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Build to Rent – 3 ideas to build our way out of a rental shortage

By Blake Dyer, Breellen Warry, James Beauchamp

• 11 May 2022 • 7 min read
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The Greater Sydney Metropolitan Area (GSA) rental market is the tightest it has been in years, which helps explain persistent upwards pressure on rents. The NSW Government has been looking for a range of solutions to the housing affordability crisis, as well as ways of delivering a broader range of housing options for their residents.

In this article, we team up with market research guru, Tim Lawless, Executive Research Director, Asia-Pacific with CoreLogic, to help explain some of the factors behind these issues and to consider three ideas around the build-to-rent development planning pathway (BTR) recently introduced by the NSW Government in the new State Environmental Planning Policy (Housing) 2021 (SEPP Housing).

The ideas that we look at in this article are below

1.

Reducing the minimum number of dwellings required for BTR from 50 dwellings.

2.

Introducing more planning incentives, such as height and Floor Space Ratio (FSR) bonuses.

3.

Providing regulatory framework around ‘rent to buy’ options.

The rental market in the GSA – a snapshot

In mid-March, the number of rental units was tracking 25% below the previous five year average. This shortage of rentals reflects a tightening vacancy rate and helps explain persistent upwards pressure on rents. In addition:

  • Sydney house rents are 8.7% higher over the 12 months to February 2022, with a median price of $620 per week.
  • Sydney apartment rents are up 8.0% over the same period to reach a median price of $500 per week.
  • Over recent months the growth in Sydney apartment rents has started to outpace the rate of growth in house rents. This is likely to be a reflection of stronger demand returning to the unit sector as low density rental options become unaffordable, inner-city areas become more vibrant as lockdowns become a thing of the past and overseas borders reopen, delivering additional rental demand, especially for inner-city accommodation.

To put this in perspective, the full-time adult average weekly earnings in NSW were $1,761.10 as reported by the Australian Bureau of Statistics for November 2021.

1. Lower the dwelling minimum from 50 dwellings

When BTR planning pathway was introduced, the NSW Government said that the 50-dwelling requirement reflected the fact that BTR housing relies on economies of scale to provide residents with a different experience, such as more shared facilities and services, compared to build-to-sell housing.

However, does this minimum number of dwellings stack up?

The argument appears to be that 50 is the minimum number of dwellings to make it feasible so to attract investment in BTR. This assumes that these new developments are offering additional services such as gyms, libraries and on-site management.

The problem with this one-size-fits-all approach is that it locks out innovative solutions, or ‘peppercorn’ in-fill development. By setting a minimum cap, it stifles innovation and smaller investors who may be looking at this kind of development for a smaller family or superannuation type investment (as opposed to large investment banks, industry superfunds or large development corporations).

If economic feasibility is the reason for the minimum dwelling cap, Tim Lawless says that there are a number of ways of increasing the economic feasibility of BTR. For example:

  • providing incentives for how BTR projects are taxed is one of the key ways state governments can encourage BTR projects
  • NSW Government has already provided a 50% land tax reduction for BTR projects, in addition to an exemption from the foreign investor duty and land tax surcharges, although there are strict eligibility requirements that must be met
  • stamp duty concessions for BTR projects would add a further incentive.

Tim also says that the cost of land is another barrier that could be addressed by State government via partnering arrangements or discounted land provisions of government-owned land for dedicated BTR projects.

We agree that these are all excellent ideas that merit further detailed consideration.

2. Introducing more planning incentives

Tim says that ensuring town planning policies recognise and allow for BTR developments is key. State level planning guidelines specific to BTR could be used to inform local town plans and provide exemptions such as higher densities or less car parking that could be relevant to BTR projects.

Part 4 of the new SEPP Housing provides the current planning provisions for BTR development in NSW.

Currently the incentives are limited to a land tax concession and the ability to build BTR in the B3, B4 and B8 Commercial zones. Suffice to say, there is definitely more that can be done in this space. There are reduced parking requirements contained at s 74 of SEPP Housing for 0.2 car parking spaces per dwelling for land within an accessible area in the GSA. This will allow for some additional density than otherwise might be the case for a residential flat building that was not a BTR development.

Otherwise, the planning incentives are limited to a more flexible approach to the application of the Apartment Design Guide than otherwise might be the case for a residential flat building.

The huge popularity with developers in ‘new generation’ boarding houses was in part due to the floor space bonus and the exemptions from certain development control standards in certain zones. This gives the government an excellent case study on how to pull levers to stimulate more development in this space. FSR and building height bonuses also allow for greater yield based upon the cost of the land, than might be otherwise achieved with traditional residential flat building development.

It is our view that there is more work to be done in this space.

3. Consider rent-to-buy models

The biggest barrier to many new home-owners is saving for a deposit, with the average apartment in the GSA being $831,790. By the time a new home-buyer has saved for a deposit, the market has moved further out of reach.

Given the fact that the BTR planning pathway in NSW restricts subdivision for 15 years, this provides an excellent opportunity for a rent-to-buy scheme to be introduced to allow new buyers into the market who may be otherwise locked out.

Tim says that there are some risks in the small number of ‘rent-to-buy’ schemes available with the most obvious risk being that a tenant under a rent-to-buy arrangement may run into financial strife during the rental or purchase phase. A failure to keep up with rental payments or inability to secure finance at the agreed time of purchase could see the contract terminated and any accrued payments lost.

Similar to risks associated with purchasing ‘off-the-plan’, the purchase price on a ‘rent-to-buy‘ arrangement is generally set at the beginning of the agreement. A lot can happen between signing the agreement and the purchasing date - preferences may change, values could fall (potentially leaving the buyer in a negative equity situation) or the buyers financial circumstances may change.

He says that from a regulatory perspective, there is less protection for buyers compared with a typical home purchase where contracts are standardised along with clauses designed to protect both the buyer and seller. Additional protections and standardised contracts would go a long way towards instilling confidence amongst potential renters/buyers in this sector.

We agree with these sentiments and think that the government should consider how people who might want to participate in such a scheme are protected in the event that they want to opt-out in the initial period, and also consider whether it is appropriate to offer subsidised finance options to both developers who adopt such a scheme and purchasers who choose to participate in such a scheme.

Without regulation, there may be reluctancy to participate given the risk, the fact that they will not be on the title of the property, and contractual terms may be unfairly biased towards developers.

Minimum regulation helps set expectations and makes this a much more attractive option to all.

There is a lot more that can be done to help drive this emerging asset class in NSW so that all parties can receive the benefits – above are just three suggestions, though we expect there are a raft of methods and tools that can support BTR. In any case, it’s certainly a topic that warrants further discussion and debate.

To that end, we’re currently planning a BTR panel event – you can register your interest in attending here, and we’ll be sure to send you the invite when it’s ready.

Looking for further information on Build to Rent in Australia?

Check out our Build to Rent page

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