L-R: Conal Newland, Savills Head of Operational Capital Markets and Paul Savitz, Savills Director of Operational Capital Markets
According to the latest Build-to-Rent (BTR) Market Update from Savills, Australia’s developing BTR industry has undergone an 18-month period of strong development and is likely to demonstrate resilience against inflationary pressures and symptoms of a weakening economy.
Australia’s BTR sector has developed enormously since early 2021, supported by substantial investment activity, with institutional grade BTR stock presently standing at 3,800, with an additional 8,400 units under development. The future pipeline now stands at 22,500 units, increasing the sector’s total size to 34,700 units finished or under construction.
According to Savills, BTR’s ability to weather the COVID-19 pandemic is indicative of the asset class’s strength, and investment sentiment in BTR has been buoyed by a combination of factors such as fast rent recovery post-lockdown, minimal arrears and elevated renewals, low vacancy, and solid income growth.
“BTR is an appealing operational asset in the current inflationary environment as the granularity of the revenue streams across multiple tenants allows landlords to recoup inflation cost pressure through increasing rents on a regular basis, rather than fixed mechanical increases as would be seen in a long-term commercial office lease,” Conal Newland, Savills Head of Operational Capital Markets said.
“Our emerging BTR sector is at a pivotal point in its growth trajectory and has also caught the attention of policy-makers, who recognise the role it can play in managing complex issues including affordability, housing deficit, rising rents and new construction.”
The rapidity with which BTR houses may be provided to market with no presale need for development, according to Savills, makes it an excellent avenue to supply more affordable housing and aid with housing for the disadvantaged in the community.
Despite rising interest rates and inflationary pressures, the Australian economy is strong, with considerable employment growth and a multi-decade low unemployment rate.
Renters account for one-third of the property market, according to Savills, so the effects of inflation-driven rental rises might be significant.
According to the report, residential will likely be shielded from an impending consumer spending constraint, with residents prioritising rent above non-essential expenditure.
The residential sector has already demonstrated its durability in times of high interest rates and inflation, and data from more competitive global markets shows that best-in-class assets are obtaining premiums despite broad yield compression.
Savills anticipates rising interest rates to have a modest impact on yields and discount rates in 2023, given the volume of capital allocation to BTR in Australia provides downward pressure owing to the strong theme, and balances any downside around increased construction and finance costs.
Since January 2021, over $3.5 billion has been raised and committed to the Australian BTR industry, and Savills expects this to rise to $4.5 billion by the end of 2022.
“As Build-to-Rent matures as an asset class globally, we have seen the type of capital targeting the sector change,” Paul Savitz, Savills Director of Operational Capital Markets said.
“The balance of BTR investors has shifted toward lower cost-of-capital investors. “The performance evidence from global markets has given these investors the confidence to enter the Australian market at an earlier stage and will continue to do so as more opportunities to deploy capital arise over the coming months”, said Mr Savitz.