Build-to-rent ramping up down under

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AUSTRALIA’S fledgling build-to-rent sector has surpassed a major milestone of 11,000 units – three years after it was first touted. With the yield gap between commercial office and residential narrowing, the relative attractiveness of BTR investments is growing, given its innate defensive characteristics.

According to CBRE’s latest report Build-to-Rent Development Pipeline, the BTR asset class continues to gain momentum and the report credits a weakening of new residential supply across Australia, which was already in decline pre-COVID-19, providing potential tailwinds for the sector over the next 12-24 months.

It was just three years ago when four industry leaders speaking at the Australian Property Institute conference said the BTR market could be a real game changer. Since that time, there are 11,000 units across more than 30 projects, with the market accelerating over the past 12 months.

An additional pipeline estimated at over 10,000 units plus currently in due diligence with further announcements expected later in 2020 and beyond. Offshore institutional institutional investors funding including private equity, sovereign wealth funds, pension funds and insurance groups, accounts for over 50% of the total pipeline, signalling appeal of the asset class’ stable cash flows to global investors in a low yield environment.

CBRE said governments across local, state and federal levels are yet to pull any meaningful policy levers to support and accelerate the development of the sector. However, Victoria has taken some initial steps by supporting the fast tracking of approvals with New South Wales expected to follow.

Debt financing remains another critical hurdle. Credit is available for long term stabilised assets, as demonstrated by Australia’s first major BTR term debt facility recently arranged by CBRE Australia. However, favourable construction finance policies specific to BTR are yet to be developed by local banks, in that regard Qualitas’ announcement to establish a dedicated $1 billion debt fund may represent a watershed moment for the industry.

The acceleration was most noticeable in 2019 and early 2020 as cost of capital continued to fall. It has also coincided with lower housing supply due to structural challenges faced in the high-density residential market including planning headwinds, obtaining presales, stricter access to development finance and mortgage financing.

As state governments across Australia accelerate development approvals and turn to the property sector to lead the post COVID-19 economic recovery, the BTR sector could potentially inject $300 billion over the next 20 years.

In the United States, where the market is much more mature and is known as multifamily, the apartments industry generated over US$3.4 trillion of national economic output and supported 17.5 million jobs in 2016, according to National Multifamily Housing Council. This represents almost 19% of total GDP and 12% of the employment growth for that year, up from 17% and 11%, respectively, in 2013.

In 2019, residential commencements were circa 35% below 2018 levels, with CBRE Research estimating that the market will tip back into an undersupply situation from 2020 onwards for the first time since 2014.

CBRE Research’s Ben Martin-Henry said the impacts of a much lower rate of population growth from 2020-22 would, however, offset lower supply scenarios and push dwelling undersupply in many markets out to 2022 – rather than this occurring earlier.

“Build-to-Rent has a role to play in filling this market void, with the sector facing a perfect storm of ideal conditions. We expect to see developers capitalise on the dynamics accelerating structural shifts in demand drivers, such as young, well-educated urban professionals prioritising lifestyle aspirations over home ownership (due to unaffordability) and thereby seeking to rent in well-located, high-quality residential developments,” Martin-Henry said.

CBRE’s associate director Puian Mollaian said BTR projects were being delivered across the country, with majority of activity in dense, urban locations like Melbourne and Sydney. However, the Gold Coast and Perth have been among the first mover markets, with some of the first projects in these locations having now reached completion.

“Melbourne has been leading the way with its development pipeline, representing over 50% of the national market while Sydney captures just over 25%.

“The key to this trend of greater activity in Victoria has been the wider availability of suitable sites and generally reduced barriers to entry, when compared with Sydney,” he added.

The report reveals that there has been a clear emphasis on scale and delivering large institutional-grade product, allowing owners to achieve operational efficiencies through economies of scale, with an average size of over 350 units per BTR project.

Mollaian said as the yield gap between commercial office and residential continues to narrow, the appeal of BTR will continue to grow, given its innate defensive characteristics.

“As a result, a growing number of seasoned international institutional investors are diversifying their portfolios into the BTR sector and seeking exposure to this asset class in Australia, mirroring their substantial exposure across global holdings,” Mollaian said.

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