Just in time for Christmas, the Australian Treasurer announced a welcome change to the treatment of build-to-rent (BTR) projects under the foreign investment regime.
A far more sensible approach will now apply to reduce FIRB fees significantly for BTR investment.
This will result in the more appropriate treatment of these projects as commercial developments which are a crucial piece in the solution to the housing supply crisis.
Unfortunately, the positive change to BTR comes alongside a questionable proposal to triple FIRB filing fees for residential property purchases regardless of the intent of the purchase.
This tripling of fees across the full spectrum of residential land acquisitions will likely have an unintended chilling effect on large subdivision development.
Reduced BTR fees
Obtaining FIRB approval is a complex, costly and time consuming process. Reducing the cost will be gratefully received by developers as well as acquirers of BTR projects.
Whilst the construction phase is regarded as commercial land (when there are more than 10 dwellings able to be built), the initial acquisition of residential land or vacant land, requires a FIRB approval regardless of value and higher fees particularly if the land is initially residential land.
The treatment of a BTR project as commercial at all stages of the development is a positive change.
Once a project is complete, it will be developed as residential land for FIRB purposes. Absent the proposed relief on fees, developers have found it challenging to realise their investment by sale as foreign investors baulk at the high FIRB fees for residential land. This has reduced the attractiveness of new housing projects to offshore institutional investors.
The Treasurer’s decision to reduce filing fees for BTR projects will assist such investment in the sector.
BTR projects will now attract FIRB filing fees at commercial land rates, regardless of how the project land is classified.
For example, for the acquisition of any type of land for a BTR project with a consideration of up to $50 million, a filing fee of $14,100 applies. This change took effect from 14 December 2023. The filing fees will be indexed on 1 July 2024.
What is a build-to-rent project?
There have been no legislative or policy updates since the Treasurer’s announcement of the BTR carve out.
However, the Treasurer’s announcement suggests that the lower fees will cover projects “that are specifically designed, built and managed to provide long‑term rental options for Australians”.
Helpfully, state governments around Australia have given tax incentives to promote BTR and provided some guidance on what a ‘BTR project’ is.
Around Australia, these common features tend to define a ‘BTR project’:
- The project involves the construction of:
- new or substantially renovated building(s).
- 50+ dwellings used specifically for BTR which are offered to the general public (subject to restrictions on affordable and social housing).
- a portion of dwellings that are affordable / social housing, or subject to discounted rent arrangements.
- All tenants are subject to a residential tenancy agreement, and offered a lease with a term of at least 3 years.
- The BTR dwellings are managed by a single entity (subject to regulations around providers of affordable and social housing).
- The relevant land is held under a unified ownership structure and not subdivided, either formally or informally (e.g., de facto subdivision within holding entity).
The Treasurer will likely use similar factors in the FIRB process to determine if a development is a ‘BTR project’.
Changes on the horizon
While the change in BTR fees is a positive development for investors and the housing market, the Treasurer has also announced a proposal to hike the fees for established residential properties which we consider may be self-defeating without a more nuanced approach to major housing developments.
- FIRB applications to purchase established residential properties will face tripled filing fees, with the potential for a maximum filing fee that could exceed A$3.4 million for acquisitions in excess of $40 million.
- Vacancy fees for established residential properties will increase sixfold.
Whilst BTR is a part of Australia’s housing future, the usual ‘build-to-sell’ house and land projects contribute even more to housing supply and should be encouraged.
It is a questionable step if property developers and their funders are made to pay triple FIRB fees for crucial investments in Australian housing development, particularly for large projects that may see hundreds, if not thousands of new blocks created.
Large existing residential blocks (which may have one house on many hectares) that can be subdivided into many housing lots are the acquisitions that will likely exceed $40 million and attract the highest filing fee.
If large developers are discouraged from investing that will have a greater negative impact on housing supply than discouraging individual acquisitions.
We suggest that:
- along with BTR projects, major subdivision developments that will deliver additional housing supply (say 50 lots or more) also receive commercial land fees rather than the tripled residential land fees;
- BTR and subdivision development be considered for “automatic approval” (similar to FIRB’s approach to low-value applications some years ago) with development conditions noting the Treasurer has a call-in power if there is any concern.
This will go some way to progressing projects quickly, removing the up to 6 months FIRB delay and addressing the housing supply crisis.
