Australia threatens foreign BTR investments with surprise ban

In a surprise move, the Australian government has banned investment vehicles used by foreign investors from owning residential rental property.

The decision will force a number of foreign investors to reassess their strategy in what was seen as an emerging build-to-rent (BTR) market in Australia.

Australia’s Federal treasurer Scott Morrison has summarily stopped managed investment trusts (MITs) from investing in residential real estate in a statement to Parliament.

He said: “from 4.30pm AEST 14 September 2017, MITs cannot acquire residential property, other than affordable housing”.

Morrison gave MITS currently holding residential property “a transitional period” until 1 October 2027 before they have to liquidate exsting investments.

Foreign investors who do not have an on-the-ground presence in Australia currently hold their real estate investments in MITs to give them access to a lower tax rate. Instead of having to pay the corporate tax rate of 30%, MITs pay an offshore withholding rate of 15% on capital gains and profits.

Under the proposed legislation, MITs will be permitted to hold affordable housing for the purpose of deriving long-term rent, and they will be able to construct or develop the affordable housing property within the MIT.

Also, if they hold the investment for three years, investors will be entitled to a capital gains discount of up to 60%.

The Treasurer claims that the draft legislation will provide further incentive for MITs to invest in affordable housing projects.

But the industry and proponents of BTR schemes disagree. To qualify as affordable housing in Australia, a landlord can only charge 80% of market rent. For the 20% discount, the landlord will get a government subsidy. This will not work for BTR, said a source.

The decision has caught leading Australian companies and their potential foreign partners by surprise. They have been in discussion with potential foreign investors to co-invest in mooted BTR projects.

IPE Real Estate understands that major developers like Lendlease and Mirvac are in advanced discussions with potential offshore capital partners for their first crop of BTR projects.

Greystar, which is in a joint venture with Macquarie Capital and Sentinel Real Estate Corporation, are the early movers in Australia’s emerging BTR market, which is tipped to be worth up to AUD300m (€200m).

It is likely that the latest government policy will force them to revisit their investment strategy for Australia.

When approached, one investor declined to comment on “the politics of foreign nations”.

Another told IPE Real Estate: “We understand the issues with the MITs and hope the matter can be resolved in a manner that encourages badly-needed housing throughout Australia.”

Interest in Australia’s BTR sector is gaining momentum, with more local players hoping to attract foreign capital into their planned projects.

A source responsible for bringing billions of foreign dollars into Australia to build and own some of the country’s largest office towers, shopping centres and hotels said foreign investors will have to reassess their options.

He added that his company was close to bringing a foreign investor into a BTR project, but would now pause to see how the situation pans out.

The executive said Australia needs foreign capital. “The MITs make their investment more efficient,” he said.

One industry source described the new legislation as a serious setback that will have a big impact on the BTR asset class. Those entering the market, he said, are already wrestling with stamp duties, other transaction imposts and broader tax issues.

But he remains confident that professionally-managed residential rental will be a viable business, and that this new obstacle will not deter serious players. They will work with their partners to find a way to mitigate the impact of the ruling.

“Faced with an affordability problem, other countries offer carrots to investors to encourage investment in build to rent with a resulting increase the housing pool,” he said.

“Not Australia. Here, the government is using a stick to discourage those same investors from funding much needed increase in rental housing supply.”