’ cooperation with Governments.
5. The IMF needs somewhere to pump their SDRs into so they are using the SDGs of the UN which will cost trillions in funding, along with side private companies like Goldman sacs buying all the residential property here (which they have been doing in the programs in the USA).
6. So end game of this build to rent is that we now have to compete with the largest companies in the world when wanting to buy any new residential stock coming onto the market.

Who will live in this? – come back to this 9Global migration compact

Thank you for listening, if you want to get in contact you can do so here