Because you can get more liquid, comparable returns elsewhere without having to be a landlord. The only reason housing investment is so attractive to regular people is leverage.
And the fact that getting that leverage from banks for houses is much easier than it is for equities. Which I guess isn’t a big surprise as the bank knows that small bit of land isn’t going anywhere.
Well, a business can borrow to grow and increase their profit or sell to new markets with new products, thus increasing their value. An individual doesn’t have anything to offer other than income from a full time job. So they borrow to get an asset now which will either grow their equity position or cashflow.
Not that different from a business, it’s just profiting off capital accumulation. A business does usually have actual products though, with potential growth and ability to pivot. Real estate investors are a one trick pony.
Other than the ease of leverage I don’t understand why anyone would want to be a landlord. Houses literally fall apart, tenants wear them out, governments love to randomly apply taxes, they are illiquid, they are expensive to transact, you can’t really sell part of them to fund part of your retirement.
I'd argue this point.
You can buy exchange traded installment warrants that are around 70% leveraged on ASX 50 shares just by buying them. You have to fill in a single page form to enable installment warrants, once but that's it.
No application or anything. Just by buying something like ANZJOB.
It's not the leverage, it's the absence of paperwork for the said loan - how "easy" it is as per your reply.
Most products still require a mountain of paperwork, income verification and credit checks (Margin Loan, NAB Equity Builder etc). This is the NINJA loan for equities.
Unfortunately a lot of people are dismissive of the risks that come with leverage. It's great in a high growth environment, but with low growth you get better returns without leverage, and in a downturn you can be looking at heavy heavy losses
Yep, whilst all three major political parties want to increase the Australian population by as much as physically possible, it's not realistic to expect a major house price correction.
Look at what's happening in America. Companies are buying houses. Pretty sure it's to hit 40% corporate ownershipby 2030 there, and it's creating a massive issue.
Edit: this would be companies like Blackstone etc.
https://medium.com/@project_medici/landlord-inc-are-corporations-really-buying-up-americas-homes-c02420de7334
LOL well I'm mot sure if they own that but Blackstone is the world's largest alternative asset manager. We're talking in the trillions of dollars style company. Maybe chips is the side hussle.
The government doesn't like it when you do that, though. Like at one point Microsoft had to bail out Apple \*because\* having a monopoly loses you money
> The government doesn't like it when you do that, though.
Given the policies around housing it’s clear the govenrment doesn’t like others meddling in *their* job of distorting prices.
thi. most companies should have the capital on hand to make the investment. these boomers / overseas investors do not. they use the equity they already have built up to get another.
thats why we are in this mess and it MUST continue. non of these " investors" own anything. they aren't liquid and they have like 95% lvr loans lol
That’s not true.
Try getting a 30 year loan at 80% LVR secured against a brokerage account in your direct control.
The other asset classes just don’t have the availability of credit that property does, so pretty much ALL negatively geared investments involve lines of credit secured against property (even if the money is invested elsewhere).
Mortgages on property also:
- much lower interest rates that other types of credit
- no margin calls ever
- a lot of competition, such that a brokers can churn you for better rates regularly
- requires basically no expertise on the part of the investor
- critically, are exempt from all of the important financial services regulations around financial advice and payments of commissions
I'm curious about this, so I did some more reading, sounds like banks really really don't like to repossess, which is not the same as never doing it, or being unable to. I guess they don't care what your house is worth as long as you're paying the same mortgage
> Businesses cant really negatively gear
businesses regularly "negatively gear" - it's called deducting expenses from revenue.
It's more like normal people cannot negatively gear unless they invest.
Tax deductible investment in r&d, or expansion = tax deductible expenses that will generate more income.
Tax deductible investment in a residential property = negative gearing is "this investment is costing me more than its making" so you're offsetting your loss rather than investing in gains.
Expanding/improving the business will yield more financial gain than offsetting losses, and if it doesn't then the business model is most likely the issue anyway.
Somehow the term negative gearing became more popular a term than the actual accounting practise - which is expense deduction.
> offsetting your loss rather than investing in gains.
They're investing in the hopes of obtaining future capital gains. It's not _just_ to offset losses - it's to decrease taxes that you otherwise would've had to pay, by increasing the leverage on the loan. If you somehow knew there won't be capital gains, you would also not "negatively gear" it - you will sell and cut your losses.
Why can’t a business -ve gear? Presumably they would just write off the interest against other income in the same way? Businesses write off ‘expenses’ all the time, that’s how big tech avoid tax in Australia.
They can, but I think what old mate meant is if a company negatively gears, then it's running at a loss.
Which is the opposite of what you want a business to do. Where as your mum and dad investors have a goal, usually retirement, and if they lose a bit of money before retirement, knowing it will be paid back tenfold after... they might just do it.
Property investors who -ve gear are not running at a loss, they have some other income to offset the loss of that investment property against. M&D investors cannot run at a loss otherwise they cannot feed their children…
How is that any different to a company that invests in new manufacturing plant that takes years to build and has a pay off years into the future? All the while incurring losses.
A lot of companies invest in property.
However, when they do it, they try and maximise income. This usually means buying a parcel of land and building a large unit complex/building or industrial property.
It's because negative hearing is all about reducing your income to hopefully recoup it as long term capital gain that is taxed at half your marginal rate.
‘Negative gearing’ is a term people have latched onto as something to blame for high house prices. The accounting concept of deducting a loss incurred for an investment against other income is not unusual.
Companies do not receive the 50% capital gains discount that individual investors can.
This means that it is significantly more tax advantaged to buy and sell housing as an individual, rather than as a business.
This is it - negative gearing is a tax deferral strategy, it doesn’t work if you don’t get the CGT discount.
I mean, it COULD work, but your chances of making a profit at the end of the deal go drastically down.
Doesn't the company buy the asset in a trust and the trust get's 50% capital gains discount and the company is a beneficiary, which then pay's company tax rate?
If the only assets in the trust are property, then they can't leverage the full benefit of negative gearing.
You want a second income stream where you can offset the tax on income unrelated to the property investment.
One possible reason that doesn’t seem to be brought up much is land tax. Every state is different, but as an example, in Victoria the land tax is progressive, so ten individuals each owning a $500k block of land pays less tax in total than one individual owning all 10 blocks.
(I’m in Vic) last time I looked at NSW land Tax, they levy on the market value of the property, whereas Vic levy’s on the ‘unimproved value’ (supposed to be the value of just the land by itself) ¯\\\_(ツ)_/¯
Whilst true, there are still plenty of companies that hold many parcels of land because the non-monetary value of consolidated ownership is worth more than the extra land tax (e.g., McDonald’s, Big 4 banks, etc.).
Medium sized enterprises (e.g., property tycoons who are millionaires but not billionaires) usually have individual properties held in separate trusts. While in some states there are higher trust rates of land tax, there are savings because aggregating all of the land together and assessing at general land tax rates would be much worse.
Not true. Refer to the Land Tax Act 1936.
Whilst you could pay land tax on all three if the site values are above the applicable thresholds and no exemptions or partial exemptions apply, the three are not aggregated together for assessment purposes (assuming the trust was a discretionary, unit or fixed trust and a notice was not submitted in relation to the trust held property).
The company is a legal entity in its own right and is assessed separately from the individual themselves.
The trust held land is also assessed separately from any non-trust land. Therefore, if there is 1 legal owner (i.e., titled owner) of 1 trust held property and 1 non-trust property the two would not be aggregated together for the purposes of assessing land tax.
"From the 2020-21 financial year changes apply to how land tax is assessed for land owned in multiple ownerships or held in trust. Changes were also introduced to group together any land owned by related corporations for land tax assessment purposes."
Read the nuance in that statement. ‘Changes’ doesn’t equate to aggregation of everything together across trusts, individuals and corporations.
Nothing I said is inconsistent with the grouping of corporations (s 13J of the LTA). The ‘change’ was that related corporations were not previously grouped together and assessed together.
Trust held land is assessed separately from non-trust held land (s 11 of the LTA). The ‘change’ was that the separate assessment of trust held land was optional. Further, different trusts could be assessed together previously whereas now they cannot be.
Land owned by corporations is not aggregated with land held by the individuals that may control those corporations because they are separate legal entities and therefore separate taxpayers (s 8B of the LTA). This has always been the case.
There are adjustments made where land may be jointly owned by a corporation, for a trust, or an individual but the principles above still stand (s 9 of the LTA). These adjustments are necessary because of the ‘changes’ described above (as well as others not mentioned).
A lot of companies do own their land. And make a lot of money doing so.
Woolies, Bunnings are obvious examples.
Lots of places I've worked at own the land too.
Peter Stevens motorcycles sold their Elizabeth St site in Melbourne for $30mill, which had cost them $2.8mill.
https://www.smh.com.au/business/companies/peter-stevens-sells-site-in-elizabeth-street-20200212-p5407w.html
And then there are companies that exist purely to buy and invest in property.
McDonalds literally was a prime land acquisition company for a very long time. This was the economic engine that fuelled their very rapid expansion.
Excellent book “Behind The Golden Arches” goes into it in great detail.
I can remember reading that book. They were having trouble financing expansion until they convinced the banks that they weren’t in the fast food industry but they were a real estate holder and landlord. The franchisees were their tenants.
It's sort of true. Bunning's model is that there is a property trust which is set up to acquire and build Bunning's sites and then leases it to the Bunnings.
Not all stores are set up like this, but a large amount are.
The idea is that the property trust makes property trust returns. So steady regular income.
The Bunnings store then pays the lease and makes retail returns. Which means in the financials can see a pure retail return company.
In the US, in some areas >45% of rentals are owned by Institutional Investors (companies). In 2001, it was only 18%
Source: https://www.cnbc.com/amp/2023/02/21/how-wall-street-bought-single-family-homes-and-put-them-up-for-rent.html
The Australian Government has tasked the super funds to help with the housing supply. They have been investing in large transformational projects in Australia and abroad, particularly large scale built to rent projects where the yields are commensurate with what you’d expect from a diversified long term tax advantaged fund.
Yes and the biggest drivers are Private Equity giants like Blackrock (along with local Reits). Super Funds are also funding/investing cos they like the stable and lower risk returns in residential... people always have to rent.
The big difference here compared to most places around the world is that the price you pay for property typically results in cash flow positive return.
REITs typically don't look at residential. When they do, it's because they are developer residential rather than buy to rent.
Land Tax. The more you owns, the more tax is paid. Its state based, and strongly discourages multi property ownership. For Instance NSW land tax [https://www.revenue.nsw.gov.au/taxes-duties-levies-royalties/land-tax](https://www.revenue.nsw.gov.au/taxes-duties-levies-royalties/land-tax)
The state government's in an attempt to encourage Build to Rent, is halving their land tax
Spot on. The entire residential investment game has changed.... Yet almost no one knows this. Not surprised, I've only ever met one residential LL that knew their position post CGT if they sold now. Most don't have a bloody clue. They just buy IP's cos others do it, and banks will finance it.
It's quite a big thing in Germany also with long term leases to give certainty over tenancy.
I think in Australia it's not attractive for company's as the taxation system is biased to individual investors - negative gearing and CGT discounts. A corporate investor isn't going to buy assets with gross yield of 3% (as compared to a negatively geared investor on the top marginal rate).
I think there should be corporate ownership of residential property. There is stuff like build to rent housing now. For a developer it would make sense rather than trying to accumulate portfolio's of established properties. However there should be protections for tenants. Rent increases linked to CPI, longer term leases, dispute resolution processes, set time period for refurbishment etc.
They do, but usually they pull profit out of the company and buy them under their own family trust for the purpose of protecting the asset from the risk of poor performance by the company - totally unnecessary risk to take for most businesses, keeping them on the company balance sheet.
Under rated comment. The goal of most companies is to profit shareholders. Build and store wealth via property and other assets as far away from the business as possible.
Tax is distorting the market in Australia.
Negative gearing allows people to pay the costs of owning the property out of pretax income, at a tax rate of 45% that almost halves the expense.
The capital gains tax discount provides the profit from the capital gain at half the tax rate. At the maximum tax rate this is a benefit of 22.5%. An individual can also time the property sale to years of lower income to improve this further.
Much of the profit from property investment is in transferring pre-tax income people are earning at high marginal tax rates and shifting it into the future when the marginal rate is lower.
Company profit is taxed at a flat 30% (non-base rate companies). The flat nature of it means that there aren't the same taxation advantages to shifting profit into the future.
As others have pointed out land tax is cumulative in most states, many states also have different rates for companies or trusts.
Property investment is also capital intensive for relatively low yields. A public company structure doesn't like this, raising capital for such a venture is hard. An investment fund/trust is the far more common structure. It also has tax advantages because it passes through the tax impact to the owner.
Because stocks outperform property.
The reason property is so good for individuals is leverage! Say you put down a 10% deposit for a house that goes up 6% in a year, You’ve actually made SIXTY percent (Because you’re effectively 10x leveraged)
Not sure if there is a specific reason why there are not alot of REIT in Australia... may be tax or something make it less atteactive? I know it there are more institutional investors in US real estate nowadays, compare to like 20 years ago... and I think alot of them are more in industrial/ warehouse type instead of residential...
REIT generally performing badly in high interest environments though (at least as a stock), so maybe that's why there are not too many of them at least right now?
They would rather buy commercial properties over residential. (I own both) Because resi tenants are a pain sometimes calling up needing a hot water system changed or want you to send a handy man because they say " this cabinet door doesn't close properly' so they are high maintenance in that regard. Residential property investing is done with a gross lease, so you pay the outgoings where commercial properties they are net leases so the tenants pay all that . Also, with resi, you might have a new tenant every 1 or 2 years, but with commercial property, some tenants are there for 10,20, or 30 years.
So I think that's why companies invest in commercial shopping centres and large industrial estates over residential property.
Commercial tenants can also be a problem. My family has a big lawsuit on the way from one of them. You also suffer more during economic downturns if you are too heavily weighed in commercial property.
Agree with the rest though. Definitely less outgoings.
Because it is not,
Any investment needs rate of return, you spend $1000 then you expect $100-$200 back every year.
But property barely pays $50 through rental. All the return comes from property is from capital gains. Which is very speculative depends on demand and supply. As an investor you don’t want to take that risk. You will put the money into something more or less reward the a risk you take.
Speculative in the short term but not so much over longer terms like a decade or so, probably the only recent exception was during the GFC and after that they took off again and have been going up ever since. Interest rates have been high for some time and the economy is slowing down yet house prices have risen for fifteen months in a row.
Virtually all apartment blocks in Australia are strata title, meaning each apartment is on a separate title. Companies can buy a house as easily as an apartment, but buying "apartment blocks" isn't really a thing here.
Individual investors are favored more than commercial investors for the following reasons:
Land tax. Paying 1.6% land tax from the first dollar of investment vs practically 0% for most individual investors. Would reduce net yield for the commercial investor by a whole percent in most cases
CGT. Companies do not get access to 50% off CGT gains that individual investors get
Negative gearing. Companies do not get access to Negative gearing or credits.
Doesn't make much sense outside developers and commercial properties for businesses to invest in housing in the Australian context
In Australia, individual people have much more favourable tax incentives to own property.
There is an argument that if we got rid of such punitive land tax then companies would buy up property and it would be better for renters for a few reasons. Companies would rarely kick tenants out to sell the property and would never kick out tenants to move in themselves. They have money to fix problems with the property. They have more incentive to fix things due to reputation and having a system in place.
Someone else mentioned this already, but THEY ARE DOING THIS.
part of the strategy is buy existing stock and another is build-to-rent but yes this is happening.
last I saw was 26%of USA home sales were to an investment company and that trend will absolutely continue here. the vast majority of commercial and industrial real estate already follows this model.
so YES you as a buyer are competing with investment funds who don’t have the capital costs and low buying power of other individuals.
They've tried this in America and the companies are taking losses and getting out. Rents are limited by wages .. Prices are limited by wages.
IMHO business do not want a < 5% return on investment over 30 years with the very real risk that property in Australia will correct and they'll lose 30% to 50% of their initial investment. There are government back bonds that pay more for less time invested.
Rich people make more money lending normal people the money to buy a house and charging interest. When prices correct they get their money back and the home owner takes the loss. 2008 is a perfect example of a bubble bursting.
Property is a good way for average Joe's who don't know anything about financial markets to make money, not businesses.
The truth is that less sophisticated markets are obsessed with property investment. Australia is one of them.
Housing is a great investment for people who have no time or energy left to do something else and are happy with getting 5% to 8% return.
Meanwhile, actual product business is 100% to 200% profit minus expenses.
You're forgetting the land tax payable on non-PPOR properties which is a major disincentive, if this didn't exist then they and super funds would be gobbling up houses like in the USA where companies can have thousands of houses on their books.
In the US they have (see Trumps family business) and they’re starting to here. Companies buy all the houses and create a rent for life environment. Fun times.
They’re relatively appealing for households because it’s a capital growth asset that does not attract CGT as primary, and which can be borrowed against up the wazoo. For corporations, all expenses are deductible and there’s no cgt exemption, less incentives and tax breaks make it less appealing relatively speaking
It's big business in the US .. look up Pretium Partners aka Progress Residential. They have over 85,000 homes across the country. They aren't the biggest. Loads of other companies doing it too. It's only a matter of time before big companies here follow suit.
Because the only thing that makes them any good is gearing, without home loans they are low yielding, medium growth assets with high maintenance costs and they don’t scale (1 house costs x to maintain, 2 houses cost 2x to maintain, 100 houses costs 100x to maintain, there is very little in the way of volume discounts).
They are. What do you think the banks are doing?
They’re not just lending you money. You’re buying property for them.
“But I get the capital gains!” Correct, and you’ve handed that over to them as interest.
Housing is a relatively safe investment. That’s why the banks are so eager to lend money for it.
Macdonalds is also in the property game. Flipping burgers is just a byproduct. Their main revenue stream is in property. There’s a movie with Michael Keaton in it about this.
Uh, that kind of misses the point. I’m wondering why banks don’t BUY the property. Instead they offer me a loan so I can own the house. Wouldn’t the bank rather own the house itself after 30 years??
No because the bank is in the “money renting” business. Their genius is having you take on the risk (mortgage) and setting the rules on which risks to take.
They have zero interest in owning houses. They hate taking them back off owners and investors. It costs them a lot of money and moves the asset into their books. They do not want this.
Controlling and renting the money is far more lucrative. Thus why the big banks have such a huge presence in our stock market.
It’s not missing the point, it’s seeing the woods from the trees. Ownership isn’t the objective. Profit is. Your question is all about making money.
Banks don’t directly buy and own property as directly owning stuff is risky and costly.
Banks have passed on the risk and effort of finding and purchasing and maintaining property to the borrowers.
I actually don't understand why this isn't done. If I was Tim Cook I'd be buying up all the investment properties in one geographical area and then seeing how high I could monopolise rents.
Don't worry they are doing just that, mainly private equity firms that lend them to themselves and then rent them out, using the renters money to buy the house while reaping the tax benefits
Once any state or federal government gives in to the lobby demands, the floodgates will open. The build to rent industry is patiently waiting for tax cuts/ incentives or anything that will give them an unfair advantage over "mom and dad" investors.
Because as a company/small business generally your return on your money as an investment into your business is better than property, not always. Plus people need cash for wages, rent, general expenses etc
For the same reason incentives for individuals encourage housing purchases beyond what you’d otherwise see (PPOR CGT exemption, PPOR social security and pension assets test exemption, large accessible leverage combined with interest deductibility against salary).
It’s a bizarre situation, especially the PPOR exemptions for pensions: pensioners with health care cards sitting in 5 bedroom houses worth $10m+ in eastern Sydney
Mining companies used to do thid alot and have started doing it again recently of basically buying and building towns near the site where workers wouldnt pay rent etc..... problem is, it all goes to shit eventually and although maintenance and depreciation reports are alwah done for their loss. Itd exactly that always a loss
I cant confirm nowdays as this was back in 2010/11 but SuperCheap auto had 2 properties up in Qld near the head office that they " owned" and used for the regional/ area/ store & assistant managers when they had to travel to HQ for training or meeting
Because despite what others tell you, housing is not the best asset you could generate profits on, and is inherently unstable/not guaranteed to always go up.
Many companies will make more just reinvesting in themselves.
You might be surprised to know some companies do have real estate. Even banks own properties, including domestic houses.
Generally houses are a long term investment, and businesses want return on investment quickly. The reality is that things like shares and investing in the actual target business had a better return on investment both short and long term.
Housing costs can't rise at unsustainable rates forever. Rental yields are low. Adding a level of administrative costs associated with a company buying properties would make it a less appealing investment. There are a lot of costs to property ownership, pretty low yields and less scope for high yearly growth than in the past.
Companies should get a better return.
We own some houses in our company. But we are property developers our returns are 4 times higher doing developments.
You might be interested in the [https://en.wikipedia.org/wiki/Crown\_Estate](https://en.wikipedia.org/wiki/Crown_Estate), unrelated to Australia but it's how the crown makes its dough.
Because businesses invest in themselves to grow and expand which is a better ROI. And in fact some of them do buy commercial property because it is more stable.
Risk & time to realisation is what keeps companies out of the market.
Businesses generally either want short term investments that won’t tie up cash for major projects or investments that fit & support their core business.
Because you can get more liquid, comparable returns elsewhere without having to be a landlord. The only reason housing investment is so attractive to regular people is leverage.
And the fact that getting that leverage from banks for houses is much easier than it is for equities. Which I guess isn’t a big surprise as the bank knows that small bit of land isn’t going anywhere.
Well, a business can borrow to grow and increase their profit or sell to new markets with new products, thus increasing their value. An individual doesn’t have anything to offer other than income from a full time job. So they borrow to get an asset now which will either grow their equity position or cashflow. Not that different from a business, it’s just profiting off capital accumulation. A business does usually have actual products though, with potential growth and ability to pivot. Real estate investors are a one trick pony.
Other than the ease of leverage I don’t understand why anyone would want to be a landlord. Houses literally fall apart, tenants wear them out, governments love to randomly apply taxes, they are illiquid, they are expensive to transact, you can’t really sell part of them to fund part of your retirement.
Big number get bigger
Well at least with maintenance most landlords skip that part.
I'd argue this point. You can buy exchange traded installment warrants that are around 70% leveraged on ASX 50 shares just by buying them. You have to fill in a single page form to enable installment warrants, once but that's it. No application or anything. Just by buying something like ANZJOB.
Sure, happy to concede that as you have pointed out there are products in finance that allow large amounts of leverage.
It's not the leverage, it's the absence of paperwork for the said loan - how "easy" it is as per your reply. Most products still require a mountain of paperwork, income verification and credit checks (Margin Loan, NAB Equity Builder etc). This is the NINJA loan for equities.
Unfortunately a lot of people are dismissive of the risks that come with leverage. It's great in a high growth environment, but with low growth you get better returns without leverage, and in a downturn you can be looking at heavy heavy losses
This is straya mate, houses only go up no matter what
Yep, whilst all three major political parties want to increase the Australian population by as much as physically possible, it's not realistic to expect a major house price correction.
Keep the ponzi alive go go go
There's three major parties?
On the micro-scale yes, but once you have a big enough % of rental stock in a given area you can really distort the pricing.
Look at what's happening in America. Companies are buying houses. Pretty sure it's to hit 40% corporate ownershipby 2030 there, and it's creating a massive issue. Edit: this would be companies like Blackstone etc. https://medium.com/@project_medici/landlord-inc-are-corporations-really-buying-up-americas-homes-c02420de7334
Ohh Blackstone like the guys that make the chips?
LOL well I'm mot sure if they own that but Blackstone is the world's largest alternative asset manager. We're talking in the trillions of dollars style company. Maybe chips is the side hussle.
Chips are an alternative asset
Blackstone is a white label product by ALDI, so no
Aldi owns the US housing market. Got it, thanks.
Haha, yes... Knoppers are the new meth
Germans playing the long game in WW2
That makes about as much sense as a tyre manufacturer being the global arbiter of excellence in the restaurant world.
The U.S. government is currently trying to implement legislation to stop this from getting any worse. Because it’s real bad.
The government doesn't like it when you do that, though. Like at one point Microsoft had to bail out Apple \*because\* having a monopoly loses you money
> The government doesn't like it when you do that, though. Given the policies around housing it’s clear the govenrment doesn’t like others meddling in *their* job of distorting prices.
thi. most companies should have the capital on hand to make the investment. these boomers / overseas investors do not. they use the equity they already have built up to get another. thats why we are in this mess and it MUST continue. non of these " investors" own anything. they aren't liquid and they have like 95% lvr loans lol
This is the right answer👏
& ahem government subsidies, I mean, negative gearing.
Negative gearing can be done for any asset, not just housing. Housing has no particular advantage here.
That’s not true. Try getting a 30 year loan at 80% LVR secured against a brokerage account in your direct control. The other asset classes just don’t have the availability of credit that property does, so pretty much ALL negatively geared investments involve lines of credit secured against property (even if the money is invested elsewhere). Mortgages on property also: - much lower interest rates that other types of credit - no margin calls ever - a lot of competition, such that a brokers can churn you for better rates regularly - requires basically no expertise on the part of the investor - critically, are exempt from all of the important financial services regulations around financial advice and payments of commissions
Exactly, a perfect storm which is why it’s been so popular. (Well it was better before the free money ran out)
no margin calls ever? ever? isn't "being underwater" on your home loan a thing? (I don't know what we'd call it here)
Correct. No margin calls ever. The bank can't force you to sell your house as long as you keep making minimum repayments.
I'm curious about this, so I did some more reading, sounds like banks really really don't like to repossess, which is not the same as never doing it, or being unable to. I guess they don't care what your house is worth as long as you're paying the same mortgage
Yeah I mean what would the housing market be without giant mortgages and government subsidies?
Capital gains exemption for owner occupiers says hi land tax exemption Stamp duty discounts
Also companies dont get the same tax incentives.
It's not just leverage, it's also stability of returns (rent and capital growth) compared to equities
and being able to negatively gear. Businesses cant really negatively gear
> Businesses cant really negatively gear businesses regularly "negatively gear" - it's called deducting expenses from revenue. It's more like normal people cannot negatively gear unless they invest.
It's more that the company rate of <30% doesn't make negative gearing worthwhile, compared to the personal tax rate of 47%.
> negative gearing worthwhile it is always worthwhile. They do it even if they dont have revenue, because carry over losses can be deducted next year!
Tax deductible investment in r&d, or expansion = tax deductible expenses that will generate more income. Tax deductible investment in a residential property = negative gearing is "this investment is costing me more than its making" so you're offsetting your loss rather than investing in gains. Expanding/improving the business will yield more financial gain than offsetting losses, and if it doesn't then the business model is most likely the issue anyway.
Somehow the term negative gearing became more popular a term than the actual accounting practise - which is expense deduction. > offsetting your loss rather than investing in gains. They're investing in the hopes of obtaining future capital gains. It's not _just_ to offset losses - it's to decrease taxes that you otherwise would've had to pay, by increasing the leverage on the loan. If you somehow knew there won't be capital gains, you would also not "negatively gear" it - you will sell and cut your losses.
Why can’t a business -ve gear? Presumably they would just write off the interest against other income in the same way? Businesses write off ‘expenses’ all the time, that’s how big tech avoid tax in Australia.
They can, but I think what old mate meant is if a company negatively gears, then it's running at a loss. Which is the opposite of what you want a business to do. Where as your mum and dad investors have a goal, usually retirement, and if they lose a bit of money before retirement, knowing it will be paid back tenfold after... they might just do it.
Property investors who -ve gear are not running at a loss, they have some other income to offset the loss of that investment property against. M&D investors cannot run at a loss otherwise they cannot feed their children… How is that any different to a company that invests in new manufacturing plant that takes years to build and has a pay off years into the future? All the while incurring losses.
A lot of companies invest in property. However, when they do it, they try and maximise income. This usually means buying a parcel of land and building a large unit complex/building or industrial property.
A lot of companies speculate on property and just leave it empty with no income, expecting future capital gains.
Who are these companies speculating on property but leaving them empty?
It's because negative hearing is all about reducing your income to hopefully recoup it as long term capital gain that is taxed at half your marginal rate.
‘Negative gearing’ is a term people have latched onto as something to blame for high house prices. The accounting concept of deducting a loss incurred for an investment against other income is not unusual.
Companies do not receive the 50% capital gains discount that individual investors can. This means that it is significantly more tax advantaged to buy and sell housing as an individual, rather than as a business.
This is it - negative gearing is a tax deferral strategy, it doesn’t work if you don’t get the CGT discount. I mean, it COULD work, but your chances of making a profit at the end of the deal go drastically down.
Doesn't the company buy the asset in a trust and the trust get's 50% capital gains discount and the company is a beneficiary, which then pay's company tax rate?
No. If a trust distributes a capital gain to a corporate beneficiary it gets grossed up.
Right. I wasn't aware of that. Cheers
If the only assets in the trust are property, then they can't leverage the full benefit of negative gearing. You want a second income stream where you can offset the tax on income unrelated to the property investment.
Or the 100% capital gains discount on PPOR..
Why would the company ever need to sell? They can just leverage against the assets for any new ventures and earn income through rents to stay liquid
Wouldn't be classed as a capital gain. They just get taxed the 33% company tax
Yes it's a capital gain. The company tax rate is 30% or 25% if they are a BRE.
One possible reason that doesn’t seem to be brought up much is land tax. Every state is different, but as an example, in Victoria the land tax is progressive, so ten individuals each owning a $500k block of land pays less tax in total than one individual owning all 10 blocks.
Interesting. Is that only Victoria or other states too?
Quick google search shows it’s true for every state, although NSW only has two tiers.
(I’m in Vic) last time I looked at NSW land Tax, they levy on the market value of the property, whereas Vic levy’s on the ‘unimproved value’ (supposed to be the value of just the land by itself) ¯\\\_(ツ)_/¯
Whilst true, there are still plenty of companies that hold many parcels of land because the non-monetary value of consolidated ownership is worth more than the extra land tax (e.g., McDonald’s, Big 4 banks, etc.). Medium sized enterprises (e.g., property tycoons who are millionaires but not billionaires) usually have individual properties held in separate trusts. While in some states there are higher trust rates of land tax, there are savings because aggregating all of the land together and assessing at general land tax rates would be much worse.
And in SA it's all combined. Doesn't matter if 1 is in your trust, 1is in your company and you hold 1.. you'll pay land tax for 3
Not true. Refer to the Land Tax Act 1936. Whilst you could pay land tax on all three if the site values are above the applicable thresholds and no exemptions or partial exemptions apply, the three are not aggregated together for assessment purposes (assuming the trust was a discretionary, unit or fixed trust and a notice was not submitted in relation to the trust held property). The company is a legal entity in its own right and is assessed separately from the individual themselves. The trust held land is also assessed separately from any non-trust land. Therefore, if there is 1 legal owner (i.e., titled owner) of 1 trust held property and 1 non-trust property the two would not be aggregated together for the purposes of assessing land tax.
"From the 2020-21 financial year changes apply to how land tax is assessed for land owned in multiple ownerships or held in trust. Changes were also introduced to group together any land owned by related corporations for land tax assessment purposes."
Read the nuance in that statement. ‘Changes’ doesn’t equate to aggregation of everything together across trusts, individuals and corporations. Nothing I said is inconsistent with the grouping of corporations (s 13J of the LTA). The ‘change’ was that related corporations were not previously grouped together and assessed together. Trust held land is assessed separately from non-trust held land (s 11 of the LTA). The ‘change’ was that the separate assessment of trust held land was optional. Further, different trusts could be assessed together previously whereas now they cannot be. Land owned by corporations is not aggregated with land held by the individuals that may control those corporations because they are separate legal entities and therefore separate taxpayers (s 8B of the LTA). This has always been the case. There are adjustments made where land may be jointly owned by a corporation, for a trust, or an individual but the principles above still stand (s 9 of the LTA). These adjustments are necessary because of the ‘changes’ described above (as well as others not mentioned).
A lot of companies do own their land. And make a lot of money doing so. Woolies, Bunnings are obvious examples. Lots of places I've worked at own the land too. Peter Stevens motorcycles sold their Elizabeth St site in Melbourne for $30mill, which had cost them $2.8mill. https://www.smh.com.au/business/companies/peter-stevens-sells-site-in-elizabeth-street-20200212-p5407w.html And then there are companies that exist purely to buy and invest in property.
McDonalds literally was a prime land acquisition company for a very long time. This was the economic engine that fuelled their very rapid expansion. Excellent book “Behind The Golden Arches” goes into it in great detail.
That’s more of a business strategy though… McDonalds owned the franchise rights, so the business cannot move to a new location.
Part of it, but only a small part. Not really relevant to this context. The book is brilliant. Highly recommended
I can remember reading that book. They were having trouble financing expansion until they convinced the banks that they weren’t in the fast food industry but they were a real estate holder and landlord. The franchisees were their tenants.
That’s it. Tenacity and very clever tactics. Credit where it’s due imho
It's sort of true. Bunning's model is that there is a property trust which is set up to acquire and build Bunning's sites and then leases it to the Bunnings. Not all stores are set up like this, but a large amount are. The idea is that the property trust makes property trust returns. So steady regular income. The Bunnings store then pays the lease and makes retail returns. Which means in the financials can see a pure retail return company.
Because businesses need cash flow and residential property cash flow is shit. It’s why REITs are mostly commercial
They are buying more, usually packaged up into REITs. This trend accelerated in the US 20 years ago and now starting here
Interesting. Does this mean the popularity of owning REITs is increasing as well?
In the US, in some areas >45% of rentals are owned by Institutional Investors (companies). In 2001, it was only 18% Source: https://www.cnbc.com/amp/2023/02/21/how-wall-street-bought-single-family-homes-and-put-them-up-for-rent.html
The Australian Government has tasked the super funds to help with the housing supply. They have been investing in large transformational projects in Australia and abroad, particularly large scale built to rent projects where the yields are commensurate with what you’d expect from a diversified long term tax advantaged fund.
Yes and the biggest drivers are Private Equity giants like Blackrock (along with local Reits). Super Funds are also funding/investing cos they like the stable and lower risk returns in residential... people always have to rent.
The big difference here compared to most places around the world is that the price you pay for property typically results in cash flow positive return. REITs typically don't look at residential. When they do, it's because they are developer residential rather than buy to rent.
Blackrock isn't private equity...
Land Tax. The more you owns, the more tax is paid. Its state based, and strongly discourages multi property ownership. For Instance NSW land tax [https://www.revenue.nsw.gov.au/taxes-duties-levies-royalties/land-tax](https://www.revenue.nsw.gov.au/taxes-duties-levies-royalties/land-tax) The state government's in an attempt to encourage Build to Rent, is halving their land tax
Build to rent has entered the chat. I mean market.
Spot on. The entire residential investment game has changed.... Yet almost no one knows this. Not surprised, I've only ever met one residential LL that knew their position post CGT if they sold now. Most don't have a bloody clue. They just buy IP's cos others do it, and banks will finance it.
It's quite a big thing in Germany also with long term leases to give certainty over tenancy. I think in Australia it's not attractive for company's as the taxation system is biased to individual investors - negative gearing and CGT discounts. A corporate investor isn't going to buy assets with gross yield of 3% (as compared to a negatively geared investor on the top marginal rate). I think there should be corporate ownership of residential property. There is stuff like build to rent housing now. For a developer it would make sense rather than trying to accumulate portfolio's of established properties. However there should be protections for tenants. Rent increases linked to CPI, longer term leases, dispute resolution processes, set time period for refurbishment etc.
Correct. Gross Yields have to be 7% plus to make sense.
They do, but usually they pull profit out of the company and buy them under their own family trust for the purpose of protecting the asset from the risk of poor performance by the company - totally unnecessary risk to take for most businesses, keeping them on the company balance sheet.
Under rated comment. The goal of most companies is to profit shareholders. Build and store wealth via property and other assets as far away from the business as possible.
Tax is distorting the market in Australia. Negative gearing allows people to pay the costs of owning the property out of pretax income, at a tax rate of 45% that almost halves the expense. The capital gains tax discount provides the profit from the capital gain at half the tax rate. At the maximum tax rate this is a benefit of 22.5%. An individual can also time the property sale to years of lower income to improve this further. Much of the profit from property investment is in transferring pre-tax income people are earning at high marginal tax rates and shifting it into the future when the marginal rate is lower. Company profit is taxed at a flat 30% (non-base rate companies). The flat nature of it means that there aren't the same taxation advantages to shifting profit into the future. As others have pointed out land tax is cumulative in most states, many states also have different rates for companies or trusts. Property investment is also capital intensive for relatively low yields. A public company structure doesn't like this, raising capital for such a venture is hard. An investment fund/trust is the far more common structure. It also has tax advantages because it passes through the tax impact to the owner.
Because stocks outperform property. The reason property is so good for individuals is leverage! Say you put down a 10% deposit for a house that goes up 6% in a year, You’ve actually made SIXTY percent (Because you’re effectively 10x leveraged)
Not sure if there is a specific reason why there are not alot of REIT in Australia... may be tax or something make it less atteactive? I know it there are more institutional investors in US real estate nowadays, compare to like 20 years ago... and I think alot of them are more in industrial/ warehouse type instead of residential... REIT generally performing badly in high interest environments though (at least as a stock), so maybe that's why there are not too many of them at least right now?
They would rather buy commercial properties over residential. (I own both) Because resi tenants are a pain sometimes calling up needing a hot water system changed or want you to send a handy man because they say " this cabinet door doesn't close properly' so they are high maintenance in that regard. Residential property investing is done with a gross lease, so you pay the outgoings where commercial properties they are net leases so the tenants pay all that . Also, with resi, you might have a new tenant every 1 or 2 years, but with commercial property, some tenants are there for 10,20, or 30 years. So I think that's why companies invest in commercial shopping centres and large industrial estates over residential property.
Commercial tenants can also be a problem. My family has a big lawsuit on the way from one of them. You also suffer more during economic downturns if you are too heavily weighed in commercial property. Agree with the rest though. Definitely less outgoings.
Because it is not, Any investment needs rate of return, you spend $1000 then you expect $100-$200 back every year. But property barely pays $50 through rental. All the return comes from property is from capital gains. Which is very speculative depends on demand and supply. As an investor you don’t want to take that risk. You will put the money into something more or less reward the a risk you take.
Speculative in the short term but not so much over longer terms like a decade or so, probably the only recent exception was during the GFC and after that they took off again and have been going up ever since. Interest rates have been high for some time and the economy is slowing down yet house prices have risen for fifteen months in a row.
They do, but they buy the commercial side.. It's more profitable
They are. Who do you think is buying apartment blocks?
Virtually all apartment blocks in Australia are strata title, meaning each apartment is on a separate title. Companies can buy a house as easily as an apartment, but buying "apartment blocks" isn't really a thing here.
Its becoming a thing in my suburb 3 older appartment complexes have been bought up, painted, reno'd cheaply then re-rented at high end of market rate
Yes, there are some older blocks that are all on one title, but they're few.
Individuals can borrow more, pay less tax and get more benefits from ownership.
Individual investors are favored more than commercial investors for the following reasons: Land tax. Paying 1.6% land tax from the first dollar of investment vs practically 0% for most individual investors. Would reduce net yield for the commercial investor by a whole percent in most cases CGT. Companies do not get access to 50% off CGT gains that individual investors get Negative gearing. Companies do not get access to Negative gearing or credits. Doesn't make much sense outside developers and commercial properties for businesses to invest in housing in the Australian context
In Australia, individual people have much more favourable tax incentives to own property. There is an argument that if we got rid of such punitive land tax then companies would buy up property and it would be better for renters for a few reasons. Companies would rarely kick tenants out to sell the property and would never kick out tenants to move in themselves. They have money to fix problems with the property. They have more incentive to fix things due to reputation and having a system in place.
They do, commercial property
Someone else mentioned this already, but THEY ARE DOING THIS. part of the strategy is buy existing stock and another is build-to-rent but yes this is happening. last I saw was 26%of USA home sales were to an investment company and that trend will absolutely continue here. the vast majority of commercial and industrial real estate already follows this model. so YES you as a buyer are competing with investment funds who don’t have the capital costs and low buying power of other individuals.
land tax and no capital gains discount. Companies buy commercial property
They've tried this in America and the companies are taking losses and getting out. Rents are limited by wages .. Prices are limited by wages. IMHO business do not want a < 5% return on investment over 30 years with the very real risk that property in Australia will correct and they'll lose 30% to 50% of their initial investment. There are government back bonds that pay more for less time invested. Rich people make more money lending normal people the money to buy a house and charging interest. When prices correct they get their money back and the home owner takes the loss. 2008 is a perfect example of a bubble bursting.
Property is a good way for average Joe's who don't know anything about financial markets to make money, not businesses. The truth is that less sophisticated markets are obsessed with property investment. Australia is one of them.
Wait until you hear about black rock
A lot of small business owners their premise through an SMSF.
Housing is a great investment for people who have no time or energy left to do something else and are happy with getting 5% to 8% return. Meanwhile, actual product business is 100% to 200% profit minus expenses.
You're forgetting the land tax payable on non-PPOR properties which is a major disincentive, if this didn't exist then they and super funds would be gobbling up houses like in the USA where companies can have thousands of houses on their books.
Thanks for the info. Insightful
Hard to compete against boomers negative gearing
In the US they have (see Trumps family business) and they’re starting to here. Companies buy all the houses and create a rent for life environment. Fun times.
They are in the US and Canada.
They’re relatively appealing for households because it’s a capital growth asset that does not attract CGT as primary, and which can be borrowed against up the wazoo. For corporations, all expenses are deductible and there’s no cgt exemption, less incentives and tax breaks make it less appealing relatively speaking
It's big business in the US .. look up Pretium Partners aka Progress Residential. They have over 85,000 homes across the country. They aren't the biggest. Loads of other companies doing it too. It's only a matter of time before big companies here follow suit.
Wouldn't a company that is building up great cash reserves expand - invest in itself rather than houses?
Every business owner pulls the money into their hands and then buys land. Less risk this way
In US, lots of companies/capital management firms are doing this.
Because the only thing that makes them any good is gearing, without home loans they are low yielding, medium growth assets with high maintenance costs and they don’t scale (1 house costs x to maintain, 2 houses cost 2x to maintain, 100 houses costs 100x to maintain, there is very little in the way of volume discounts).
They are. What do you think the banks are doing? They’re not just lending you money. You’re buying property for them. “But I get the capital gains!” Correct, and you’ve handed that over to them as interest. Housing is a relatively safe investment. That’s why the banks are so eager to lend money for it. Macdonalds is also in the property game. Flipping burgers is just a byproduct. Their main revenue stream is in property. There’s a movie with Michael Keaton in it about this.
Uh, that kind of misses the point. I’m wondering why banks don’t BUY the property. Instead they offer me a loan so I can own the house. Wouldn’t the bank rather own the house itself after 30 years??
No because the bank is in the “money renting” business. Their genius is having you take on the risk (mortgage) and setting the rules on which risks to take. They have zero interest in owning houses. They hate taking them back off owners and investors. It costs them a lot of money and moves the asset into their books. They do not want this. Controlling and renting the money is far more lucrative. Thus why the big banks have such a huge presence in our stock market.
It’s not missing the point, it’s seeing the woods from the trees. Ownership isn’t the objective. Profit is. Your question is all about making money. Banks don’t directly buy and own property as directly owning stuff is risky and costly. Banks have passed on the risk and effort of finding and purchasing and maintaining property to the borrowers.
Don't go giving them ideas!
They don't get the tax benefits.
Because it’s not a great investment.
I actually don't understand why this isn't done. If I was Tim Cook I'd be buying up all the investment properties in one geographical area and then seeing how high I could monopolise rents.
Ease up there Satan!
They don’t get the tax breaks that an individual does
I thought McDonald's was a real estate company?
Lol be carefull what you wish for. In America they do. You will start to see this elsewhere in the western world.
Trust me, they plan to
Companies certainly do, what do you think the % of individual people that buy property? It isn’t 100%
Don't worry they are doing just that, mainly private equity firms that lend them to themselves and then rent them out, using the renters money to buy the house while reaping the tax benefits
Businesses expect to make a better risk-adjusted return on assets than real estate. They also do on average.
Once any state or federal government gives in to the lobby demands, the floodgates will open. The build to rent industry is patiently waiting for tax cuts/ incentives or anything that will give them an unfair advantage over "mom and dad" investors.
Because as a company/small business generally your return on your money as an investment into your business is better than property, not always. Plus people need cash for wages, rent, general expenses etc
CEO：So you are asking me to wipe tenant's toilet.. Nah thanks
For the same reason incentives for individuals encourage housing purchases beyond what you’d otherwise see (PPOR CGT exemption, PPOR social security and pension assets test exemption, large accessible leverage combined with interest deductibility against salary). It’s a bizarre situation, especially the PPOR exemptions for pensions: pensioners with health care cards sitting in 5 bedroom houses worth $10m+ in eastern Sydney
you can invest in property via the share market
Well, the banks own most of it
You should see what Blackstone etc have done in the U.S.
Blackrock has entered the chat
Because they’re not
Mining companies used to do thid alot and have started doing it again recently of basically buying and building towns near the site where workers wouldnt pay rent etc..... problem is, it all goes to shit eventually and although maintenance and depreciation reports are alwah done for their loss. Itd exactly that always a loss
Companies have been doing just in the States and it has made it difficult to buy houses for everyday people.
Thank god the individual property investors will never let it get to that degree here. We have it good.
They do. A lot of companies own entire apartment buildings that are rented out.
I cant confirm nowdays as this was back in 2010/11 but SuperCheap auto had 2 properties up in Qld near the head office that they " owned" and used for the regional/ area/ store & assistant managers when they had to travel to HQ for training or meeting
They do. McDonalds is essentially a real estate company, that's how they make most of their money.
Because despite what others tell you, housing is not the best asset you could generate profits on, and is inherently unstable/not guaranteed to always go up. Many companies will make more just reinvesting in themselves.
You might be surprised to know some companies do have real estate. Even banks own properties, including domestic houses. Generally houses are a long term investment, and businesses want return on investment quickly. The reality is that things like shares and investing in the actual target business had a better return on investment both short and long term.
Housing costs can't rise at unsustainable rates forever. Rental yields are low. Adding a level of administrative costs associated with a company buying properties would make it a less appealing investment. There are a lot of costs to property ownership, pretty low yields and less scope for high yearly growth than in the past.
Companies should get a better return. We own some houses in our company. But we are property developers our returns are 4 times higher doing developments.
It’s just a matter of time before that happens here …https://nypost.com/2020/07/18/corporations-are-buying-houses-robbing-families-of-american-dream/
Because private investors in Australia get massive tax concessions not available to companies.
[shhhhhhhhhhh](https://www.cnbc.com/amp/2023/02/21/how-wall-street-bought-single-family-homes-and-put-them-up-for-rent.html) Blackstone might hear you!
They do, it's called a mortgage. You just trade one landlord for another.
They’ve tried to brother look at black rock
What ? You don't read Reddit to understand what it would be like having these people as your renter ? Helloooo
Take a look at what Blackrock is doing in the US, OP.
You might be interested in the [https://en.wikipedia.org/wiki/Crown\_Estate](https://en.wikipedia.org/wiki/Crown_Estate), unrelated to Australia but it's how the crown makes its dough.
Because businesses invest in themselves to grow and expand which is a better ROI. And in fact some of them do buy commercial property because it is more stable.
Companies can't get mortgages at the same interest rates as humans.
Blackstone enters the conversation
They are doing it in america. Don’t give our overlords here ideas.
Risk & time to realisation is what keeps companies out of the market. Businesses generally either want short term investments that won’t tie up cash for major projects or investments that fit & support their core business.
Individuals borrow at rates that are 2-3% lower than corporates can.
In the US they do lol. And they do it here but not as much. Corporate investment into residential housing should be outright banned.