Article | Intelligent Investment

The Budget’s impact on commercial property

May 10, 2023

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The Australian Government officially unveiled its 2023 Federal Budget overnight with crucial property talking points to evaluate. From the current housing shortage crisis to the mounting pressure on household incomes driven by high inflation and surging interest rates, the latest Budget measures were aimed at delivering relief while mitigating the impact of fiscal policy on the economy’s overall health.  

CBRE’s 2023 Budget response looks at the direct impact it has on the commercial property outlook in areas such as build-to-rent, development and infrastructure. 

Unpacking the 2023 Federal Budget  

Helping to breakdown, analyse and evaluate the Federal Budget is Sameer Chopra, CBRE’s Head of Research, Pacific & ESG, Asia Pacific.  

Economic overview: 

  • The Australian economy remains on a strong footing with a budget position of a FY23 surplus of $4 billion and FY24 deficit of $14 billion. This is better than what the Government had expected in October last year with a forecasted FY23 deficit of $37 billion. 
  • For FY24, the Government expects economic growth to be 1.5% (real term) and 2.25% in FY25.  What’s helping this is the tax take from higher commodity prices and the positive impact of inflation (GST, wage growth). Low unemployment is also contributing to this growth trend with the Government expecting unemployment will be 4.25% and inflation to be 3.25% in FY24. 
  • New initiatives include:  
    • $9.5 billion cost-of-living subsidy for low-income households (JobSeeker, single parents, rent assistance). 
    • $11 billion for an increase in aged care wages.  
    • $6 billion incentive for bulk-billed Medicare. Lowering some costs of health and medicines. 
    • $1 billion energy efficiency loans for 110,000 homes. Write-offs for energy efficiency investment by small businesses up to $20,000. Also $1 billion for Tasmanian ‘Battery of the Nation’ project, $1.5 billion in Victoria’s offshore wind project and $4.7 billion for NSW transmission infrastructure. 
    • $15 billion fund for investment in manufacturing in sectors such as renewables, defence, medicine and agriculture. 
    • Reduce deduction from petroleum rent tax (PRRT). A 30% tax rate for superannuation earnings where fund has a $3 million balance.  

Real estate overview: 

  • Net overseas migration has been revised up to 400,000 in FY23, 315,000 in FY24 and 260,000 in FY25. 70% of permanent migrants will be in the skilled category. Temporary Graduate visa holders with select degrees will also be offered two years of post-study work rights. This is very impactful for the residential, student accommodation, retail, industrial and office markets in that particular order. Population growth has been revised up to 2.0% and 1.7% over FY23 and FY24 from 1.4% per annum. 
  • The retail sector is expecting to see tailwinds and less headwinds as the budget includes cost of living measures worth $9 billion in FY24. It also immunises the economy from a retail downturn during a period of inflation and rate hikes. The total retail spend in Australia is $420 billion per annum. Chopra sees the budget as helping provide a circa 2% boost to retail spend in FY24. 
  • Residential (build-to-sell) will see an increase in eligibility for the First Home Guarantee scheme.  
  • Residential (build-to-rent) will see a cut in the managed investment scheme tax rate from 30% to 15% while the depreciation rate increases to 4% from 2.5% per annum for BTR projects. 
  • Residential (social and affordable) will see $2 billion of additional loan guarantee capacity for the National Housing Finance and Investment Corporation (NHFIC).  
  • ESG and energy efficiency will be further supported through the withholding of tax concession for funds investing in construction of energy efficient warehouses and data centres. 

Looking at short-term housing construction, Chopra believes that there are some immediate obstacles to take note of.  

“It will be challenging to unlock housing supply over the next two to three years with competing needs.  I expect fundamentals will keep rental growth rates and capital values elevated,” he added.  

Build-to-rent sector granted largest Government support to date 

Australia’s build-to-rent (BTR) sector is gaining serious momentum as a contributing solution to help ease the country’s housing crisis. Andrew Purdon, CBRE’s Regional Director, Living Sectors - Capital Markets, Pacific, takes a closer look at what the Federal Budget means for BTR. 

What the Budget means for BTR 

“The reduction to 15% MIT withholding tax for eligible BTR projects is a very positive move from the Federal Government and will undoubtedly unlock global institutional investment in the sector,” says Purdon.  

“Since the Prime Minister’s initial announcement of the tax change on 28 April, CBRE has received a notable increase in enquiries from investors across APAC, Europe and North America requesting market intelligence and guidance on how they can access the Australian BTR market. However, some of the finer details of the new BTR policies need to be carefully considered but quickly resolved by the Government to provide clarity to investors and enable them to commit to new projects as soon as possible.” 

What new migration means for BTR  

“The headline of 1.5 million in net migration during the next five years is a huge number of people to accommodate,” says Purdon.  

“Data shows us that the majority of new migrants start their lives in Australia in inner cities and approximately 70% are renters. These rental markets are trending below 1.0% vacancy rate, which is a record low in Australia and some of the tightest vacancy rates in the world.  

“The new apartment supply outlook is severely impacted by construction cost increases since COVID plus general lack of capacity in the marketplace due to recent insolvencies and labour shortages.  

“We can see a major problem with new supply across all state capitals at the same time as net overseas migration is increased to a 30 year high.”   

Expert outlook and recommendations 

Purdon believes that the Government should continue to liaise with the investment community and the construction industry to identify solutions that accelerate new apartment supply as a matter of urgency. 

“The creation of new rental accommodation should be considered as critical infrastructure and essential to the future success of Australia.” 

While BTR has been touted by some as a potential “silver bullet” to Australia’s housing crisis, Purdon believes it’s just one consideration.  

“BTR is not a ‘silver bullet’ for housing supply as the scale of the shortage is so large. However, it is a critical part of the solution alongside increased volumes of build-to-sell and delivery of affordable housing. We need more of all housing tenures to rebalance supply and demand and a bespoke policy approach which recognises the specific housing typology required in each part of our cities.” 

How the Budget affects development and infrastructure 

The Budget measures will have some flow on effects to the country’s development and infrastructure landscape. This includes an array of projects across water, energy, transport and more. Justin Woodcock, CBRE’s National Director, Development & Infrastructure, Australia, explains what investors and stakeholders in the relevant assets need to be aware of.  

Looking at the 2023 Budget on a macro level, Woodcock calls it a ‘classic Labor budget’.   

“They’re enjoying a unique surplus achieved through full employment, everyone’s got a job, massive income tax revenues, GST revenues, economic stimulus of all that infrastructure investment plus resource prices. It puts them in a very strong position.  

“As a result, this budget incorporates massive social security and welfare support totaling over $40 billion. Gas rebates, Medicare payments, single mother benefits; all to support those in need.”  

Development and infrastructure challenges 

Woodcock is, however, surprised by the significant forecast increase in migration which raises the crucial question of where those incoming migrants will live.  

“I thought that the social housing investment was quite modest at $2 billion considering the significant lack of investment directed towards that sector in the past 10 years. I was expecting something larger there and thought it was relatively low from a national perspective,” he says.  

“Social housing has really been neglected recently so it’s good to see them directing more funding in that direction,” says Woodcock. 

“Not surprising, but a bit disappointing, is that there’s very little investment in infrastructure as a result of the pipeline review being undertaken. The property and infrastructure market is the largest employer in Australia and has been significantly supported by state and federal investment over the last 10 years. It’s provided massive economic benefit for all and it’s a shame that they may be looking to slow down on that important area of economic growth.” 

Development and infrastructure wins 

The BTR tax relief is a very smart idea according to Woodcock who says that “it will supercharge that sector for the benefit of lowering rents and providing a pathway for further investment into other asset classes by foreign REITs”.  

“That’s exciting. I don’t think people fully appreciate what they could do with that relatively new market. As in the US, the multifamily housing market is enormous, and all of the conditions are ripe here in Australia for it to be a very significant market. It’s still at a very embryonic stage here, albeit very exciting.  

Other areas of the Budget that Woodcock highlights as positives are the strong investment in defence including the AUKUS program as well as the $2 billion hydrogen alternative energy investments.  

“The opportunity and also the risk is the significant increase in migration. That will supercharge the economy, tax revenues and obviously demand for residential.”      

On the topic of new legislative changes to encourage residential development, the 2023 Budget brought with it tax breaks to further bolster the viability of build-to-rent projects. This includes the increase of depreciation rate from 2.5% to 4.0% per year for projects commenced after 9 May 2023. 

Expert outlook and recommendations 

Woodcock believes a wholesale review of the planning statutory framework should be considered to realise the true potential of BTR in Australia and the knock-on benefits for long terms renters. 

“Several states, particularly NSW, have an onerous planning approval process which is very time consuming. So the barriers to entry and cost to the investor are significant.  

“The other thing they could consider would be instruments to fast-track development approval that fit within certain criteria. They’ve done it in the past in NSW for seniors living and social housing and to some extent with Exempt and Complying Development. It was really effective during the accelerated Nation-Building Program. I think it would be a somewhat progressive suggestion for governments to consider streamlining planning pathways for institutional grade BTR projects.” 

Expert insight for your greatest property ambitions  

Sameer Chopra  

Sameer is the Head of Research Pacific & ESG. Responsible for framing the real estate market outlook and developing economic and property sector forecasts. He is proud of the unique insights he brings to the market, which are cutting edge. 

Andrew Purdon 

Andrew is the Regional Director, Living Sectors - Capital Markets in Pacific. Responsible for driving CBRE’s Capital Markets offering in the fast-growing build-to-rent (BTR), purpose-built student accommodation (PBSA) and co-living sectors, he draws on his experience in previous roles as a senior leader of CBRE’s UK Residential Capital Markets business based in London.

Justin Woodcock 

Justin leads CBRE’s Structured Transaction and Development Advisory group nationally. His team provides advice to both public and private sector clients, on the strategy, feasibility, planning, financing and initiation of major projects and property portfolios.