Understanding Build to Rent and Large Corporate Landlords
What is the difference between these multi-unit rental models?
Last updated 4 April 2019
Proposals to increase the supply of rental dwellings in Australia and improve the experience of tenants have included developing a ‘build to rent’ and a large corporate landlord (LCL) sector. While these two sectors may share similarities, there is a subtle difference between them.
What is build to rent?
The ‘build to rent’ model focusses on increasing the supply of rental housing through improving investment options and outcomes for institutional investors. As such developers and their financiers build multi-unit buildings and, instead of selling the units, retain them to rent to tenant households. Rents may be set at market rents or, for affordable housing, an appropriate discount to market rents could be offered with appropriate government support to make up the funding gap.
‘Build to rent’ is an established practice in both the UK and USA but it has not been taken up in Australia. Developers cite Australia’s tax settings, which were designed for a ‘build to sell’ model, as a major impediment, in particular land taxes and the inability to defer GST costs on construction materials makes retaining dwellings unprofitable.
Previous AHURI research identified a number of barriers for institutional investment in the Australian market, reducing the attractiveness of 'build to rent' for investment by the large banks, insurance companies and the superannuation funds. These barriers, which reflected the market conditions at the time of the published research in the early 2000s include low returns, high risk, high management costs, illiquidity, poor market and no track record. Recent media coverage suggest these conditions have changed, and with the right policy settings, Build to Rent would become a more attractive development option.
In essence, once the building phase is completed, ‘build to rent’ developers may become large corporate landlords in their own right. However, the skills and expertise in managing a tenant base are not the same as the skills required to obtain finance, design and construct a large residential building.
What are Large Corporate Landlords?
LCLs are different in that they are financial institutions that acquire large numbers of dwellings and make them available to the rental market, or potentially at a discount to market rents for low-income tenants if appropriate government support is provided. LCLs don’t necessarily build new housing stock, they can purchase properties in the market or through mergers and amalgamations with other LCLs. Indeed the largest LCL in the USA, Mid-America Apartments, (99,939 apartments in 2017) was created in 2016 through the merger of two smaller LCLS that had each been established in the 1970s. Another LCL, Blackstone’s Invitation Homes, grew through purchasing 200,000 already existing single family dwellings between 2012 and 2014 (spending $100 million per week at one stage in 2013).
In essence, once the building phase is completed, ‘build to rent’ developers may become LCLs in their own right. However, the skills and expertise in managing a tenant base are not the same as the skills required to obtain finance, design and construct a large residential building. ‘Build to rent’ building developers may therefore merge with (or sell their buildings to) LCLs with a professional history of managing rental dwellings.
Do these models improve the housing experience for tenants?
Proponents claim LCLs and ‘build to rent’ schemes offer greater supply of rental housing, greater security of tenure for tenants, and better professionalism in tenancy management than small scale 'mum and dad' landlords. However, these models have also been criticised in other countries for maximising rent increases and for evicting tenants en masse. In one case, 60 families were threatened with eviction in Tyrrelstown (Dublin, Ireland) in 2016 when the LCL that owned the residential complex had to sell over 200 houses to an internationally based financial institution in order to repay debts. In an area where there were already housing shortages, having such large numbers of tenants all looking for a home at the same time can cause rents to rise dramatically. Ultimately the Irish Parliament legislated that where a larger landlord sells 10 or more properties in a multi-unit development within six months, the sales must be subject to the existing tenancies continuing.
Such examples suggest that successful implementation in Australia of the ‘build to rent’ and LCL models will require adequate regulation to ensure the proposed benefits and a better housing experience are properly enjoyed by tenants.