Key Highlights
- The financial feasibility of a BTR project is highly sensitive to the size of units. Better design to improve building efficiency and density of development can improve viability.
- Land cost reduction and land (ground) lease can also be used as strategies for improving financial feasibility. Ways to reduce land cost could be through zoning land for BTR use or through mechanisms such as joint venture with landowners. There is a case to use land lease structure in BTR projects by involving public and private landowners.
- For a BTR project with affordable housing component, the biggest gain in the number of affordable units in the project is achieved with land leasing or land cost reduction strategies followed by treatment of GST liability like BTS developers.
- Among the options for land assembly for BTR projects, land lease models improve the feasibility without impacting the attractiveness of a BTR project to end-users (as users do not aim for ownership). Other methods that encourage land assembly such as land trust model, special zoning for BTR and the use of air rights should also be encouraged through market and planning mechanisms.
- For a BTR project to become viable, the following are necessary: buoyant housing market conditions, conducive user characteristics, conducive investors’ characteristics, housing demand and supply conditions in the suburb, planning and zoning regulations applicable on the site, and facilitating tax environment.
Authors
Dr Jyoti Shukla, Dr Piyush Tiwari and Dr Djordje Stojanovic, University of Melbourne
This project examines the viability of mixed/single use decentralized Build-to-Rent (BTR) housing model to address problems of declining housing affordability; changing households’ preferences towards renting and living closer to work and transit locations; and lack of long-term rental housing options.
The research also evaluates the viability of underutilized urban land stock (i.e., land parcels having obsolete uses and outlived buildings structures including previously used industries and warehouses) for reuse as BTR. The output from the research include a comprehensive assessment of various levers that will assist in improving viability of BTR projects particularly with affordable housing component, strategies for assembling land for a BTR housing project, and site selection framework for a BTR project.
There are about 11,000 BTR units under construction/constructed in Victoria. In current market and regulatory environment, the financial feasibility of BTR projects is low and hinges on the ability of units to be leased at higher than market rents. The results from financial analysis that examines revenue maximising, cost reduction, fiscal and planning levers indicate that while all levers add to improvement in viability the largest gain are from land cost reduction strategies and GST treatment of BTR developers like the build for sale developers.
The product mix that is skewed towards studios and 3-bed units increase financial viability. The mixed use BTR (residential in combination with commercial) does not provide significant financial benefits though including small retail (3-4% of net lettable area) may be a possibility. A reduction in size through better design (examples in the report) can improve viability. Land cost reduction and land (ground) lease can also be used as strategies for improving financial feasibility. Ways to reduce land cost could be through zoning land for BTR use or through mechanisms such as joint venture with landowners. Land lease is an established mechanism for transferring the use rights of public land and the land owned by not-for-profit entities but is not widely prevalent.
There is a case to use land lease structure in BTR projects by involving public and private landowners. Exemption on income, land tax and rates (like CHPs) can result in higher IRR but due to complexities in tax structures involved market participants are less keen on this option. Full GST refund results in similar IRR as exemption on income, land tax and rates would offer. This is also demanded by industry.
The research also examined the levers that can build affordable housing component in a BTR project. The biggest gain in the number of affordable units in a BTR project is achieved with land leasing or land cost reduction strategies followed by treatment of GST liability like BTS developers.
The research suggests eight strategies for bringing passive land into active use for a BTR project. These include (i) Land assembly through door-knocking, (ii) providing service incentives to landowners willing to develop land for rental housing, (iii) providing zoning and density incentives to landowners, (iv) a land trust model of converting passive land into active use, (v) a combination of the land trust and zoning incentives, (vi) using unused air-rights to develop BTR housing, (vii) demarcation of growth areas conducive for BTR housing development as a catalyst to land market, (viii) rezoning land under obsolete/unproductive uses into ‘BTR residential zones’.
Land leasing is most attractive as while improving the project’s financial feasibility for developers/investors, it does not impact the attractiveness of a BTR project to end-users.
Finally, the six most important criteria for selection of an infill and greenfield site for a BTR housing project include (i) buoyant housing market conditions in the suburb, (ii) conducive user characteristics (suburb level), (iii) conducive investors’ characteristics, (iv) housing demand and supply conditions in the suburb, (v) planning and zoning regulations applicable on the site, and (vi) tax environment in the market. Careful consideration of these factors can facilitate the identification of suburbs suitable for a BTR housing project.
Media coverage
Article: How making Build-to-Rent more viable can help address Australia’s housing affordability crisis | The Australia & New Zealand Property Journal
Previous APREF Research
This research was funded by the Australian Property Research and Education Fund (APREF). Learn more about APREF here.
