How "Build-To-Rent" is shaking up the residential development landscape

“[Build-to-rent] is a nascent sector... however, BTR is expected to take off, with the market to grow nearly tenfold in the next five years.”

Last week, Ready Media Group published an article exploring Pace Development Group’s latest offering, and how it coincided with the rise in popularity for the build-to-rent (BTR) sector. Now, new market research from Cushman & Wakefield is highlighting just how prominent BTR could become, even within the next five years. 

“It is unlikely that the current supply of Australian housing will absorb forecast demand, pushing rents higher. Population growth supporting tenant demand, higher rents increasing investor returns, and a significant amount of capital targeting Australian housing are all tailwinds for build-to-rent over the next decade.”

- Sean Ellison, Cushman & Wakefield Research Manager, NSW 

What is Build-to-Rent? 

BTR is a class of real estate assets encompassing institutionally-owned residential buildings. Unlike the more traditional build-to-sell (BTS) model, where a developer might construct an apartment complex and then sell each individual unit, BTR developments are rented to residents subsequent to completion. All of the units are owned and managed by a sole property manager.  

As income is generated through rent, revenues flow throughout the life of the project, rather than being received in a single lump sum, all whilst the owner faces maintenance and staffing costs. 

With there being fewer tax incentives for BTR in the residential property market, developers have conventionally eschewed this approach in favour of the BTS model. But this is changing rapidly. 

Why is it becoming more popular? 

In Australia, residential property has traditionally not been an institutionally-owned asset class due to relatively low yields and a market and taxation structure that favours capital gains. However, with yields on other forms of commercial investment declining in recent years, BTR is starting to become a viable alternative. 

Beyond just providing ample return to an investor, BTR also addresses a major concern in Australia right now; the housing supply issue. With demand currently exceeding supply, BTR will hopefully provide low-to-medium income renters with a reserve of affordable tenancy options.

It’s this which has motivated the Victorian government to offer land tax concessions for eligible BTR projects that are completed and operational between January 1st 2022 and December 31st 2031. These newfound incentives have created an appetite from developers for the sector. 

How big is the sector in Australia right now? 

Currently, there are only 1,859 apartments operating across six projects: one in Victoria, two in Queensland, two in Western Australia and one in New South Wales. But that figure is about to soar. 

According to Cushman and Wakefield, the number of apartments is set to nearly double every year through 2024.  

“Currently, construction is expected to peak in 2022 with 12,848 units under construction, though as more projects are planned the construction pipeline in later years is expected to see a bump.” 

Developers like Assemble, Gurner, Sentinel and Investa are all committing to projects in the BTR space, and this is set to transform both Australia's residential outlook, as well as specifically Victoria’s place in the sector. Victoria will go from having one operating BTR development, to possessing the majority share of BTR apartments in Australia. 

The major projects (and the strategies that underpin their locations) 

On a recent episode of Ready Media Group’s The Roundtable, Rob Langton and Josh Rutman sat down with Mark Fischer, Brian Farrelly and David Hill, to discuss the rise and future viability of BTR projects. Mark Fischer, the Co-Founder and Global Head of Real Estate at Qualitas Group, explained the demographic considerations taken into account when assessing feasible locations for developments. 

“The right demographic was 25-to-39-year-olds. That was where the biggest pool of rental customers in Australia is currently, and is going to be for the foreseeable future.” 

During a separate episode, Chris Key, the Managing Director of Greystar Australia, explained that their site selection process has an “urban focus”. 

“The things we look for in those urban locations: what does the age demographic look like, and do they sort of slot into the right characteristics that would typically rent homes from us. We look at, obviously, transport links. We look at the local offering in terms of lifestyle amenity.” 

Many of the biggest developments follow these considerations. In 2019, Milieu and Mirvac partnered together to purchase 395-411 Albert Street in Brunswick, a 1.03-hectare landholding made up of 7 consolidated properties, that is set to house over 500 BTR apartments. The suburb has a much higher percentage of its population aged in its late twenties than the rest of Victoria (16.2% of Brunswick is aged 25-29, compared to just 7.4% of Victoria as a whole). That, in combination with the site’s proximity to Brunswick Station, seem to adhere to the criteria Chris Key and Mark Fischer have laid out. 

With their demographic consisting of a younger clientele who are looking to live in inner-city areas, BTR developments tend to have a higher mix of studio and one-bedroom apartments than the BTS model. For example, at the aforementioned Brunswick site, of the 501 residential apartments earmarked for construction, 275 are designed as studio or one-bedroom apartments. 

Development Summary for 395-411 Albert Street, Brunswick

With additional BTR projects in suburbs like South Yarra (Greystar is constructing 625 units between two towers on Yarra Street and Claremont Street) and North Melbourne (Hines is developing 220 rental apartments at 36-58 Macaulay Road), it’s clear that for the time being, many of the biggest Australian BTR developments are finding their home in Melbourne’s most desirable urban areas. 

What obstacles does BTR face in Australia? 

“I had very early on advice from [Bob Faith], who said to me, “Look, Chris, you’re going to experience people who will tell you that you can’t do it. It’s different here and it won’t work.” He said, “I’ve had that same experience in every place we’ve been to.” And I agreed with him.”

- Chris Key 

Cushman & Wakefield’s market research indicates that BTR faces three primary hurdles as it continues to grow.

Tax 

Currently, unlike BTS, a BTR developer has to pay the 10% goods and services tax (GST), and additionally, their projects are ineligible for the Managed Investment Trust (MIT) tax concession. For foreign investors, this adds significantly to the capital requirements of a BTR development. 

But with both the Victorian and the New South Wales governments offering land tax concessions, it appears that it’s only a matter of time before BTR is taxed in a similar way to its BTS brethren. As more states become engaged in the BTR sector, the federal government will likely be induced into revising their legislation, and widespread change could very well follow. 

Costs 

BTR developments typically utilise more amenities, and demographic demands often dictate that they are built in central locations. As such, there is a lack of quality land available for these projects, and the land that is available is highly sought after. Additionally, construction costs are in the process of rising, though this is in part a result of a lack of resources, as a result of the the slowdown in supply caused by the COVID-19 pandemic. 

Financing 

“You have to have multi-decade capital available.”

- Mark Fischer 

Given that BTR is a long-term class of asset, developers need to bring significant capital to the table. BTR developments have a more extended cash flow and less initial liquidity, which can make raising funds more difficult compared to alternative models. But part of this issue stems from BTR’s lack of a definition.  

As Brian Farrelly asked on The Roundtable, “It’s not residential. It’s not commercial. Is it commercial residential?” Whilst student accommodation is considered commercial residential, and is subsequently eligible for a range of concessions, BTR currently sits in a sort of limbo. As landmark BTR projects are developed over the course of the next half decade, institutional lenders will start to develop the historical data necessary to give them more confidence in defining the sector, and the growth rate will, in all likelihood, start accelerating at a compounding speed. 

In summary... 

As the share of renters in Australia continues to increase due to immigration and affordability issues, BTR is a practical approach that addresses some of the key issues facing the housing market over the next decade. The rise in BTR development is not an instant fix, particularly without legislated incentives for meeting affordable housing quotas. But given the success of BTR in the USA and the UK, many of the obstacles that the sector has faced in Australia are a product of how new it is. As developers, lenders and governments become more familiar with BTR’s structures, expect the model to grow exponentially.

You can view The Roundtable: Episode 1, with Chris Key and Julian Anderson here.

You can view The Roundtable: Episode 2, with Mark Fischer, Brian Farrelly and David Hill here.