Home Property Australia Institutional investors sharpen focus on build-to-rent, but challenges loom

Institutional investors sharpen focus on build-to-rent, but challenges loom

  • February 21, 2024
  • by Property Australia
Sentinel launched Melbourne’s latest build-to-rent development, The Briscoe by Kinleaf in West Melbourne last week

Institutional investors are sharpening their focus on residential market, ensuring build-to-rent (BTR) supply will increase by a multiple of almost 3.5 times to 16,500 apartments by 2026, according to Colliers Residential Investment Review 2023.

Colliers National Director of Residential Capital Markets Robert Papaleo said the urgent need for institutional investment and alternative housing models to provide a helping hand for Australia’s housing crisis has many parallels to the UK’s situation in the early 2010s, ahead of institutionalisation of its now robust BTR market

“Despite limited exposure to the Australian residential sector historically, market activity in 2023 indicated growing interest from institutional investors, who drove the lion’s share of BTR sales in a year which saw 43 per cent of total sales activity since 2015.

“Domination of the rapidly expanding BTR market is a foot in the door to the broader $10.2 trillion residential market for these investors, who have been renowned for providing residential accommodation overseas for decades and are well-poised to support alternative housing models in addition to greenfield development.”

By the end of 2023, completed institutional BTR assets represented an estimated market value of around $3.3 billion, which is approximately 80 per cent of the national BTR market and 0.03 per cent of the total value of Australia’s residential market.

Melbourne currently has the highest share of Australia’s completed BTR stock (48 per cent) due to greater availability of well located, larger sites with permitted schemes of 300+ apartments historically. While South-East Queensland boasts the second largest share of completed stock (39 per cent), due primarily to conversion of the former Gold Coast Commonwealth Games Village.

“Notwithstanding the significant historical barriers to institutional investment in Australia’s residential sector, the BTR market has rapidly evolved since the first institutional-backed BTR projects were delivered in Perth (2017), Gold Coast (2018) Sydney (2020) and Melbourne (2022).” Mr Papaleo said.

“The nature of projects is maturing, as market participation of institutional investors, who account for six of the top 10 BTR platforms in Australia, 13,650 completed and committed BTR apartments, as well as sites which may provide an additional 8,250 apartments, induces developers to bring forward projects with innovative partnership models and alternative structured deals.”

Over $5 billion in capital was raised in 2023 to support the Australian BTR sector, and while the current average project encompasses 281 apartments, projects set to be delivered by 2028 will contain an average of 365 apartments.

Just last week, Sentinel launched Melbourne’s latest build-to-rent development, The Briscoe by Kinleaf in West Melbourne.

The 172 apartment Briscoe is Sentinel Australia’s third operational BTR apartment community in Australia.

Likewise, last week Aware Real Estate announced its latest BTR development in Zetland, Sydney. 

However, some little-known tax changes may threaten institutional investment in the sector. 

Earlier this month the Senate Economics Committee released its review of the proposed Thin Capitalisation legislation, in which it recommended its passing. 

Property Council Group Executive Policy & Advocacy Matthew Kandelaars said the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Bill 2023 continues to threaten the government’s 1.2 million homes by 2029 goal.

“Instead of aligning with the government’s housing goals, this Bill works against them.

“More broadly, the Bill will result in diminished investment returns for multiple large-scale projects, particularly in sectors like housing and build-to-rent, making them financially unviable to proceed.

“While we welcome the amendments made to the Bill since it was first introduced, we will continue to work with the government and the Senate to ensure that this Bill maintains Australia’s appeal as an investment destination,” he said.

Fresh EY research, commissioned by the Property Council of Australia, also showed that lowering the managed investment trust (MIT) withholding tax rate to 10 per cent for build-to-rent projects with an affordable housing component could accelerate the building of 10,000 affordable homes over 10 years. 

The recent modelling expands on EY’s 2023 research, commissioned by the Property Council, that showed a 15 per cent managed investment trust withholding rate can result in 150,000 apartments by 2033, a change announced in the May 2023 Federal Budget.  

The specifics of this budget measure are yet to be finalised, but the Property Council has warned that forced affordable housing elements at the 15 per cent tax rate for build-to-rent housing would jeopardise those 150,000 new apartments.