New form of developer investment: Build-to-rent schemes

Build-to-rent housing projects in NSW are relatively uncommon. That position is anticipated to change with the NSW Government recently announcing reform to the planning and tax provisions governing build-to-rent schemes.

Build-to-rent refers to a residential development in which all apartments are owned by the developer and leased to tenants. This contrasts with the traditional model of build-to-sell where the developer sells off each individual lot to a third party who then lives in it or rents it out as their own investment.

There have been two initiatives announced to incentivise developers to explore build-to-rent projects.

The first is a 50% land tax discount on the construction of certain build-to-rent projects from 1 July 2020.

The second is a proposal to prepare a new State Environmental Planning Policy (Housing Diversity) 2020 to facilitate investment into these schemes. A draft Housing Diversity SEPP has not yet been released. However, it is anticipated that the Housing Diversity SEPP will introduce definitions and planning provisions for build-to-rent housing and co-living based on the Explanation of Intended Effect released in July 2020 by the NSW Department of Planning, Industry & Environment.

It is proposed that the definition of build-to-rent housing would refer to a building that:

  • contains at least 50 self-contained dwellings that are offered for long term private rent;
  • is held within a single ownership;
  • is operated by a single management entity; and
  • includes on-site management.

It is proposed that the definition of co-living would refer to a building held in a single ownership that:

  • provides tenants with a principal place of resident for 3 months or more;
  • includes on-site management;
  • includes a communal living room and may include other shared facilities, such as a communal bathroom, kitchen or laundry; and
  • has at least 10 private rooms, some or all of which may have private kitchen and/or bathroom facilities, with each private room accommodating not more than two adults.

It is intended that the Housing Diversity SEPP will also include a mechanism where the building may change from a build-to-rent scheme to a strata-titled apartment development.

The schemes would only be permitted in certain zones including R4- High Density Residential, R3- Medium Density Residential and B4-Mized Use.

Unfavourable GST conditions are a concern for the build-to-rent developer market. Potentially the market would need to rely on government subsidies to operate because while GST is passed down to buyers in a build-to-sell model, GST can’t be passed down in a build-to-rent model.

Tenancies could also prove problematic for developers if there are frequent changes in occupancy rates.

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