L-R: Marc Kemp, Michelle McNally, Mark Lee and Belinda Chain on a panel at the Property Council Capital Markets Forum on 13 October 2022 in Melbourne.
With the build-to-rent (BTR) housing sector blossoming in Australia as more domestic and institutional investors get into the space, the nascent asset class still has some ways to go until it matches established markets such as the US or UK.
BTR housing provides superior security of tenure, better facilities and better ongoing service provision than is normally available to people renting in the private market. In overseas markets where the primary investors represent patient capital, often from pension funds, BTR housing also supports construction jobs even if the build-to-sell market is at the bottom of the cycle.
Australia’s BTR sector has developed enormously since early 2021. Savills data puts institutional grade BTR stock 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. However, it remains at pilot scale when compared to overseas markets.
Savills report that a record £1.6bn was invested into UK BTR assets in Q1 2022, the highest number recorded for a first quarter.
The UK’s BTR stock now stands at 72,700 completed homes with a further 46,300 homes under construction. The future pipeline currently stands at 106,400 homes, including those in the pre-application stage. This brings the total size of the sector to 225,400 homes completed or in development.
Meanwhile, CBRE believes 300,000 plus units will be delivered in 2022 across the US space, above the 206,000 units delivered annually since 2010 and 171,000 since 1994.
Belinda Chain, Director of Unlisted Property at the Future Fund Management Agency said the group doesn’t have direct investment in Australian BTR assets but is looking for opportunities.
“It isn’t that we don’t believe in the sector,” she said at the Property Council’s Capital Market Forum, “I absolutely agree with the need for the sector and its evolution.
“The whole team has participated in it directly and indirectly offshore and understand its European and US experiences and all the lessons learned there.
“We’re applying that to our particular capital characteristics about what do we do as a house versus other investors.”
Chain said exit analysis is critical for the group as the fund grows by creating tangible profits.
“Opacity of exit does make it extremely challenging when you go up against all other sectors in that total portfolio approach to justify why Australia versus the US market, which is incredibly sophisticated, or even a European market which trades very readily.
“So that has made it challenging – that relative value is the key – but we actively explore ways in which to access the sector.”
An exit plan is also important for Mark Lee, Senior Portfolio Manager, Australian Retirement Trust who said a lack of data and a secondary market made investment difficult.
“We are looking at it from the perspective that we can get stabilised US real estate multifamily at a six, seven or eight per cent [IRR] and that has a track record as a secondary market that has been trading for decades.
“So, from our side of things, if that’s our floor cost of capital then what does BTR bring into that from a risk perspective. When you add those risk premiums on top… it makes it a little more difficult.
“I think that’s where we’re trying to figure out how then, acknowledging that that’s the market, can we get that risk down to a level where we think we can actually play?”
Lee also pointed out the maturity of tax treatment, noting there are still issues, and if the market was willing to pay for a high amenity premium product as other barriers.
In early May the WA state government announced a 50 per cent land tax concession for eligible BTR projects, a move welcomed by the Property Council.
The Property Council has long championed significant BTR planning and tax reforms at Federal and State levels designed to attract the level of investment needed to put downward pressure on the cost of renting.
While there have been BTR policy successes in many states, more are needed. Successive Federal governments have also missed the opportunity to allow MIT distributions from Build-to-Rent housing to qualify for the 15 per cent MIT withholding tax rate consistent with investment in other property asset classes, among other initiatives designed to support affordable BTR housing.
The Property Council is continuing to champion these important reforms across the country, with a particular focus on the new Federal Government.