Build To Rent Gaining Momentum in Australia
What is build-to-rent?
The build-to-rent (BTR) approach is ongoingly gaining pace in major cities of Australia. Different to the conventional build-to-sell (BTS) model, in BTR projects, the developer retains ownership of the multi-family residential properties and offers mid to long-term leases to tenants. Whilst the BTS model emphasizes on selling the final products to buyers, the BTR approach fucuses more on the renter demographic. In other words, the BTR model is more about maximising residents’ liveability and creating a secure alternative to home ownership.
In Australia, the BTR concept is relatively new, and the market is more immature when compared to the US and UK. According to Matt Berg, the co-founder of new build-to-rent platform Local, the build-to-rent equivalent averaged at about 11 percent of total rental stock in the US. Even in the UK, about 1 percent of total stock is build-to-rent housing. However, Mr Berg estimated the Australian figure was ‘about 0.1 percent now.’ He also predicted that around 60,000 units of rental stock per annum are required to meet the future demand.
Benefits of Build-to-rent for Tenants
From a tenants’ perspective, there are three major benefits the BTR rental customers will enjoy as the sub-market matures.
1. Greater security of tenure
When compared to the ‘standard’ leasing term of non-BTR residential tenancy (typically 6 to 12 months), BTR projects are more than willing to offer longer agreements – typically up to 3 years. Furthermore, the rise of rent during the three-year period is fairly predictable because it tracks CPI (Consumer Price Index).
2. More relocation flexibility, less communication cost
The leasing processes of BTR properties are more streamlined than the private rental market. Thanks to the economies of scale, the prices of BTR products are more transparent and easier to access. Some essential services, such as the broadband connection, are included in the BTR leasing agreements, which will benefit the tenant who may not be familiar with the service provider (such as the new migrants). All the characteristics above offer tenants more flexibility when relocating.
On the other hand, the operator of BTR property acts as the single point of contact during and after the leasing period. Comparing this to the private rental market, there is usually no third-party agent involved in the leasing and property management process, which enables the tenant to communicate directly with the BTR operator. Therefore, the communication cost of tenant is greatly reduced.
3. Better amenities and community atmosphere
Successful BTR project will offer its tenants a sense of strong community in buildings. Thanks to the onsite amenities provided in building, the BTR operator promotes the community element through the sharing of space and facilities such as gym and yoga rooms.
Benefits of Build-to-rent for Developers
The BTR approach will also benefit the developers in several aspects:
1. Constant and steady rental income stream
Although BTR projects typically generate a lower yield than other asset classes such as office buildings, BTR assets are less likely to be reliant on an anchor tenant to secure the rental income. As a result, BTR projects will have a spread of tenants, minimising key tenant risk as well as cyclical volatility. In this way, the rental income of BTR assets is more constant and steadier. It is the reason that BTR is becoming more attractive to large, long-term institutional investors and asset holders, such as the super funds.
2. Preferential tax policy
In the past the tax challenges are key barriers for investors and developers to enter the BTR market. The Victoria Government has proposed changes on land tax to help establish the build-to-rent sector.
From 1 January 2022 until 31 December 2031, eligible build-to-rent developments will receive a 50 percent land tax concession for up to 30 years and a full exemption from Absentee Owner Surcharge over the same period.
These concessions are part of Victoria’s Big Housing Build and will reduce a developer’s holding costs.
- 3. Minimising costs
- According to Dr Diaswati Mardiasmo, chief economist for PRD, BTR approach could help developers to minimise costs in both the build phase (such as wholesale prices for apartment fit out) and ongoing (such as having maintenance facilities on a retainer that can do a bulk fixing job).
The Market is ‘Almost Perfect’ for Build-to-rent
From a social perspective, Australia tends to have high rate of home ownership in history, and the "Australian Dream” is cultural hurdle for Australia’s BTR market to overcome. However, when housing affordability becomes a critical issue, especially in capital cities, the growing Millennial population are comfortable, or at least becoming more comfortable with renting rather than owning.
On the demand-side, since Australia has fully reopened its border in Q1 2022, rental demand is expected to surge across capital cities. As border reopens, with a flood of new migrants able to re-enter the country, the major cities in Australia are experiencing an increase of rent and occupancy rates.
As to the supply side, the rental market is facing a crisis where supply is not enough to satisfy demand. According to Mr Hanan, Mirvac’s head of commercial property, ‘There is muted supply across traditional housing product.’ He took LIV Indigo (Mirvac’s first build-to-rent project at Sydney Olympic Park) or example and said the occupancy rate has now increased to 98 percent. Mr Hanan also pointed that ‘there’s almost the perfect environment for build to rent right now.’
Challenges for Build-to-rent
Although BTR has become a popular concept in Australia, there are still challenges for BTR developers and investors to overcome, one of which is the financing issue.
Generally speaking, the yield of BTR asset is lower than alternative asset class such as office buildings. BTR properties are more likely to have a higher turnover of tenants therefore a shorter weighted average lease expiry (WALE). Due to the nature of BTR asset, it could be more difficult for BTR projects to obtain finance.
Conventional lenders, such as banks, tend to hold a more conservative attitude towards BTR financing covenant. Loan to value ratio may be lower, and rates & fees may be higher than traditional development financing. It is expected that the ‘discrimination’ against BTR will be eliminated gradually once the market is mature and has proven itself.
As mentioned earlier, investors (such as super funds) seeking a lower yield, lower risk investment, could favour BTR more than the banks, which provide an alternative to bank finance. These players will be likely to use a fund-through model to participate in the BTR market. In a fund through model, the developer secures construction finance for the development from an investor who will take over ownership of the property on practical completion. Using fund through approach, the developer can benefit from capital uplift, and the investor can keep the development risk on the developer’s side.
Source of Image: Allens.com.au
Article by Jacky Cui, Senior Analyst, Wolfe Advisory Group