Build-to-rent: a COVID-19 green shoot?
WHO SHOULD READ THIS
- State Government entities.
THINGS YOU NEED TO KNOW
- The Commonwealth and NSW Governments are working together to drive build-to-rent projects in New South Wales. The changes will enable Governments to benefit from build-to-rent developments and deliver new social, affordable and private dwellings on Government owned land.
WHAT YOU NEED TO DO
- Review this article prior to entering into build-to-rent partnerships.
COVID-19. Coined by economists as a “dampener” on the property market, may have inspired the Commonwealth and NSW Governments to utilise new initiatives like ‘build-to-rent’ to address the NSW affordable housing shortage whilst stimulating the economy.
On 20 August 2020, the National Housing Finance and Investment Corporation (NHFIC) and the NSW Land and Housing Corporation (LAHC) announced they would work together on LAHC’s Community Housing Renewal Program (Program) to boost the supply and quality of community housing projects. This compliments the recent State Revenue Legislation Amendment (COVID-19 Housing Response) Act 2020 (NSW) (Housing Response Act) assented on 11 August 2020, which provides a 50 percent discount on land tax to developers who invest in build-to-rent projects.
Build-to-rent refers to the business model for residential construction where a developer holds onto and becomes the property manager of an entire building, instead of selling individual lots to investors or owner-occupiers immediately after construction. The model has gained significant traction overseas, including in the United States and Europe, but it is yet to gain real traction in Australia.
LAHC intends to utilise a derivative of this model by granting 40-year leases to developers and Community Housing Providers (CHPs) to enable them to develop, maintain and manage residential buildings. CHPs and developers would then pay market rent to LAHC and manage long-term rental properties. The developers of the build-to-rent projects would also obtain the benefit of access to low interest rates and long-term funding to construct the dwellings via the NHFIC and will be able to collect rental income from the residents during the lease period. At the expiration of the lease, all buildings and improvements will revert to the ownership of LAHC, allowing the Government to create an asset that will generate income, while retaining its land portfolio.
While the Program can be considered as an “innovative thinking and collaboration model with the potential to boost the social and affordable housing sector and assist with the recovery of the economy”, it does invite some inquiry for the NSW Government.
BUILD-TO-RENT IN AUSTRALIA
Despite its perceived advantages, build-to-rent has been slow to take off in Australia. The reasons for this vary. However, at the core, the key issues pertain to the impact of Australia’s tax structure on developers (for example, GST and land tax payable in NSW). The Project and Housing Response Act seem to be a step in the right direction to realise the profitability potential of the built-to-rent market and to aid the economy in a post COVID-19 recovery. However, Australia should be cautious not to adopt a build-to-rent model formed soley in reliance on social and affordable housing market and instead follow successful examples from the US and UK models, which treat the built-to-rent model as an ancillary income stream with the ability to generate long-term rental returns as well assisting with the shortage of supply issues.
So what does Australia need to do to get it right? Mirvac seems to be the first major Australian listed company actively participating in the built-to-rent marketwith its launch of ‘LIV Indigo’ at Sydney Olympic Park (LIV). LIV, being the first of its kind in New South Wales, will have on-site maintenance, a social club and brand new, energy efficient applicances that are to be replaced every five years (or sooner, if they break down). Marketed as “a new way to live” it intends to give tenants the flexibility of renting “with the security of ownership”. These facilities and amenities are no doubt expensive to maintain and it is for this reason that LIV is rumoured to be more expensive to rent than other properties within the Sydney Olympic Park suburb.
KEY CONSIDERATION FACTORS
The right fit
Given the 40-year term of the proposed LAHC leases, it is prudent for the NSW Government to select the right developer to drive and maintain the build-to-rent collaboration projects. To ensure that the NSW Government is able to achieve its objective to “build new and better social housing by renewing ageing assets that are expensive to maintain”, the appropriate model may be one where CHPs and private developers work in unison to develop, manage and maintain built-to-rent properties. The outcome of the Communities Plus Redfern Project situated at 600-660 Elizabeth Street, Refern, New South Wales seems to suggest that this is the NSW Government’s preferred model.
This approach will also ensure that resources are shared equally between the public and private sectors. In addition, by selecting developers with tenure and a strong reputation within the construction industry, an inadvertent effect could be that the interest in and demand for build-to-rent developments will increase within New South Wales and subsequently, Australia.
Managing the fit
The parties’ expectations should also be considered and managed upfront in built-to-rent collaborations between Governments, CHPs and private developers. Governments will more than likely require the agreements to remains flexible to address changing internal policies, whilst, similarly, a developer may require flexibility to allow it to adopt to its changing circumstances, if, for instance it looks towards expanding its company or winding down its operations.
Agreements should therefore enable the parties to assign or transfer their interest in a particular project within certain parameters. Provisions may include inserting procedures and criteria outlining what requirements must be satisfied when a party is looking to assign or transfer its interest in a particular project and may include limitations on a developer’s ability to sell or outsource its management portfolio to a third party.
AT THE END OF THE DAY: MAINTAIN OR DISPOSE THE ASSET?
The LAHC model contemplates the return of land, buildings and improvements to a Government agency at the expiration of the 40-year period. This raises further questions relating to what Government’s intention is at the expiration of the agreement. For instance, would the intention be to maintain, or dispose of the property asset?
If the Government’s preference is to retain the property asset, agreements should also include obligation on the developer to transfer its management portfolio and restrict the developer from entering into agreements that could exceed the lease term.
Alternatively, if the Government were considering disposing of the property asset, then it should look to whether it would first offer the properties to the developers or its long-term tenants. If this is the preferred course of action, then long-term planning is necessary from the inception phase of the built-to-rent project to ensure that the appropriate structure of the development is selected (for example, strata subdivision to enable apartments to be disposed of individually).
Special thanks to Felicia Pserras, Lawyer, for her assistance in putting this article together.
For further information on any of the issues raised in this alert, please contact:
 Land and Housing Corporation, ‘Pilot Program to deliver additional community housing throughout New South Wales’, 20 August 2020 accessed at https://www.communitiesplus.com.au/news/pilot-program-to-deliver-additional-community-housing-throughout-new-south-wales
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.