With construction costs, inflation and interest rates on the rise, developers across Australia are looking at their build-to-sell projects through a different lens. But is build-to-rent a better bet in the current market? We asked Altus Group’s Product Manager Anthony Lisbona to help us crunch the numbers.
Build-to-rent, or BTR, has emerged as a new asset class in Australia in recent years as robust income and strong rental growth attract significant new capital.
The demand drivers for BTR are clear. Household incomes haven’t kept pace with rising house prices, and the deposit hurdle now stands at a national record high of 11.4 years, according to CoreLogic’s latest Housing Affordability Report. “Built-to-rent sits at the intersection of aspiration and economic reality for many Australians,” Lisbona notes.
The return of skilled migrants and the appeal of the “lock it and leave” lifestyle to downsizers and empty nesters are also driving demand for high-quality, well-located rental product.
Currently, Australia’s tax laws do not do enough to encourage BTR investments, although some recent positive moves by state governments have been welcomed by the property industry. The Victorian Government was first to pull the policy levers, offering a 50 per cent land tax discount. The NSW followed suit and more recently loosened its legislation for BTR projects in commercial zones. The WA Government announced a 50% cut to land tax to promote BTR developments in its latest budget.
There are currently few completed BTR projects operating in Australia. Cushman and Wakefield puts the figure at 1,859 units across six projects but expects the market to “explode” over the next few years. Australia will have nearly 160,000 operational BTR units by 2027, based on existing projects alone.
Witnessing this upward trend first-hand, Lisbona says a slew of traditional build-to-sell, or BTS, customers are asking his team how to model BTR feasibilities. “Traditional BTS is focused on designing and developing to get the maximum sale price. BTR is a completely different strategy. By prioritising the resident’s enjoyment and liveability, BTR aims to attract a rental premium.”
Unlike traditional build-to-sell residential developments, BTR developments do not require pre-sales or pre-leasing to ensure viability, which significantly reduces development timeframes.
“Yes, it may be a lower yield compared to other non-residential investments. But it’s also a strategy to diversify your portfolio. Property sale cycles go up and down, but people will always need to rent.”
But what does a successful BTR project look like? And how do the key performance indicators evolve? Altus Group’s ARGUS EstateMaster helps developers run scenario analyses to make the smartest decisions.
There’s a lot to consider, from stock availability to target markets. “When the target market is renters, the product itself is very different. The design must maximise the experience for the tenant.”
Lisbona offers several instructive illustrations. BTR developments typically include more shared space, like rooftop bars, cinemas, gyms and gourmet kitchens, as well as hotel-style amenities such as concierge desks and parcel pick-ups.
Eye-catching façades aren’t as important in BTR developments as the durability of materials within. Developers are also incentivised to invest in energy and water efficiency as they hold the asset over the long-term.
When everything from floor space ratios to façades can vary, and these variations can influence a project’s feasibility, how do you weigh up the risk and reward?
“To crunch the numbers, developers must model everything from capital expenditure to ongoing maintenance costs, absorption rates and vacancy, and their impact on cash flow over time,” Lisbona notes.
Some developers are “dipping their toes in the water” with a hybrid model. “They are building two residential towers – one build-to-rent and one build-to-sell – that gives them options to reduce their debt exposure and offset some risk. But that brings even more modelling complexity.”
Real estate development is always about balancing risks versus returns. “To test project viability of BTR you need to calculate an entirely new set of KPIs – and they can’t be done on the back of an envelope,” Lisbona concludes.
Find out how Altus Group’s ARGUS EstateMaster can help you appraise your next development opportunity, build industry-standard feasibility reports and manage detailed project cash flows and forecasts.