Numbers stack up for build-to-rent
Latest data from the Property Council/IPD Australian All Property Index signals a stabilising commercial property market and an emerging build-to-rent sector as investors look further afield for opportunities.
The Australian commercial property market continues its strong performance, recording total annual returns of 11.9 per cent for the year to June 2017. However, this is a step down from its post-GFC high of 13.4 per cent in June 2016.
Both income return (down from 5.6 per cent to 5.0 per cent) and capital growth (down 6.6 per cent to 5.6 per cent) fell between June 2016 to June 2017.
To prepare the index, MSCI Inc assesses nearly 1,400 assets and 68 funds with a combined value of $176 billion.
Mitchell McCallum, MSCI vice president, says office markets in Sydney and Melbourne were driven by strong capital growth, with 10.9 per cent and 5.8 per cent returns recorded, respectively.
Office markets in Perth continued to soften, with negative annual capital growth of -2.7 per cent. The Brisbane market showed signs of growth, with a 1.9 per cent return.
Strong market movements in Sydney office rents have not translated into higher income returns for investors as capital growth has continued to outpace income growth.
“In Sydney, office yields are compressing faster than income is growing,” McCallum explains.
Tightening cap rates and lack of stock have fuelled demand for other non-core property options. The hotels and healthcare segments, for example, performed well, with total returns of 22.8 per cent and 25.1 per cent respectively.
Maarten Broek, also vice president with MSCI, says interest in the built-to-rent sector continues to grow, and MSCI’s analysis finds it could provide diversification benefits for Australian real estate investment portfolios.
“Two flows of money are coming into the Australian market: Australian superfunds are growing and so are their allocations to real estate; and foreign money is looking for attractive yield.
“The increasingly competitive landscape of the core sector means investors and managers alike are looking for new opportunities.
“Non-core sectors, such as healthcare and hotels, have become increasingly more attractive to investors. But as these markets are small, they are looking further afield to the built-to-rent sector.”
McCallum says the build-to-rent sector will “potentially provide the scale that large managers and investors need.”
MSCI measures $319 billion of residential investment in 11 markets, of which $106 billion is in the United States.
Build-to-rent is a substantial sector in other global markets, making up to per cent of MSCI’s national database in the Netherlands, 23 per cent in the US and six per cent in the UK.
Annualised income returns over the last 14 years range from 3.3 per cent in the United Kingdom to 5.7 per cent in Canada. The United States averages 5.2 per cent.
While the Australian market continues to crunch the numbers, McCallum says international markets, such as the US and UK, have “managed to make build-to-rent stack up, despite lower yields, and to get significant scale in the marketplace”.
“It is about finding the right delivery model, with the right opportunity, with the right investor. If you can get those three factors to line up, then irrespective of the slightly lower yield, it can be an attractive investment.”