This article is from the Australian Property Journal archive
AUSTRALIA’S current property tax regime is slashing almost half of the internal rate of returns for prospective build-to-rent projects when compared to build-to-sell developments, according to modelling by CBRE.
Its new Viewpoint report, A Taxing Time for build-to-rent, analysed the impact of land tax, GST and withholding tax over a 13-year period for a hypothetical build-to-rent project.
It found the IRR for the project would be 7.43% under the current regime, versus an IRR in the vicinity of 12% to 14% for a build-to-sell project. The IRR is reduced by 2.42 percentage points and return slimmed down by 25% currently than if the taxes were more supportive of build-to-rent developments.
“While this modelling is based off just one hypothetical build-to-rent development, and results would differ from development to development, the overarching results would be the same: land tax, GST and withholding tax all reduce returns on build-to-rent investments, yet these are not equally as punitive on other real estate asset classes,” CBRE’s head of capital markets Ben Martin Henry said.
CBRE had posited that Australia’s fledgling build-to-rent sector could be worth as much as $300 billion over 20 years, before then-Treasurer Scott Morrison introduced measures managed investment trusts (MIT) than made it more difficult for them to acquire residential assets, unless they are for affordable housing.
In July, the federal government announced draft legislation that would permit institutional investors to invest into build-to-rent residential through an MIT.
“The purpose of holding assets in an MIT is to take advantage of a lower tax rate – halved from 30% (the company tax rate) to 15% – provided certain criteria are met, which has given non-resident investors a strong incentive to invest in Australian property,” Martin Henry said.
The proposed new rules specify that the lower 15% tax rate would be applied to local investors only, with non-resident investors to be taxed at 30%.
GST also appears to encourage developing a residential asset or commercial asset as build-to-sell rather than build-to-rent, with CBRE’s model determining the IRR falls 99bps for both foreign and domestic investors under the current set-up.
Likewise, land tax, which is a key consideration due to the underlying profit margins of build-to-rent investments being relatively tight. The CBRE model, which applies NSW land tax laws, knocks 89 basis points off the IRR.
CBRE’s Pacific president & chief executive officer, Ray Pittman, said CBRE’s view was that a level playing field – rather than concessions – was required for the sector to flourish, so that preference wasn’t skewed towards one part of the market or another.
“As it stands, the build-to-sell market has an advantage in that developer returns aren’t eroded by land tax and GST costs while commercial real estate receives GST and withholding tax concessions.
“Meanwhile, the proposed new legislation for residential assets in MITs is likely to temper demand for BTR assets from overseas investors, resulting in shallower investor pools, a smaller BTR market and potentially lower levels of new housing stock.”
Australian Property Journal
