It seems that May is the month that state governments make their big proclamations. We recently shared our views on the Victorian Government State Budget 2023-24 and, in particular, the new Land Tax Surcharge that will hit property investors.
While it wasn’t as widely reported, the WA Government has also introduced land tax changes, but for a very different reason. The Land Tax Assessment (Build-to-Rent) Bill 2023, was introduced to WA Parliament on 17 May 2023, but was first proposed in last year’s State Budget. The McGowan Government believes that the Bill will help to alleviate rental stress in the future but increasing the supply of rental properties across the state.
Land Tax Summary
Here’s a summary of what they are proposing:
- A 50% reduction on land tax bills for up to 20 years, applying to qualifying Build-to-Rent properties; where the property
- Contains at least 40 self-contained dwellings available for residential leases
- Is owned by the same owner, or group of owners, and is managed by the same management entity
- Is completed between 12 May 2022 and 1 July 2032
So, the intention is to reduce the holding cost of a Build-to-Rent property in order to improve the feasibility so that large apartment developers commence new projects, adding to the future stock of apartments.
The big question is: how will this affect property investors in Perth?
The simple answer is that it will not have any impact on the supply of dwellings in Perth in the next 2 years. It currently takes at least 2 years to construct a medium to large scale apartment project in Perth, and more likely longer with the lack of available trades. That is from the day that works commence on site. There is also upwards of 1 year in design and planning for a project of that scale to get approval. So, any potential rent relief is at least 3 years away, and that assumes that the incentive will have a material impact on driving the development of Build-to-Rent projects.
Sadly, even land tax reduction is not going to suddenly improve the fortunes of a project in Perth and motivate developers to start turning dirt. This is due to a range of converging challenges:
- The labour shortage is causing projects to take twice as long to construct
- Construction cost escalation over the last few years has eroded profit margins
- Higher interest rates mean funding costs have increased considerably, adding risk and further eroding margins
- Build-to-Rent projects are valued in a “capitalisation rate” basis, similar to commercial properties, so higher interest rates mean lower valuations.
There is no shortage of demand for housing and apartments in Perth right now, but projects will only go ahead when a developer can make a sufficient margin to cover their risk and capital return. As a result, many approved projects have been shelved and are covered in mothballs. Short of costs dropping by 20-30%, the only way that these “mothballed” projects will come to fruition is if selling prices rise by 20-30%.
The result is that many large-scale projects will remain dormant, constraining new supply and exacerbating the housing shortage in Perth, until rents and prices have risen sufficiently to offset the higher cost of construction.
So, I think we can put this latest announcement down to a good piece of spin-doctoring by the McGowan Government in an effort to demonstrate their compassion and effort to help struggling renters.
Relevant article: Smart Property Investment – WA Government Introduces Land Tax Relief to Inspire Rental Supply
