Build-to-rent: Do your numbers stack up?

Australia’s burgeoning build-to-rent sector requires a rethink of feasibility modelling and new standards to ensure everyone from appraisers to lenders are on the same page, says Altus Group’s Anthony Lisbona.

Australia’s pipeline of BTR assets, or multifamily as it is known in the United States, grew by 68 per cent last year alone, according to CBRE. Forty projects across 15,000 units are underway, with Mirvac, Blackstone, Sentinel, Investa, Oxford Properties and Greystar all pushing the BTR barrow.

"As the big property players throw their hats in the ring, the industry needs software solutions and standards to ensure it capitalises on the BTR boom" says Anthony Lisbona, Product Manager for Altus Group.

“How you measure feasibility of a build-to-rent project is completely different to build-to-sell. The question is not ‘what margin can I make over two years?’. It’s ‘will I make a return over 20? Spreadsheets and back-of-the-envelope calculations can’t deliver the robust feasibility modelling and complex analysis required to ensure the numbers stack up, build-to-rent investors are looking for returns over decades, not years. This means investment is less sensitive to economic cycles than traditional build-to-sell. On the other hand, build-to-rent feasibility needs to evaluate long-term performance, make detailed leasing assumptions and consider turnover costs every time a tenant leaves.”

Evaluating long-term performance

BTR operators also make long-term investments in lifestyle amenities – and many of these, whether it is 24/7 concierge or coworking spaces – come at a cost. “How will a building management team deliver the customer service that keeps renters renewing year after year? This is a question that must be considered as part of the feasibility process,” Lisbona explains.

“Then the feasibility model needs to consider long-term upgrades. Will these enhance the building’s value, uncover new revenue streams, or maintain a competitive position? Will new amenities allow rent increases? There is a lot more to consider than standard build-to-sell."

“Even companies with reasonable reporting systems are finding they aren’t suitable to understand the complexity of build-to-rent. Lenders are looking for robust modelling that they can trust. A lot of people are coming to us because they need to have confidence in their modelling before they go to the bank.” Lisbona says this points to the need for standard metrics to ensure “everyone is talking the same language”.

Three key takeaways for success

Altus Group has three key takeaways for BTR feasibility modelling:

Start with your strategy

“Today’s decisions can affect your asset or portfolio for years, so define your priorities against your strategy and then forecast your financial position accordingly,” Lisbona advises.

Understand your unique asset

Each property is unique, and measuring an asset’s future performance against comparable properties, both in type and geography, is not always easy. Reliable benchmarking data can help.

Measure to manage

“When you know where you stand against industry best practice, you can find opportunities to improve,” Lisbona adds.

“BTR effectively transforms developers into investors. But that means they need multiple perspectives across the entire lifecycle – and those perspectives can’t be found in spreadsheets.”