Australian Build-to-rent trends emerging

What is build-to-rent?

Recently the Treasurer of New South Wales (Dominic Perrottet) suggested that build-to-rent properties may reduce the housing affordability problems currently being faced by first home buyers.

Build-to-rent refers to properties built and owned by developers which are rented to tenants. These types of developments have been available in the US and Europe for some time. In the US they are known as multi-family developments.

Is this asset class a feasible investment in Australia?

This type of real estate asset has always been seen as the holy grail of property investment however in Australia such assets have not previously been considered an attractive investment class due to their relatively poor yields.

In the US, the dramatic fall in real estate prices post-GFC provided developers with a large number of opportunities to acquire residential properties at incredibly low prices and to upgrade/refurbish them at low cost. As a result, the build-to-rent/multi-family asset class was not only feasible, it was and is an attractive investment. In addition to these positive economic factors, government programmes (particularly the availability of long term, low cost, government guaranteed financing) have contributed to the growth of build-to rent or multifamily properties as a stable and well performing asset class in the US.

The situation in Australia is very different. Although interest rates remain at historic lows, acquisition and construction costs remain high (particularly in those markets where the majority of people wish to live) thereby raising the question as to whether the build-to-rent asset class is, in the absence of local, State and Federal government incentives, a realistic way to ease the affordability crisis in the current environment.

Momentum is building in Australia

There has recently been much discussion about the future of build-to-rent projects in Australia.

The New South Wales Government has established a working group to consider how to make this asset class work in practice.  

The CEO of Mirvac (Susan Lloyd-Hurwitz) has been reported as being of the view that a yield of 4.5% could possibly be achieved for this type of investment which, given the compression of yields in commercial property, may make this asset class an attractive investment.

Lendlease has reported its interest in this type of asset class in the UK and the US and other large Australian investors (such as industry superfunds) are also investing or considering investing in such assets overseas.

One or two developers are already dipping their toes in the water in respect of this asset class in Melbourne.

Emerging trends

Based on the overseas experience and the above Australian market factors, it is our view that some of the key features which will apply to an Australian build-to-rent market can already be identified. These are:

1. Local, State and Federal Governments will need to provide some form of assistance to developers in order for projects to be financially attractive. These will include tax, GST, stamp duty and/or land tax relief as well as possibly some form of government guarantee in respect of the debt funding needed for the project;
2. The majority of developers involved in this sort of project are likely to be the larger, more institutional developers as they will be able to accept a lower yield (due to the diversity of their overall real estate portfolio) than smaller developers whose investors will not benefit from higher returns generated from other real estate assets;
3. Industry superannuation funds may find the asset class attractive (due to the stable nature of the returns) and be significant investors in the sector;
4. It may be necessary for the build-to -rent property to be part of a larger development which includes higher yielding property assets, such as a hotel, in order for the overall return to the developer being acceptable;
5. The terms of the leases to be granted to the residents in the development will need to be carefully considered. Provisions relating to the term of the lease, rent increases, termination rights and relocation rights will be crucial to both the developer (in terms of its initial and future returns) and the tenants (in terms of their security of tenure and ability to save money for a deposit to buy a property) and are therefore likely to be regulated;
6. The nature of the title to the property will need to be considered. For example, will a build-to-rent property be able to be subject to strata title? This may be relevant to the ability of the developer to raise finance to carry out the development;
7. It may be difficult to obtain financing on these types of assets without some form of government guarantee. Any legislative restrictions on enforcement of the lender’s security or impediments as to the matters referred to in point 5 above may make such financing unattractive to lenders. In addition, depending on the title held by the developer, if it cannot sell individual apartments in order to repay their debt, the lender will be relying solely on the developer ‘s ability to refinance as the source of repayment of the loan. Again, this may not be attractive to lenders.

Clearly there are a lot of stakeholders in the build-to-rent market and a large number of issues which need to be addressed before such asset class becomes large enough to have any significant impact on the Australian residential market.  

I welcome your feedback at [email protected]

Peter Faludi Consulting  

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