Build-to-Rent, Solid and Stable

The recent announcement by the Federal Government regarding build-to-rent (BTR) assets in Managed Investment Trusts (MIT), attracting a reduced withholding tax rate of 15%, for overseas investors from the 1st of July 2024 has been met with positive reception within the industry. Subsequently, there have been several new BTR developments announced, and whilst these were certainly already in the works the tax changes do indicate the potential for increased interest and investment in the sector.

As the BTR sector in Australia is still in its early stages, there is limited availability of performance data for comprehensive analysis. Consequently, it becomes necessary to look at overseas markets to assess the sector's performance, particularly in comparison to other sectors, considering the current period of uncertainty and instability.

Investors globally have long been attracted to the BTR sector due to its ability to generate solid, stable cashflows. Having multiple units with multiple tenants reduces the income risk associated with churn in the building leading to a consistent stream of rental income. This stability in rental income resembles the operational model of office buildings, which have multiple tenants and leases across different structures, thereby reducing the potential loss of income if a single tenant were to vacate.

The office sector tends to closely mirror the economic cycle and is subject to the economic fortunes of its tenants. However, in the residential market, there is a consistent demand for housing both in favourable and challenging economic times, resulting in a steady stream of individuals seeking accommodation. Consequently, BTR assets demonstrate lower volatility in performance compared to other sectors.

By analyzing the performance of BTR assets in comparison to the three core sectors in international markets, a clear observation emerges regarding the greater stability of their return profiles. Both in the U.S. and the U.K., the BTR sector (referred to as multifamily in the U.S.) exhibits lower volatility whilst maintaining solid returns.?????

In the U.S., the multifamily sector ranks as the second-best performer as well as being the least volatile. Similarly, in the U.K., although the BTR sector only surpasses retail in terms of overall returns, it significantly outperforms all sectors in terms of volatility. Considering the relatively nascent stage of the BTR sector in the U.K., and the ongoing instability in the office sector, it would not be surprising in the near future to see these two asset classes swap places with regards to performance.

So, what insights can we derive from these findings regarding the potential performance of the BTR sector in Australia? Remarkably, the relativities between Australia’s core sector performance aligns closely with that of the U.S. and the U.K., suggesting that similar outcomes could be anticipated for the Australian BTR sector.

Moreover, when considering the current state of Australia's private residential rental market, characterized by low national vacancy rates hovering around 1%, surging rents, and persistent undersupply, the demand for BTR units is expected to be very robust. The outlook for the BTR sector appears bright, and it would not be surprising to see it surpass the industrial sector to become the top-performing asset class in years to come.

?Any opinions expressed are mine and not those of MSCI and should not be construed as investment advice.