This article is from the Australian Property Journal archive
AUSTRALIA’S fledgling build-to-rent sector could attract up to $300 billion worth of institutional investment over the next 20 years.
Also known as multifamily, the sector is strongest in the US, where it is only behind office in terms of institutional property investment, currently accountingfor around 20% to 25% of the US$2 trillion invested in total.
After 25 years of growth in the US – it is still an emerging sector in the United Kingdom – it takes in around 15% of properties with five or more units.
Although in its infancy in Australia, the sector has become a hot talking point as it emerges as an option to break the grip of unaffordability on the residential market, as well as presenting a viable investment as continually firming commercial yields tighten towards 4%.
CBRE’s head of research for Australia, Stephen McNabb, speaking ahead of the release of a paper on the sector from the firm, said that factoring in that 35% of Australia’s population rent, if the build-to-rent market here evolved to the level of the US, up to 5% of the country’s dwelling stock by value could be institutionally owned in several decades.
“In today’s dollars, that represents circa AU$300 billion worth of residential assets or around 300,000 apartments,” he said.
CBRE’s paper outlines four key propositions for the sector to thrive in Australia, including “an acceptance of build to rent as a new product paradigm, acknowledgement of the asset class as an investment proposition, understanding the customer value proposition and recognition of the various policy influences”.
McNabb said investor and consumer objectives have combined to make market conditions more supportive of build-to-rent residential products than in the past, and changing investor expectations would be a key driver.
“Required returns are falling across all asset classes and there is now a greater focus on investments which provide income stability and steady growth while limiting capital risk.
“Residential assets also provide a stable, long-term income stream at a time when investor demand for longer tenure assets is increasing as the population ages. The ability to de-risk development businesses and to spread these returns over the life of the ‘end-product” provides for a compelling risk-adjusted proposition,” he added.
Speaking at the recent Australian Property Institute’s Victorian State Conference event, APN Property Group non-executive director Howard Brenchley said, “I have seen some modelling where the developer leaves their development profits and then rents them out and those numbers showing it could stack up”.
“But it could only stack up for this moment whilst interest rates are low and you could get the cheap debt, so you could get the 4% to 5% yield from the residential development.
“It will only ever stack up if residential yields move up further – that’s the bottom line,” Brenchley said.
Also at the event, SG Hiscock & Company director Grant Berry said in the past, the sector was not as attractive when compared to other asset classes such as offices, which was previously generating yields in order of 7% whilst residential was providing 3.5% to 4% yields.
However conditions have changed, Berry said, because of prices.
“Now office yields are down to 4%, take it down another 100 basis points, it is down to 3%,”
SG Hiscock is an investor in the US multi-family sector through equities.
Berry said the differences between offices and residential is that offices can have vacancies of up to 20%, whereas residential does not.
In the US, Colliers International research shows the occupancy rate nationally was 96.1% during the second half of 2016 with rental growth averaging 3.7% annually. According to real estate research firm Reis Inc, the US office vacancy rate was 16%.
The CBRE paper will say that higher service levels will be critical to attracting tenants from the existing private rental market if the build-to-rent model is to succeed in Australia.
However, whilst the sector may relieve pressure on existing housing stock, “it won’t, by itself, be a panacea for housing affordability”.
McNabb said it would bring economic benefits in reducing household debt and the potential to transform financing of the sector away from traditional intermediated finance for development and end-product purchasers.
He noted that the Federal Government would need to consider zoning and tax changes to provide certainty to the asset class.
Funding will be another key consideration, CBRE’s Simon Cowley said.
“In the early phases, the capital stack will be formed mainly through equity rather than debt,” Cowley forecast.
“It will entail institutional investment via either the forward-funding or forward-commitment route, via joint ventures with developers and through partnering with asset managers with expertise in this sector.
“This will be the quickest route for institutional investors to get scale, and by partnering with expert asset managers, they will gain efficiencies in building a platform/brand and start to mitigate the gross–net deductions of managing these projects,” he added.
Also speaking at the recent Australian Property Institute’s Victorian State Conference event, AustralianSuper senior investment manager property Christine Phillips said there is definitely a market for institutional owned professional run, rental accommodation, with security of tenure and “more and more people are coming to the decision that they don’t want to own a house anymore”.
“These would offer exceptional amenities, so you have gyms, swimming pools and recreational areas. But the question is how do we unlock the supply?” she said.
AustralianSuper is already an investor in the sector in United States.
Phillips said the supply side is more problematic because of mum and dad investors, who are “very actively involved” in the residential property investment sector.
“Land prices are also so high,” she pointed out, “So to make it work, you basically got to disrupt the feasibility at some level, you got to get the land cheap, build more cheaply.
“You’ve got to take development profit out and proof up the income side… and you’ve got to generate efficiencies to operate and run them,” she added.
Phillips said there are players in Australia who are demonstrating the capabilities to do it.
“We do have some operators that are closer to able to do that, Lendlease and Mirvac. They are able to not take a development profit; they’ve probably got land that is sitting there at a cost that makes the numbers stack up. They’ve also got the end operation, so they have advantages,” she said.
Phillips said the question that had to be asked was, “What return do we need to invest in the sector in Australia?”
Mirvac appears to have established an early benchmark, recently started tapping institutional groups via UBS to create a “club” for developing and owning build-to-rent projects, with an upfront yield of 4.5% targeted.
Salta Properties announced in May it would develop Melbourne’s first major build-to-rent project in the form of a 260-unit, $330 million Docklands tower. Apartments will take up the top 16 floors of the 26-level building at 699 Bourke Street, which will also include a 170-room Hotel Indigo, and completion is expected in 2020.
Australia’s first multifamily project will be the 1,250 Gold Coast development built for next year’s Commonwealth games by a $500 million fund managed by UBS Grocon Real Estate.
Australian Property Journal
