Will the Federal Government’s ambitious tax-break plan for property investors in low-income housing work? For years I have railed against residential investment property that is sold with rental guarantees, stamp duty savings and other “sweeteners”.
Such incentives usually mask a property’s lack of propensity for capital growth. My basic premise has always been that properly selected, well located investment property doesn’t need guarantees or any other incentives to produce a consistent, long-term combination of capital growth and rental yield.
I see no reason to change my mind now. Don’t get me wrong: I fully endorse the fact that Government’s provision of “social housing” is part of what we would and should expect in any functional, compassionate and successful society.
In Australia’s case, this has consistently stood at about 5% of the total national housing stock, according to census data. I am also aware that for the past 20 years state governments – which are largely responsible for the provision of public housing – have increasingly relied on securing stock in the private rental market, with private investors “subsidised” via rental allowances to ensure a reasonable level of low income accommodation.
However what concerns me the most is the way in which this scheme is being sold on a “new” investment basis. Federal Housing Minister Tanya Plibersek has effectively given her approval for a residential property investment scheme based on guaranteed, but under-market rental income at the expense of capital growth.
She claimed this scheme “opens up a whole new class of investment in residential real estate, and I hope over time it will become an important new area for the supply of affordable rental accommodation”.
Prime Minister Kevin Rudd is attempting to equate the business of making money out of property, through a reasonable combination of rental return and capital growth, with the social responsibility of providing affordable accommodation for those who need it most.
While social responsibility is certainly an investment in the fabric of any civilised society, it is not the same as achieving a solid financial outcome for the individual or institutional end-user investor.
The scheme as outlined so far aims to encourage corporate investors, including superannuation funds, to finance the construction of 100,000 new, designated “affordable”, properties over a 10-year period. These properties would be rented at 20% below market value. In return, investors receive an $8000 a year incentive for 10 years, made up of $6000 in federal tax credits and $2000 in cash or “in-kind” state government incentives. To attract these incentives, the properties must be new.
I think the bottom line – whether the investors are corporate, institutional or individual – is an expectation that any investment scheme launched in a free market economy should be accompanied by accurate information, including full product disclosure, and should be capable of delivering a fair level of income and return.
This is particularly so when individuals place their financial faith in property trust arrangements, fund asset mixes or individual property holdings that carry taxpayer-funded incentives.
Plibersek refers to this new investment stock as “long-term.” That’s just as well, because it is most unlikely there will be short-term gains inherent in the type of property being referred to. In the current residential market, rental yields, even on prime assets, should deliver 3% to 4.5% of capital value.
The economic modelling presented to last year’s National Housing Summit called for debate and input on housing affordability – mainly compiled by the Housing Industry Association, the ACTU and the Australian Council of Social Service – claimed that combined cash and in-kind incentives worth $7500 a year would give an annual rate of return of 8% for superannuation funds and 9% for other corporate investors.
These returns are being projected for new property, most likely to be built either on outer urban fringes, incorporated into new CBD high rise projects or as part of urban in-fill sites.
Even when we do see exactly how and where these projects are built, how well serviced they are and whether they become an integrated part of our housing scene and social fabric, it could take about 10 years for supply, demand and investment patterns to become predictable.
This story first appeared in the Eureka Report.