Victoria's build to rent investment at risk: Greystar
US build-to-rent investor Greystar has warned that land tax increases in Victoria’s budget undo last year’s halving of the tax rate and could drive more than a quarter of its planned $4 billion pipeline north to NSW.
Greystar, which earlier this year raised $1.3 billion for a build-to-rent (BTR) fund – the country’s largest to date – that could eventually house more than 5000 dwellings, said the higher land taxes and stamp duty, worth an estimated $473 million next year alone, slashed the viability of some projects.
“This closes the gap with NSW and, depending on project to project, that marginal dollar could now well flow to NSW as a result of the land tax change and stamp duty changes as well,” Greystar Australia managing director Chris Key said on Thursday.
“There’s around $1.125 billion of marginal dollars that is just as likely now to go to NSW.”
Victoria has led NSW as a destination for build-to-rent projects as higher land costs in Sydney have deterred investors. But the southern state’s decision to raise land tax rates on properties worth more than $1.8 million and levy a higher stamp duty on properties over $2 million put the development of almost 9000 build-to-rent units in Greater Melbourne at risk, the industry said.
Danni Hunter, the Property Council of Australia’s Victorian executive director, said: “Unless the land tax discounts previously announced wipe out the land tax hikes that the government has announced in this budget, build to rent will be off the cards in Victoria.”
The nascent industry was buoyed in the state’s delayed November budget by a 50 per cent reduction from 2022 to 2040 in land tax levied on BTR projects, matching an earlier move by NSW.
But the finite nature of the Victorian land tax discount limited its benefit for investors and meant it was less than 50 per cent for viability assessments, Mr Key said.
“Because it ends in 2040, it’s a finite period,” he told The Australian Financial Review. “The face value of a 50 per cent discount is only worth a 25 per cent discount because it’s a finite period.”
Greystar is the biggest operator of apartments in the US. Its local $1.3 billion fund would, with leverage, be able to develop between $3.8 billion and $4 billion worth of apartments.
Mr Key said that while the fund had a geographical weighting it was aiming for, Victoria’s new rules would force it to reconsider that.
“What will end up being a 19-year period land tax concession plus the new increase in land tax rate will result in 75 per cent of the 50 per cent we were supposed to be getting eroded,” he said. “The actual policy becomes quite marginal.”
Greystar has already acquired two sites in Melbourne, one for a $400 million mixed-use precinct in South Yarra and another in South Melbourne. Mr Key said the company had not made a decision about the future of those projects.
Melbourne-based real estate investor Qualitas, which has partnered with Rich List developer Tim Gurner to create a $1 billion build-to-rent development fund, agreed that Victoria risked losing investment to other states and other countries.
“In order for project returns to compete in the event of higher indirect taxes, you need an offset, creating the need for either higher rents, more density, cheaper land or lower construction costs,” Qualitas group managing director Andrew Schwartz said.
“However, in the absence of an offset somewhere, the mathematics are that project returns are lower and Victoria makes itself less attractive relative to other regions both in Australia and offshore.”
Mr Key said the Victorian changes would also make investors nervous about what other policies could affect the investment landscape.
“If this can just go and be done, what else is up people’s sleeves?” he asked.
“There’s a risk here that has become more focussed on by us and our investors. That’s this point around sovereign risk.”
