Moving towards build-to-rent assets
New delivery models, innovative lease frameworks and a shift in mindset will all determine whether the build-to-rent asset class gains a foothold in Australia, finds a new report from EY.
Multi-Family as an Asset Class in Australia: Are We There Yet? unpacks some of the challenges faced by Australia’s property and construction industry as it explores avenues to enhance housing affordability through multi-family or build-to-rent models.
The report’s author, EY partner Luke Mackintosh, says there are valid reasons why the build-to-rent asset class is yet to take off in Australia.
Among these are the historically higher returns available on other property types, such as commercial offices; the push to realise capital growth up-front through sell-down of residential properties; and limited experience in the management of large-scale residential portfolios under lease, particularly vertical villages.
But the narrowing gap in capitalisations rates between the commercial and residential sectors, and the limited supply of investment grade commercial property in Australia is encouraging institutional investors to look further afield.
At the same time, an undersupply of suitable rental housing in inner-city locations favoured by ‘millennials’ is creating a viable source of tenant demand.
Build-to-rent is a long-established asset class in the United States, and is gaining favour in the United Kingdom, but Australia will need to develop its own model to suit its unique market.
Earlier this year the Property Council established a Build-to-Rent Roundtable to bring together investors, operators, managers and advisers with a focus on this sector.
“The role of the Roundtable is to help foster the emergence of build-to-rent as a new asset class in Australia,” said Property Council chief executive Ken Morrison.
“Our early focus has been identifying the tax, planning and regulatory issues that need to be addressed to help facilitate this outcome.
“As we saw in the federal Budget, governments are also increasingly interested in the potential for the build-to-rent sector to provide affordable rental housing. This will require a viable at-market build-to-rent sector and appropriate government incentives.”
While there is “general acceptance” in the US that build to rent units are designed to a lower spec than traditional build-to-sell units, Mackintosh says developers in Australia are “hoping to achieve a premium on their rents, so will be looking at construction to a higher spec – but this is a balancing act”.
And while the US build-to-rent model is centred on short-term leases, primarily of six to 12 months in length, other markets, such as the Netherlands, Germany and Denmark offer infinite leases.
Mackintosh notes that the length of a lease is dictated by legislation in each state, but “in Victoria we are seeing a move to five-year leases to provide tenants with greater certainty of tenure”. This undoubtedly sends a signal to the market.
Build-to-rent product is suited to locations within 15 kilometres of city CBDs, close to transport, schools and shops, Mackintosh says, and developers must “strive for the right mix of units and floor configurations to ensure they are meeting the market demand”, in much the same way shopping centre developers must get the tenant mix right.
Stepping into the build-to-rent market requires “sector specific skills, good governance and good systems in place to effectively manage the property and its tenants” Mackintosh says.
“Multi-family ownership is about streamlining process to reduce your costs – traditional property management, body corporate and on-site management models need to be enhanced to reduce these costs.”
Download Multi-Family as an Asset Class in Australia: Are We There Yet?