Super funds will lose money on rental properties, warns CEO

Super funds are diving head-first into build-to-rent projects. But with rates predicted to stay high for longer, how well can this asset class really perform?

Australia’s building sector has been lobbying the government for concessions on build-to-rent projects for some time. In last week’s Federal Budget, they got what they wanted.

As part of Labor’s housing supply initiative, the budget included two incentives. One was reducing the withholding tax rate for eligible fund payments from managed investment trusts attributed to newly constructed build-to-rent developments from 30 to 15 per cent. The other was increasing the capital works tax deduction (depreciation) rate from 2.5 per cent to 4 per cent per year.

Labor said these changes would increase the after-tax returns for newly-constructed build-to-rent developments, many of which would be owned by super funds. But according to one major architect tasked with designing these properties, the numbers fail to stack up.

“This is putting the cart before the horse,” said James Alexander-Hatziplis, CEO of Sydney-based architect Place Studio.

“It is great reducing tax costs to a project to return better outcomes for stakeholders when there are profits. But with increasing finance costs from higher interest rates, the actual viability of projects needs to be addressed first,” he said.

Place Studio has 40 staff and was the architect behind major residential, commercial and mixed-use developments across Australia. These included The Archibald in Gosford and Vela in Southport – a 61-apartment mixed-use property on the Gold Coast.

Speaking exclusively to Super Review, Alexander-Hatziplis said the build-to-rent (BTR) sector was being touted as the “silver bullet” for super yet, in practical terms, was constrained by the factors that were impacting the entire building industry. Namely, high capital and construction costs.

He believed super funds were entering a high-risk asset class that could result in losing money for their members.

“While you can play with the way profits are dealt with through taxation and depreciation, it doesn’t change the fundamentals that these projects rely on and the capital required to procure the project is only increasing,” he said. 

“Superannuation funds can't just be seen as the white knight riding in to solve this Australia-wide problem. They need to return good yields for their stakeholders and that starts at decisions they make at the beginning; they need to be designing with yield as the focus.”

Build-to-rent (BTR) projects were far more common in the UK and US than in Australia, where 67 per cent of people owned a home. 

In the US there were more than 20 million build-to-rent housing units, representing 12 per cent of the country’s total housing stock. In the UK, the build-to-rent sector had grown from 47,000 units in 2016 to over 240,000 in 2022.

But with a growing housing crisis and affordability concerns, BTR was gaining attraction among pension funds.

Aware Super recently announced a $900 million investment in London-based BTR operator Get Living, while HESTA committed $240 million to develop 1,600 dwellings in Victoria.

Aware Super told its members that returns would come from the rent received from tenants combined with the potential capital growth on the value of the apartments.

One of its BTR pilot programs had 61 newly-developed home units in the Sydney suburb of Epping. The industry super fund, formerly First State Super, claimed it would provides housing for those working in health, education, policing and emergency services.

“Many of our members are key workers who provide essential services to the community. They are finding it increasingly difficult to find somewhere affordable to live in metropolitan areas,” the group said.

“As it becomes harder for them to find affordable housing close to their workplaces, many face long commutes between home and work. These long journeys are both expensive and can also affect active participation in family, social, civic and recreational activities. 

“Therefore, [we are] exploring ways to partner with governments, community housing providers and developers to help address the chronic shortage of affordable housing stock.”

A recent EY report estimated that the current size of the build-to-rent sector in Australia is $16.87 billion (just 0.2 per cent of the total value of the residential housing sector) with only 11 operating build-to-rent projects, and another 72 projects in the pipeline. 

The report suggests on conservative estimates, if the sector grew to just 3 per cent of Australia’s residential stock, it could be worth $290 billion.