BTR pipeline continues to swell despite tax policy, construction hurdles

But the immediate focus of the sector has shifted to delivering projects underway as opposed to starting new ones according to JLL’s latest build-to-rent sector update.

The pipeline of Build To Rent (BTR) apartments across the nation has almost doubled in the last 18 months (up 98 per cent) despite construction constraints and uncertainty surrounding legislative changes on tax incentives. Along with higher bond rates that have pushed up required returns, all these factors have temporarily put a brake on further investment, according to JLL’s latest market research. 

The Build-to-Rent (BTR) Australia: Q2 2024 report found the pipeline of supply had swelled significantly over the past year with 40,631 apartments now in various stages of development including operational stock (5,483), under construction (11,320), those with plans approved (15,028) and those being planned (9,488).

Victoria continues to lead the way with 58 per cent of the pipeline, followed by Queensland (22 per cent) and NSW (14).

Leigh Warner, JLL’s Head of Residential Research – Australia, said the delay in the passage of significant federal government policy support measures – notably, a reduction in withholding tax rates from 30 per cent to 15 per cent for foreign investors in Managed Investment Trusts (MITs) and accelerated depreciation tax allowances for eligible BTR projects – was heightening market uncertainty and curtailing investment.

“The impact of these tax uncertainties has been magnified by the significant change in capital markets globally the past year or so,” said Mr Warner. “Higher bond rates have seen a shake out in many markets and the rise in real estate yields has been much larger in many sectors globally than it has been in Australia and this has presented investors with many attractive return options.

“So despite no change in the longer-term fundamentals for BTR in Australia, investors have been diverted to other places and new investment has largely stalled.  But this won’t last forever and investors still acknowledge that the drivers behind BTR in Australia are strong,” said Mr Warner.

With capital slowing, so too has new construction commencements. But JLL’s report highlights that the focus of most major operators is on delivery of projects at hand anyway with 21 projects scheduled to complete by the end of 2025 and add 7,172 apartments.

BTR stock will more than double by the end of 2025, so despite less projects starting recently, the major operators in the sector will still be very busy delivering and leasing these projects.

JLL’s Head of Living Sectors, Capital Markets Jack Bergin believes all this new stock will greatly help in establishing a more transparent capital market for the sector and ultimately help to support further project starts.

“A lack of transactional data in the market currently means exit yields have become increasingly difficult to underwrite.  However with the wave of recent and upcoming completions, much needed rental housing is being delivered to the market at scale, and investors are benefitting from increased rental and operational benchmarks which will ultimately help enormously in informing future investment in the sector.

“It is all part of the maturing of the nascent sector here. We saw exactly the same as the sector developed in the UK and we can take some comfort that this process quickly gains momentum once it gets started,” Mr Bergin said.