Why Does a Billion-Dollar Landlord Get a Better Tax Break Than a Mum-and-Dad Investor?

Australia needs more homes.

On that point, I don't think there is much disagreement.

But there is another question we should be asking.

Who do we actually want to own them?

Because quietly, Australia is changing the incentives around residential property investment.

And I am not sure most Australians realise what is happening.

For decades, Australia's rental market has largely been funded by individual property investors.

People bought one or two investment properties, developers relied on those buyers to secure pre-sales, projects obtained finance and new housing was delivered.

The owner might eventually sell that property to another investor or an owner occupier.

The property remained part of the normal housing market.

That model is now being challenged by the rapid growth of Build-to-Rent.

Build-to-Rent is different.

Instead of a developer constructing 200 apartments and selling them individually, one institution can own the entire development and rent every apartment out.

Superannuation funds and other major institutional investors are increasingly moving into this market.

Aware Super and Barings, for example, recently opened a 366-apartment Build-to-Rent development in Brisbane's Fortitude Valley. Their wider Build-to-Rent pipeline now exceeds 2,000 homes across Australia.

I have no issue with institutional capital helping fund housing.

We desperately need investment.

But here is the part I think deserves far more attention.

The Tax System Is Giving Them an Incentive

An ordinary Australian buying a new residential investment property will generally claim eligible Division 43 construction costs at 2.5% per year.

That means those construction costs are effectively written off over 40 years.

Qualifying Build-to-Rent developments can now claim those capital works at 4% per year.

That reduces the effective write-off period to 25 years.

Treasury has been very clear about why the concession exists.

It was introduced to encourage investment and construction in the Build-to-Rent sector.

Think about that for a moment.

We have effectively acknowledged through tax policy that accelerating depreciation can improve investment returns and encourage investors to fund new housing.

But we have chosen to give that accelerated rate to qualifying Build-to-Rent developments rather than the Australian buying one new investment property.

Consider a simple example.

If there were $100 million of qualifying construction expenditure:

• At 2.5%, the annual Division 43 deduction would be $2.5 million.
• At 4%, it becomes $4 million.

That is an additional $1.5 million deduction each year during the accelerated period.

For a billion-dollar institutional investor, depreciation matters.

Apparently enough that government policy has deliberately been changed to improve the investment proposition.

So why shouldn't we be asking whether the same principle could encourage private investors to fund new housing?

This Isn't Available to the Average Investor

There is an important distinction here.

A person cannot simply buy an apartment, rent it out and elect to claim 4%.

The concession applies to qualifying Build-to-Rent developments.

Among the requirements, the development generally needs at least 50 residential dwellings available for rent, and the dwellings must remain under single ownership through a lengthy compliance period.

Treasury's policy was specifically designed around large-scale Build-to-Rent investment.

That leads me to a simple question.

Why does the tax system provide a stronger depreciation incentive to the owner of 100 apartments than to the Australian buying one?

Are We Changing Who Owns Australian Housing?

This goes much further than depreciation.

Australia's superannuation system now holds approximately $4.44 trillion in assets.

That is an extraordinary pool of capital.

There is nothing inherently wrong with deploying some of it into housing.

In fact, institutional capital may be capable of delivering projects that otherwise would not proceed.

But we need to think about the long-term consequences.

A traditional apartment development might contain 100 apartments owned by 100 different Australians.

Over the next 20 years those apartments could be bought and sold many times.

A renter might eventually buy one.

An investor might sell one to an owner occupier.

A young family might use one as their first step onto the property ladder.

Now consider a Build-to-Rent tower.

One institution owns all 100 apartments.

They are deliberately retained as rental accommodation.

They may remain under institutional ownership for decades.

We have still created 100 homes.

But we haven't necessarily created 100 homes that Australians can ever buy.

Housing supply and home ownership supply are not the same thing.

That distinction matters.

What Happens to Australia's Smaller Developers?

There is another consequence that I believe deserves much more discussion.

I work around property and construction, and one of the biggest challenges for developers is making projects financially viable.

Many smaller and mid-sized residential developers rely on individual buyers to provide the pre-sales necessary to obtain construction finance.

Private investors have historically been an important part of that market.

If government policy continues making individual property investment less attractive while simultaneously improving the economics for institutional Build-to-Rent, what happens?

The large institutional players have access to billions of dollars.

Smaller developers do not.

Over time, we could create a residential development industry increasingly dominated by organisations capable of holding entire buildings rather than developers building homes for individual Australians to purchase.

That may not happen tomorrow.

But housing policy needs to be considered over decades, not election cycles.

There Is Another Irony Here

Australians are required to put money into superannuation throughout their working lives.

Super funds then invest that money to generate retirement returns.

Increasingly, some of that capital may be invested into residential housing.

So we could ultimately arrive at a strange situation.

Your super fund owns residential property.

Another Australian's super fund owns your residential property.

And both of you rent.

Technically, Australians still own part of the housing through their retirement savings.

But that is very different from owning the roof over your own head.

I Am Not Against Build-to-Rent

I want to be clear about this.

Build-to-Rent has a role.

We have a serious housing shortage and Australia needs capital from every available source.

Large-scale rental developments can add supply, provide longer-term rental options and deliver housing that may otherwise never be constructed.

The problem is not Build-to-Rent.

The problem would be allowing policy to favour institutional ownership while progressively discouraging individual ownership and investment.

We need both.

• We need super funds investing.
• We need private investors.
• We need first-home buyers.
• We need owner occupiers.
• And importantly, we need small and medium-sized developers capable of competing and delivering housing.

The Question Government Should Answer

If increasing Division 43 depreciation from 2.5% to 4% is considered an effective enough incentive to encourage institutional investors to build rental housing, why aren't we considering similar incentives for Australians who invest directly into new housing supply?

Imagine restricting an accelerated depreciation incentive to newly constructed homes.

Buy an established investment property? Normal rules.

Fund the construction of a genuinely new dwelling? Accelerated depreciation.

That would directly reward investment that adds to Australia's housing stock.

Instead of arguing endlessly about investors competing with first-home buyers for existing houses, government could create incentives that direct investor capital towards the one thing Australia desperately needs:

more new homes.

That is the debate I think we should be having.

Because Australia's housing crisis is not simply about the number of dwellings we build.

It is also about who gets to own them.

If we're not careful, Australia could eventually succeed in building substantially more housing while simultaneously making home ownership less accessible.

We may solve the housing shortage.

But we could still become a nation of renters.

And that would be a very different Australia from the one most people think we are trying to build.