This article is from the Australian Property Journal archive
WITH rental stock limited in almost 70% of local government areas in the country’s major capitals and current supply not meeting demand, the market is ripe for the emerging build-to-rent sector to fill the void left by residential investors.
According to the latest research from Savills Australia, much of the five major capital cities’ local government areas are in need of rental supply, which is pushing rental growth far above the historic average of 3% per annum.
This on top of a shrinking supply of new residential supply, Savills believes, is the ideal environment for the country’s emerging BTR sector.
In September of last year annual new apartment completions were down 30%, when compared with the same month in 2017, which is anticipated to continue to drop to 40% below its peak in 2022 and 2023.
“With new rental supply not plugging the current supply gap, there is considerable scope for investors to deliver BTR across all locations and price points,” said Conal Newland, head or operational capital markets at Savills.
Savills found that BTR may be an obvious solution to this falling rental supply, which could be exacerbated by a return of overseas migration, which is anticipated to outpace pre-pandemic levels by 2024 to 2025.
However, last year’s federal government Intergenerational Report forecasts the reduced population growth will be the most enduring effect of the pandemic on Australia’s economy, leading to concerns of an oversupply of units particularly in CBD markets.
With late-2021 SQM Research figures showing the CBD apartment vacancy rate was at 7.2% in Melbourne and 6.9% in Sydney, while outside of city centres rental vacancies continued to tighten.
Analysis based on Savills research forecasted that 2024 will see a peak in the annual delivery of BTR residences, with as more than 10,500 anticipated. This would coincide with both record levels of overseas migration and predicted residential completions reaching their lowest level since 2014.
More materially, there are currently over 5,000 apartments in the sector under construction, with 2,300 apartments anticipated for completion in 2022.
“We look to more established BTR markets such as the UK and US for an indication on how the Australian market will progress, and we expect consolidation in the future, as has happened in BTR markets globally,” said Paul Savitz, director of operational capital markets at Savills.
In October of last year, the Victorian government announced that build-to-rent developments completed and operational between 2021 and the end of 2031 will receive both the 50% land tax discount and full exemption from the absentee owner surcharge for up to 30 years from 1 January 2022.
Likewise, in 2020 the New South Wales government’s announced land tax for build-to-rent projects would be cut in half to boost the sector and address housing affordability, following the Victorian government’s announcement of a similar initiative.
The latter quickly led to Canadian giant Oxford Properties committing to a $450 million BTR project in Melbourne’s Footscray,a suburb which for several years has been listed as at risk of unit oversupply, making the list of top 10 danger zone suburbs for oversupply only last October.
“As BTR continues to mature as an asset class, we expect greater liquidity and economies of scale will put downward pressure on the sector’s risk premium,” concluded Savitz.
