Many Australians who feel that the traditional forms of property ownership are out of reach are turning to alternative concepts for achieving the great Australian dream.
There are several known challenges for housing and accommodation in Australia. One issue is motivating people in detached housing to relocate to affordable accommodation in their area. Another is mobilising planning schemes, as long delays often limit the supply of affordable housing in the longer term. A third is the low level of under-utilisation of property in major urban areas.
The property market is responding with alternative models that balance affordable accommodation and match it to the demand.
How does lending sentiment measure up to changing property ownership and income paradigms?
Build-to-Rent housing is large-scale, purpose-built rental housing held in single ownership and professionally managed. This type of housing includes student accommodation and retirement living.
The Federal Government is keen to incentivise this model and recently made a few changes, including increasing the depreciation rate applied to build-to-rent projects to 4% per annum. In addition, withholding tax has been halved to 15%, claimable from 1 July 2024 to encourage foreign investment in the Build-to-Rent sector.
Lender appetite here is emerging, though the challenge for financiers is the relative lack of precedent data to draw on.
More broadly, the sector is absorbed in the well-documented risks around construction and development costs, which is a shadow on all property development categories.
As a general rule, where funding support is available, expect a lower Loan to Value Ratio (LVR) and much due diligence for all development parties. In general terms, we expect this category to be better supported in the near future.
Short-stay rental properties via platforms such as AirBnB and Stayz are increasingly subject to changing government regulations, particularly in urban zones. These properties have the potential for high returns.
In terms of the housing debate, this is a key policy area for governments.
Lender attitude to borrowing to provide short-stay rental assets is varied. Most will accept these on a first mortgage basis, but with a limitation on using the rental income to demonstrate the ability to service the resultant repayments on a new loan. This can make it harder for people to invest solely for the purpose of short stay, which ironically will not displease Governments.
Boarding Homes are becoming more common as property investments. Lenders will generally treat boarding houses that are purpose-built as being for business purposes as opposed to existing residential properties that are converted into small boarding-styled tenancies.
Lending sentiment appears to be changing here, with some appetite to fund developed or completed assets.
At a smaller end of the scale, boarding income for those who rent a spare room to a lodger, such as a student, FIFO worker or relative, has traditionally been ignored by lenders when assessing borrowing capacity.
Another housing investment trend gaining traction is converting large 4-6 bedroom homes into self-contained units that are rented separately. The project owner or developer may reside in one of the units or choose to rent them all.
There is flexibility here for lenders to assess this as a commercial or residential loan, depending on various criteria, and there is a diverse range of factors to consider. For owners of multiple-unit property, be wary of how your development or established units are treated for valuation purposes. Many are caught out where assessments are done “in one-line” rather than as individual properties. As a result, a lower valuation may result rather than if each unit were valued separately.
Cohousing Australia defines cohousing as a group of 8-50 households with separate homes but sharing communal areas such as kitchen or living zones. Cohousing Australia is a membership-based cooperative that supports cohousing communities with resources, planning and construction while encouraging sector diversification.
A recent co-housing example in New Zealand saw a group of six friends purchase a 650sqm block with a single home, which they converted into four new three-bedroom homes that share a 20% communal living zone. Financing proved difficult due to outdated lending terms and conditions, and it took three years for the project to commence.
Lenders in Australia are still evolving policy for cohousing projects. There are many considerations for lenders, not limited to regulation covering Responsible Lending. At present, there isn’t broad lender support for this category.
Buying property with friends is becoming increasingly popular for those who struggle to save a deposit on their own.
The Australian Government has recognised this with an announcement that from 1 July 2023, the Home Guarantee Scheme (HGS) has expanded eligibility criteria to include property purchases among friends, family and other relatives. The federal government acts as guarantor on up to 15 per cent of a loan.
Some lenders, such as CommBank have products designed for two or more friends to purchase a property together. When buying a property with friends, having a legally binding ownership structure that includes a dispute resolution strategy is advisable.
From our experience, this can also be very problematic as property is an illiquid asset. So, always document and agree on the plans for the property upfront before seeking finance.
One way around saving for a large deposit is fractional investing, where it’s possible to purchase a 5%, 10% or very small unit stake in a property. Similar to the concept of a managed fund, an investor pools their money with others of like mind. In Australia, platforms include BrickX and DomaCom.
In terms of creating more availability of stock for tenancy, this isn’t at scale enough to make a material impact, but it is a watch.
We will continue to track trends in non-traditional property and housing alternatives. Emerging lender policy in these areas is welcome to meet future housing demands and evolving socio-economic needs.