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30 Jul 2020

Build-to-Rent: the start of something new

BY NIKKI ROBINSON, ANGUS ROY

The NSW Parliament is set to introduce legislation for land tax cuts for most new projects in the build-to-rent sector. Together with the proposed new guidance on planning policy for build-to-rent projects, these tax cuts will help give the sector the boost it has been looking for over the last few years.

Proposed tax cuts

Under the State Revenue Legislation Amendment (COVID-19 Housing Response) Bill 2020, NSW is proposing to give developers who invest (or have invested since 1 July 2020) in new build-to-rent schemes a 50% land tax discount. It is intended that this discount will last for 20 years.

Up until now, developers in NSW attempting to enter the new build-to-rent sector have found it difficult to make a business case for their project and this support from the NSW Government will be a welcome relief for their investors. This in turn will help to boost the supply of new housing that is and will be needed in NSW.

The NSW Government is encouraging developments which are of a significant size by only allowing the tax cuts for projects in metropolitan areas with at least 50 units. Smaller unit numbers are being considered for projects in regional areas. In addition, the reforms proposed under the bill will only be available to projects under a single unified ownership structure.

Amendments to the tax payable on build-to-rent schemes have been requested by investors in this sector for a long time and these current changes are as a result of a taskforce set up during the COVID-19 pandemic to review the roadblocks in this sector.

International impact

The build-to-rent sector in Australia is tracking about 10 years behind that of the UK and at least 30 years behind the USA. In both of these countries, local tax and duty relief (which has taken different forms) has enabled the build-to-rent sector to flourish. In the USA, the build-to-rent sector (referred to as Multi-family) now accounts for over $2 trillion USD of investment and about 20% of all housing in the country.

The reforms proposed also include an exemption from foreign investor surcharges (purchaser duty and surcharge land tax). These additional reforms will assist in attracting international capital to new build-to-rent projects in NSW and entice some of the biggest build-to-rent investors to assist with the potential exponential growth of a new asset class in Australia.

Build-to-rent developers should revisit their business cases and update them to take into account these tax savings

Other assistance: proposed change to planning policy

The NSW Government is also drafting an update to its planning policy in this area, providing a greater degree of clarity on the context and character of a new development. The success of the build-to-rent sector in other countries has not just been about the different types of housing but also the types of tenure. The best projects have seamlessly integrated private housing with affordable and social housing together with commercial and retail outlets in the same scheme. The ability for build-to-rent developers to create communities for their customers to live in and call their home has meant customers spend a vast majority of their lives within the same development, moving to different homes within the scheme as their personal circumstances change. To this end, the proposed reforms must provide customers with the ability to take longer leases of their homes and cater to people looking for greater flexibility to move to suit their needs in particular at any given time.

These proposed planning amendments under the Housing Diversity State Environmental Planning Policy are on exhibition until 9 September 2020. Further guidelines of how these amendments will impact the build-to-rent sector are expected soon.

Next steps

Given these proposed changes, build-to-rent developers should revisit their business cases and update them to take into account these tax savings. Also, given the expected clarity provided by the amendments to the planning process, developers should have more certainty of the approval process for their development. Both of these amendments should provide a faster development timeframe for the sector.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.