Multi-family sector: An investment class in Australia? | KPMG | GLOBAL

Multi-family sector: A genuine investment class in Australia?

Multi-family sector: An investment class in Australia?

Grant Mackinlay discusses the potential viability of the multi-family sector as a separate investment class in Australia.

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Director, Deal Advisory – Tax

KPMG Australia

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If you’ve opened the Property section of the Australian business papers recently you would have noticed articles discussing the emergence of a new sector in the Australian property market – ‘build to rent’.

It can be defined as medium to long term investments in residential assets for rent. The owner becomes the landlord to a large number of residential tenants generally on longer term leases.

Sometimes referred to as ‘multi-family’, this sector is well established in other countries but is only in its infancy in Australia.

Commercially, property developers in Australia have historically embraced the build to sell model because rental yields on build to rent projects didn’t stack up.

In the 2017 Federal Budget, the Government announced amendments to the MIT provisions to encourage investment in build to rent affordable housing by Managed Investment Trusts (MIT).

However, the Government recently released draft legislation enacting these measures but went further to include an integrity measure to prevent MITs investing into residential property other than affordable housing.

Large property players and investors have begun to dip their toes into the sector and yesterday’s announcement significantly limits the attractiveness of the build to rent sector to foreign investors.

Taxes will continue to play a role in determining the viability of potential build to rent projects:

  • A build to sell developer is able to claim Goods and Services Tax (GST) input tax credits on their build costs while a build to rent developer suffers a 10 percent cost uplift given they are unable to claim GST credits on their costs. 
  • Unlike build to sell developers, build to rent investors are also placed with annual land tax bills. 
  • Trusts investing in build to rent investments outside of affordable housing will need to consider whether such investments will cause them to be carrying on a trading business that could result in the trust being taxed as a company.

As yields in other sectors tighten, long term capital may come become more interested in the sector, but will still need to consider questions such as:

  • Can my model support an investment premise built on a long term rental yield rather than capital profit?
  • Is my investment viable in the current GST regime?
  • What about stamp duty and the significant duty surcharges placed on foreign investment into residential property?

The implications of the recent draft legislation, and future policy developments, will determine the long term viability of the build to rent sector as a separate investment class.

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