Build-to-rent (BTR) properties have long been a successful housing trend in the US and the UK. In Australia, they are slowly gaining traction, as demand for alternative housing platforms and investable assets grows. Their popularity is also changing the way build-to-rent developers and tenants are approaching such properties. What is build-to-rent and how can this emerging housing trend potentially benefit both renters and developers?
What is the Build-to-Rent Model?
Build-to-rent or multi-family housing is a large-scale development that’s owned and managed by a developer. The BTR units are leased out to tenants for the long term, unlike in traditional build-to-sell (BTS) projects where units are sold off to buyers or tenants. Furthermore, because Build-to-Rent in 2023 are aimed for long-term leases, these housing units are designed to ensure that tenants enjoy better living conditions, multi-year leases, multiple mixed-use spaces, and public amenities.
What Does the Build-to-Rent in 2023 Sector Look Like in Australia?
Australia’s build-to-rent sector is still in its early stages. However, it looks promising, with many large property developers, such as Mirvac, getting into the trend.It’s expected that by 2027, over 160,000 build-to-rent units will become operational. In 2022, Australia already has some 28,000 BTR units planned, with most BTR projects being built in Sydney, Melbourne, and Brisbane.
Who Are the Typical Build-to-Rent Tenants?
Build-to-rent properties are popular with the younger generation of renters, particularly Millennials and Gen Z tenants. A majority of local build-to-rent tenants in one development by Mirvac are under 40 years of age. Despite the large number of younger tenants, this new housing model is also gaining popularity among tenants over 55 years old, as well as with families who are looking to downsize.
How Does Build-to-Rent Work in Australia?
The build-to-rent sector in Australia is typically composed of large-scale residential housing projects. It’s also being seen as a viable housing alternative, especially for those who cannot afford to purchase their own homes yet or those who prefer to rent. More than a third of Australians are currently renting, and Australia’s BTR developments are designed to appeal to this market.
It’s also likely that in the coming years, Australia will see more BTR developments being funded by local and global investors.
Build-to-Rent vs. Other Housing Rental Models
Unlike build-to-sell projects, in which developers build residential houses that are then sold off to owners, BTR projects are designed for long-term leases. This means that while tenants are renting for longer periods of time, they won’t own the unit. However, unlike typical apartments, which have shorter leases, BTR developments offer multi-year, renewable leases. Moreover, BTR developments are designed in a such a way that they foster the growth of a community through amenities that are accessible to all the residents.
Is Build-to-Rent a More Affordable Housing Option?
Build-to-rent might be an affordable housing option, especially if you’re looking for a starter home. BTR rentals are 15% to 20% higher compared to other housing options in the same area. However, you also have to consider the trends in rent prices.
What Are the Benefits of Build-to-Rent Properties?
Let’s take a quick look at some of the benefits and drawbacks of build-to-rent developments in Australia for both renters and build-to-rent developers.
For Renters
Pros
- BTR housing gives tenants access to lease security. Unlike traditional housing models, like private rentals that have leases that are capped at 6 or 12 months, some BTR operators offer longer, multi-year leases. Additionally, while some BTR leases are capped at 12 months, tenants have the option to renew as often as they want to.
- Tenants can enjoy more flexible living arrangements, given that the property is managed by the developers themselves. And because these projects are owned by one entity and they have onsite management in place, it’d be easier for you to get in touch with a representative if you’re planning to downsize or upsize your living space.
- BTR units allow tenants to access a number of amenities. For example, some local build-to-rent developments have amenities such as co-working spaces, pools, and community gardens. Some projects also offer pre-installed fixtures, such as appliances, while others allow tenants to add optional features, such as storage or charging stations for electric vehicles.
Cons
- Tenants don’t own the unit, even if they’ve been renting it for a long time. BTR developments are owned by build-to-rent developers and their investors.
- Some BTR properties also come with a premium price tag, which may make them less accessible to a wider audience.
- There’s also the risk of being tied down by the longer lease terms.
For Build-to-Rent Developers
Pros
- Some owners hold on to their property for a year before they sell, because if you own the property for 12 months or more, provided that you are an Australian resident, you may be eligible for a 50% discount on your capital gains tax once you decide to sell the property 12 months later.
- The market value of each BTR unit may potentially increase over time. Thus, the developer can rent the units out and wait for their market value to increase and then opt to sell the units in the future for greater returns.
- Build-to-rent developers can claim tax deduction benefits, particularly property depreciation, on rental property. The Australian Taxation Office (ATO) allows depreciation for Division 40 (plant and equipment) and Division 43 (capital works) assets, which may include mechanical or removable components, such as appliances and flooring, as well as the property’s structure, any improvements, and permanent fixtures (under capital works). You can use the ATO’s depreciation and capital allowances tool to get an estimate of claimable deductions. For investment properties, the ATO allows a 2.5% PA tax deduction of the total construction costs per year, covering a period of 40 years, after the completion of the property’s capital works. The newer the property, the higher the depreciation at the beginning of the asset’s life.
- Build-to-rent properties offer a longer and steadier income stream for developers. This is because the BTR arrangements are designed to minimize shorter turnover of tenants.
- BTR properties can also pave the way for better returns for build-to-rent developers, given that they can potentially charge higher than the average rental rates.
Cons
- The BTR scene is still an emerging concept in Australia. Thus, it’s likely that investors will be apprehensive in approaching this new housing model. How this housing model will perform in the future also remains to be seen.
- Given that tenants are locked into longer leases, it’s likely that developers can’t suddenly implement rent increases, especially if you’ve agreed upon a set price for a given period of time.
Is Build-to-Rent Profitable?
Build-to-rent properties can be profitable for BTR developers and investors—it’s posed to be a solution for the country’s housing shortage. Also, because BTR units are intended for long-term leases, this gives developers and investors access to a steady stream of income.
Is It Better to Build and Sell or Rent?
There’s no right or wrong answer to this one. While the build-to-rent model is becoming more popular in Australia, many people are still looking to have their own homes, something that the BTR model can’t give them. Also, what you ultimately end up choosing will depend on how much time, money, and other resources you’re willing to invest. However, if you want to opt for the BTR model, you may also want to factor in creating a building management team and providing them with community management tools to help add value to your BTR property.
It’s also possible for developers to adopt a hybrid model, combining BTR and BTS models to diversify their investments and income streams, as well as to offset the risks involved with sticking to just one particular housing model.
Planning Your Build-to-Rent Properties With SQM Architects
Planning to get in on the trend and start a build-to-rent in Victoria?
SQM Architects can help you bring your vision to life. We offer custom design solutions that will fit your unique needs. We work closely with our clients to create a master plan, deliver concepts on time, build your project’s visual elements, and start construction without a hitch. Schedule your free consultation today and set your build-to-rent project in Victoria in motion.
