Build-to-rent and affordable housing

An idea, posed by Australian academic Matthew Palm of the University of Melbourne, has suggested that in Australia the affordable housing crisis can be plugged by government incentives towards build-to-rent constructors.

Build-to-rent and affordable housing

Originally appearing on academic journal The Conversation, Palm suggests that the federal government, currently scratching its head regarding the massive shortfall in affordable housing, should instead focus its efforts on providing tax and financial incentives to builders of ‘build-to-rent’ properties, often off-plan apartment complexes.

Build-to-rent, by Palm’s definition, simply means developers build housing with the intent of retaining the building and renting it out to lower-income families at prices affordable for those families. We can, for the purposes of this article, compare this comfortably to the current off-plan property market in the UK, which is thriving. In particular, off-plan construction is booming across the Northern Powerhouse area of Northern England, in cities such as Manchester, Leeds and Liverpool.

The idea seems simple, the government should provide financial incentives for these companies in order to build more, sell the apartments to private investors, and ensure that the housing remains affordable to low and middle income tenants.

But how can the idea be implemented in the UK? And is it viable?

Failing to address the issue quickly in Australia, Palm argues, will cost billions of dollars. The picture in the UK is similar. With families struggling badly to accumulate the capital required to enter the housing market, demand has never been higher for rented properties, but with supply desperately lacking across cities and urban areas, rents are starting to quickly climb beyond the reach of most.

If the situation continues, some argue, then we can expect an increase in homelessness and financial hardship for families whose rent will eat up the vast majority of what they earn, leaving them unable to buy necessities such as clothing, food and other household essentials. If this were to be the case, it’s highly likely the government would need to step in with some form of financial subsidy for these families. If we follow Palm’s line of logic on this, we can assume that the government can avoid such costs by offering tax breaks to these property builders.

The suggested program’s US counterpart, Palm says, known as “tax credit housing”, is so popular that a bipartisan group of senators are working to expand its funding by 50%. Australia’s super funds have even invested in US tax credit housing.

Truly affordable rents for low-income Australians, or indeed Brits, simply cannot cover the costs of building state of the art, modern housing though. Building and maintaining the buildings costs money, and if the builders are to receive a return on their investment, they will need money to bridge the gap.

US housing experts call this problem the “housing finance gap”, and many of their foreign counterparts have called on their respective government to help fund it.

Palm uses recent data from several Californian tax credit housing projects from between 2006 and 2016 to illustrate the issue. With the typical cost of one of these units sitting at $300,000, only $105,000 of this cost is covered by investors, bonds and rents, should they stick to affordable rent caps. The rest is bridged by land donation, waved taxes and state subsidies to the tune of $85,000, whilst the other $90,000 is covered by federal tax credits.

In principle, Palm argues that the UK government, like the Australian government, could and should refocus tax breaks, subsidies and other incentives towards investors and builders who can build property much quicker and much more efficiently than government. With the correct incentives and intelligent tax breaks this could allow affordable rents capped for lower and middle income families.

Investors, too, could reap the benefits with lower capital investment with similar capital appreciation on the property over time. Rents, whilst marginally lower, would still represent similarly yielding profit margins and this would allow more diversity over a property portfolio.

Certainly, with the UK government seemingly failing to get to grips with the issue, ideas and innovations such as these could play a part in relieving the stresses on housing.

yieldit vertical - April 2019

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