This article is from the Australian Property Journal archive
PRIVATE capital, through the vehicles of shared equity schemes and rental investment trusts, present the best opportunity to address Australia’s national housing crisis for would-be home buyers and renters, according to analysis by LongView and PEXA, while the “jury remains out” on the longer-term impact of build-to-rent developments on affordability.
The third instalment of their housing affordability whitepaper series, Mobilising Private Capital for New Housing Solutions, concludes that the size of Australia’s $10 trillion residential market and the growing scale of the current housing crisis mean “governments alone will never be able to make a meaningful difference” to bridge the widening purchase and rental affordability gap for Australians, nor the rental experience.
The paper calls for private capital from traditional sources like superannuation funds, banks, family offices and high net-worth individuals, as well as from the $2.1 trillion invested in housing by Australia’s suburban landlords – “the largest capital pool of all where private capital is plentiful and agile enough to help deliver immediate and large-scale solutions to an urgent national problem”.
“The size of Australia’s housing market, and the seeming impossibility of government intervention at the scale required to significantly address these problems, requires the involvement of private capital, and corporate Australia, to find new solutions that work,” said PEXA CEO Glenn King.
At the federal level, Labor’s flagship Housing Australia Future Fund remains at a stalemate, with the Greens refusing to pass the $10 billion fund through the upper house. The off-budget fund would spend up to $500 million a year in returns with the initial aim of building 30,000 social and affordable rental homes over five years. The Greens want more to be spent, and for it to be coming from a consolidated revenue, as well as a freeze on rent increases.
Rents in the capital cities have surged by a record 11.7% over the past year, and vacancy rates remain stuck at historic lows of around 1%. The country is set to receive a record 400,000 new migrants in the current financial year and 315,000 in the next, putting further strain on supply and upwards pressure on rents.
LongView and PEXA evaluated four key private investment models – shared equity, institutional ownership of rental properties, build-to-rent developments and rent-to-buy schemes – to determine which would make biggest difference, work at scale and provide sufficient returns to attract private capital in the first place.
Shared equity schemes and institutional ownership offer greatest potential
The analysis concludes that shared equity schemes and institutional ownership offer the greatest potential to improve housing affordability and the rental experience, while “the jury remains out on the longer-term impact of build-to-rent developments on affordability”.
LongView executive chair, Evan Thornley, said it was “clear” that shared equity and institutional ownership offered the greatest potential to ameliorate Australia’s housing crises.
Shared equity schemes – where an investor puts up some of the purchase price – were found by the whitepaper to improve purchase affordability by reducing the mortgage deposit barrier faced by homebuyers while offering good exposure to capital growth.
Institutional ownership – effectively the creation of real estate investment trusts that hold a large number of rental properties – could “offer a radically better renting experience through more professional ownership and because institutions tend to hold property for longer periods”.
“This would significantly reduce the possibility of renters getting evicted for a sale,” he said.
To make this more attractive for investors, reform of some land tax regimes would be required, which penalise large landholders unless they invest directly in affordable housing.
“While there is a lot of discussion lately about the role of government and especially superannuation funds, the single biggest source of capital, by far, is the $2 trillion already invested by Australia’s private landlords – much of it poorly,” Thorney said.
“By creating an environment where landlords are attracted to moving out of direct ownership of individual properties and into owning shares of large funds, we can enable these transformations.
“These solutions need enabling infrastructure like a liquid secondary market for shares in the fund, which will improve the liquidity of these models and make it easier for investors of all stripes to meet their financial needs while supporting housing models which improve the lives of Australians. And ultimately, that’s the game. We need to recycle the private capital and housing stock that is already in the system in more effective ways to solve the problems we are facing.”
Build-to-rent targets premium markets
Build-to-rent developments were found to offer better tenure security and experience for renters than other market alternatives but, to date, have “not demonstrated they improve affordability as they tend to target premium markets”.
A recent study by EY, commissioned by the Property Council of Australia, found that if the managed investment trust withholding tax was halved to 15%, in line with other property asset classes – which the Labor government has committed to doing – three times as many build-to-rent projects would go ahead resulting in 150,000 new rental homes over the decade, and up to 350,000 new apartments in an optimistic scenario. State governments across the eastern seaboard have also been introducing tax concessions for build-to-rent projects.
“The potential to create 150,000 homes over the next 10 years with just one asset class shows build-to-rent is about as close to a housing policy silver bullet as they come,” Property Council of Australia chief executive Mike Zorbas said. Australia’s build-to-rent market is still relatively new and small, with the sector currently worth $16.87 billion, or 0.2% of the total value of the residential housing sector, the study found.
The LongView and PEXA whitepaper acknowledged that rent-to-buy does offer a pathway to homeownership, but it may worsen rental affordability up to that point, making it attractive only for people with low savings and high incomes.
The whitepaper also backed private-sector data and information to help speed up responses to increasing demand by local governments, planners, developers and builders, and a centralised, national social housing register to support the provision of social and affordable housing.
