Build to Rent - Is this the answer to Australia's affordable housing crisis?
The COVID-19 crisis has put a magnifying glass on the existing undersupply of affordable rental homes, for people on moderate, low and very low incomes – including essential workers such as nurses, teachers, cleaners and hospitality industry professionals.
The City of Melbourne's draft affordable housing strategy estimates that one in five of all new dwellings constructed in Melbourne will need to be social and affordable rental housing in order to meet the projected undersupply.
It is clear that the emerging Build to Rent (BTR) sector in Australia will be critical to both:
- the delivery of the required affordable rental housing at scale; and
- establishing a future pipeline of construction work post COVID-19 (particularly as we are likely to see a slowdown in hotel and student accommodation projects in the immediate future).
What is BTR?
BTR is housing that is purpose built, retained and managed as long-term rental stock, usually by a single owner. Institutional investors (such as superannuation funds) are often attracted to the model because it can generate a long-term and stable income. BTR is commonplace in both the UK and United States.
Is BTR "affordable" accommodation?
BTR accommodation is not affordable housing in itself – although it can assist in addressing the current affordability crisis in two ways:
- by delivering more rental product to market at scale much more quickly than the equivalent number of traditional 'build to sell' apartments (particularly in a depressed real estate market, where achieving the traditional levels of required pre-sales will be challenging); and
- it can make certain 'affordable housing' units within the BTR development available at a discounted, or subsidised rent.
BTR – Learnings from the UK
Similar to what is currently occurring in Australia, the BTR sector in the UK was a response by the private sector to address a chronic undersupply of quality affordable housing. Fast forward 10 years and the BTR sector in the UK, together with the Private Rented Sector (PRS) – is now the second largest form of tenure in the UK.
Given the infancy of the BTR sector in Australia, it is useful to look to the UK example to provide guidance on the planning, tax and other regulatory drivers required to support the growth and success of this asset class in Australia – so that all levels of government in Australian Government can target policy change and stimulus to these specific areas.
What is apparent from the UK experience, is that planning and tax reform is urgently required in Australia, to support the viability of the BTR asset class in Australia. As has been widely reported, the current regulatory regime is punitive – particularly for foreign investors.
BTR, Tax and Planning reform in NSW
The NSW State Government recently announced that it will issue a 50% discount on land tax to developers investing in BTR schemes. An exemption from foreign investor surcharges will also be provided until 2040 for BTR developers.
The NSW Government is also exhibiting a new planning policy, which includes proposed development standards for BTR projects and design guidance on context, character, sustainability and amenity.
In order to remain competitive, other Australian States and Territories are expected to introduce similar legislative changes.
How can BTR assist in the delivery of affordable rental housing in Australia - quickly?
Given the maturity of the BTR asset class in the UK, the Australian BTR sector has the benefit of being able to adopt 'tried and tested' strategies which will enable BTR accommodation to be delivered to the market quickly.
1. National BTR Targets and Separate Planning Use Class
To ensure the delivery of affordable BTR assets in the UK, there has been guidance encouraging the local planning authorities, which implement national planning policy to assess BTR as a separate planning use class. While the Use Classes regime in the UK is still in the process of being amended to reflect this suggested change, a similar approach could be adopted in Australia and be reflected in local planning schemes for uniformity, while BTR remains in its early stages.
In the UK, the suggestion is that the facility needs to be 100% rented stock but an agreed proportion to be "affordable". Tenancies should be offered for at least three years to encourage long term renting, and there should be a covenant applied to ensure the units remain in the rental sector for a specific time period. If for viability reasons units need to be sold off earlier, the Guidance on Build to Rent outlines a clawback mechanic to secure a financial contribution to affordable housing in lieu of provision.
The UK Government has also applied certain targets on local authorities and registered providers for housing, and these targets include facilities for the renting population. A similar approach could be taken by the Federal Government for BTR projects in Australia.
A uniform national approach in Australia could assist in achieving affordability targets – particularly if these projects are given planning priority across all of the States and Territories.
Developing a tailored BTR planning definition or Use Class from the sector's infancy, would enable the local planning authority to:
- include specific design requirements for BTR projects (e.g. communal open space and co-working spaces), in order to deliver high levels of amenity for future residents;
- incorporate development incentives and uplifts for BTR projects, to allow for greater density in exchange for the delivery of affordable housing targets; and
- fast track the planning approval process for BTR conversions (i.e incorporating the equivalent of the UK's "permitted development" rights into Australian planning policy) and new BTR developments which incorporate affordable housing targets (e.g. by exempting compliant projects from third party notice and review).
Ideally a uniform planning definition should be adopted across all Australian jurisdictions.
2. Conversion of existing private residential accommodation
The first wave of PRS accommodation in the UK was achieved largely through conversions of existing buildings and estates, by virtue of either planning permission being granted, or such conversions being "permitted development" rights (as explained above).
In Australia, incentivising the conversion of existing private "Accommodation" and "Residential Dwelling" planning permits into "Affordable Rental Housing" planning permits, could significantly fast-track the delivery timetable of affordable rental housing – particularly if such conversions could be issued by the planning authorities by way of secondary consent, without the need for third party notice and review. A specific 'conversion exemption' could be drafted into the relevant planning scheme and any related local planning policy.
3. Partnership opportunities with affordable housing provider
There are also opportunities for BTR developers to partner with affordable housing operators (such as City West Housing in Sydney or Women's Property Initiatives in Melbourne), to assist in managing the affordable units.
It would assist developers, operators and the relevant local Councils, if a standardised set of affordable housing documents were developed which streamlined and standardised the management and transfer process of affordable housing units.
While there have been concerns about imposing mandatory social or affordable housing requirements on the emerging BTR sector in Australia – given the 'new normal' we now find ourselves in post COVID-19 - there is real opportunity for Government and BTR developers to work together, to develop a solution which enables BTR accommodation to be delivered to the market quickly. This approach has been successful in the UK and by getting the policy balance right, the BTR sector has continued to flourish in the UK, while still delivering much needed affordable housing.
This article has been co-authored by Andrea Towson and Guy Rusling. DWF is an international legal business, which acts for a large number of Build to Rent and Public Rental Sector investors and developers on schemes and assets all over the UK and in Australia. If you require further information or have any queries in relation to this legal update, please contact Andrea Towson, Guy Rusling, or a member of our Real Estate team.