Home Property Australia Build-to-rent sector is set to break off the shackles

Build-to-rent sector is set to break off the shackles

  • September 20, 2023
  • by Property Australia
Knight Frank Chief Economist Ben Burston

New research from Knight Frank indicates that the expanding build-to-rent (BTR) sector in Australia is projected to witness a surge in completions, based on the current robust pipeline of developments and the demonstrated growth trend observed in the UK. 

According to Knight Frank’s Breaking the Shackles – the rise of BTR report, if the total BTR stock reaches 55,000 units by 2030, it would still only constitute 1.5 per cent of the overall rental supply in Australia, underscoring the significant potential for further expansion.

As of September 2023, there are approximately 8,350 dedicated BTR apartments under construction nationwide, with an additional 12,900 units approved for development in the near future, according to the report. 

Research from The Property Council and EY released earlier this year showed that this number could increase even further. The study said that a level investment playing field for build-to-rent developments could create 150,000 rental homes over 10 years.

The report also showed build-to-rent housing, which is relatively new to the Australian residential market, is currently worth $16.8 billion but has the potential to expand by a factor of 17, to a $290 billion sector, which would see the creation of up to 350,000 new apartments in an optimistic scenario.

According to high-level financial modelling undertaken as part of the study, if the managed investment trust withholding tax was halved to 15 per cent (which the Australian Government announced in its most recent budget), in line with other property asset classes, three times as many build-to-rent projects would go ahead compared to a business-as-usual approach. 

Knight Frank Chief Economist and report author Ben Burston said after a long gestation period, the BTR sector in Australia had sprung to life and the quantum of committed and planned development was increasing fast.

“A wave of construction activity is now underway, with the pipeline is most advanced in Melbourne and Brisbane, but activity is picking up across all major cities,” he said.

“The current groundswell of activity points to a sustained expansion in total stock, and by 2030 BTR is expected to have emerged as a critical part of the housing supply mix, with Australia set to mimic the UK’s BTR journey over the past decade.

“The acceleration in development that we have seen in Australia in 2023 mirrors the beginning of the expansion phase that occurred in the UK from 2015 onwards.

“Over the following eight years to 2023, total UK stock has expanded from 11,312 to 82,636 units, reflecting average growth in the total stock of BTR units of 30 per cent per year, or 9,450 units.

“Our forecast of 55,000 dedicated BTR units in Australia by 2030 implies an annual delivery of 5,900 units as supply accelerates from 2024 onwards.

“This is slower than the UK in terms of annual unit delivery but a similarly rapid expansion in proportionate terms.”

Knight Frank Head of Alternatives Tim Holtsbaum said across the globe investors were seeking greater exposure to alternative sectors, and the residential ‘living’ sectors were at the front of the queue, led by BTR.

“The change in the MIT regime makes BTR immediately more viable for offshore investors and will add further impetus to the current expansion.

“However, global limited partner (LP) investors generally wish to partner with local developers as general partners (GPs) for their experience sourcing suitable sites and delivering schemes that appropriately cater to specific locations and demographic profiles.

“The presents challenges to create deal structures that align interests between parties that differ greatly in size and expertise.

“LPs are naturally attracted to large schemes which have potential to deliver greater efficiency and larger scale deployment, but these also imply the need for a large financial commitment from local developers.”

Mr Burston said the underlying demand-side drivers for the BTR market have been in place for some time, but a combination of cyclical and structural supply-side impediments have, until recently, held back development.

“However, many of these constraints have either abated or been removed and the sector appears set to expand rapidly over the next decade,” he said.

“Given the size of the market for rental accommodation, investors and developers are able to access a market offering the potential for large-scale capital deployment, while the community stands to benefit from a much-needed additional source of supply to help address Australia’s structural undersupply of housing.

“There is clear case for BTR to play a part in redressing the imbalance between demand and supply in the residential market, with a new model needed to facilitate faster growth in rental supply beyond the sole reliance on the existing build-to-sell model with mum and dad investors providing housing.

“The BTR model aims to align the interests of investors seeking to secure long-term income streams closely linked to inflation, with the interests of tenants, and over time this will result in a more diverse product mix that promises to improve the service offering and widen the range of options for renters.

“In coming months, the pipeline of potential development is likely to expand further as developers seek to position themselves to benefit from the current surge in rental growth, although the actual quantum of schemes under construction may be slower to accelerate until construction cost pressures ease.”

The Knight Frank research found that among the major cities, Melbourne was leading the way for BTR developments, with 4,920 apartments under construction and another 8,250 approved.

Brisbane is next with 1,743 under construction and 2,567 approved, followed by Sydney with 1,529 and 965 units respectively.