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By Niall McSweeney, Senior Director, Asia-Pacific | 28 February, 2021

This article originally appeared in The Urban Developer

The resilience of established build-to-rent markets globally is enticing institutional investors to Australia, real estate consulting and software heavyweight Altus Group says.

Altus Group, which has long championed the use of big data to understand fast-changing market trends, expects the next 12 months to be a key period for the nascent asset class to finally “make the move into the mainstream”.

The group’s latest Investment Trends Survey has revealed build-to-rent is quickly becoming an increasingly strong option for investors who are pivoting away from traditional office and retail investments.

“Altus Group is in a unique position due to our global operations to shed some light on this space,” Altus Group senior director Asia-Pacific Niall McSweeney said. “We know from our global market data that build-to-rent or multi-family is proving to be the sector of resilience. The push for economic recovery across the Australian market is now driving more rapid change and transforming the risk and return profile for those in the residential development space. Build-to-rent also provides diversification from traditional asset classes and a secure revenue stream in a volatile economic climate.”

Investment trends survey: Altus Group

^Source: Altus Group

 

Momentum for build-to-rent intensified over the last 12 months as interest and investment surged resulting in a record number of projects now in the pipeline.

The strong pick-up follows cuts to land tax applied to a number of projects announced in NSW and Victoria last year.

Sydney and Melbourne are now likely to be at the epicentre of an Australian “build-to-rent boom”, with rental apartments affording tenants with security of tenure as both cities rank third and fourth as the least affordable cities to live in globally respectively.

“Our recent trends data has affirmed that overseas demand for multi-residential assets remains robust as pent-up demand, as well as low interest rates, continue to push the market forward,” McSweeney said.

“Locally, we are now on track to see the highest number of completions in the sector this year, making the sector a reality and driving consumer and industry confidence.”

McSweeney said the UK market, which is currently about five years ahead of Australia’s, kick-started the sector by giving developers breaks on key infrastructure contributions, which cut as much as 6 per cent from the cost of development and made long-term rental housing viable.

The UK now has almost 40,000 complete build-to-rent dwellings and another 100,000 under construction or in planning.

▲ Australia’s BTR pipeline grew 68 per cent through 2020 and there are now 40 projects incorporating 15,000 units—55 per cent of which are in Melbourne.

Offshore institutional investors have been key to facilitating the first wave of projects in Australia with US property platform Greystar recently putting together the largest fund yet in the local market, a $1.3 billion vehicle seeded by two inner-city Melbourne projects.

Canada’s Oxford Properties is pursuing the first BTR project in Sydney’s CBD, adding a Melbourne project to its portfolio in December.

Local player Gurner has partnered with Qualitas on a $1 billion development fund, while ASX-listed Mirvac is an early mover as well.

“We know from overseas markets that scale is crucial to achieve operational and cost efficiencies with most projects averaging upwards of 350 units,” McSweeney said.

“A ‘build it cheap’ approach won’t work with build-to-rent. Buildings deemed sub-par will attract low rental yields and high vacancies. Affordable, high-quality and sustainable design measures should be a priority from the early planning stage”

Australia, which has long lacked government support to kick start the sector, is now ripe for disruption following the removal of tax and other hurdles during to Covid-19 pandemic.

Last year, Victoria halved the land tax levied on build-to-rent developments from 2022 through to 2040 following a similar land tax cut for build-to-rent projects adopted by NSW.

The changes will make more projects viable as build-to-rent and enable developers to achieve a similar development profit (e.g. 15 per cent margin on cost) as seen across build-to-sell projects.

“The ‘Australian dream’ of homeownership has become increasingly difficult as property values have increased at rapid rates,” McSweeney said.

“Strong culture and belief in Australia that homeownership correlates to success and the perception that renting is a short-term stepping stone to home ownership still needs to be shifted.”

“All the signs indicate an exciting future for this emerging asset class in Australia that could be key to helping solve the housing crisis and provide investors with predictable long-term returns in the process.”

Altus Group leverages significant global market experience to provide expert advice and software solutions for the development and investment management of build-to-rent assets.

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