Ep 25: Why a pause in apartment development is good news for build-to-rent
Australia’s build-to-rent sector gets a kick-start, improving options for renters.
Meet our speakers
James is the fund manager and leads the Australian build-to-rent business on behalf of Investa and Oxford Properties. Having been involved in shaping the strategy from inception and underwriting and now execution, James also sits on the Property Council of Australia round table for build-to-rent as well as being a member of the PCA capital markets committee.
In the U.S it is well established, and the same goes for parts of Europe. In the U.K, since the global financial crisis, it has been a major draw for capital, too. In Australia, though, things have moved a little slower. That is, until now.
If you haven’t yet guessed – though the title of this episode may have given it away - I’m talking about the build-to-rent residential sector. That’s apartments built specifically for rental only, managed professionally, and promising to trump tenants’ experience of renting in Australia, which, let’s face it, can sometimes be pretty grim.
Joining me on this podcast to tell us more are JLL’s head of residential research Leigh Warner, and fund manager in build-to-rent at Investa, James Greener.
I’m Rebecca Kent. And you’re listening to JLL’s Perspectives podcast.
Leigh give us the down-low on Australia’s residential market right now
It's a really strange market at the moment because the general housing market is so strong, but the apartment market is a little bit disconnected. The bottom line is the apartment demand, particularly off the plan apartment demand still relies quite heavily on investor demand. So the stimulus measures that we've had in the market have boosted owner-occupier demand. But at the moment investor demand is starting to pick up but it's still subdued.
Overseas investors certainly are still not back into the market. And they are also not likely to come back in force until after borders reopen. So it's a bit of a strange situation.
So for build to sell developers, they still need pretty high levels of pre-commitment. Generally, banks want to cover their whole debt position with free sales. So that's quite a large covenant. That's particularly hard for large developments to reach those pre-sale hurdles. And so it's still a tough environment to get a project going. And few are even starting.
In Melbourne and Sydney in particular, there's still a bit of stock from the last cycle that still needs to be sold. So that competes with pre-sales as well. And it's still a quite tough market to get a large high-density project in particular going. So developers are more focused on smaller boutique suburban developments that are more amenable to the owner occupier.
What does this all mean for build-to-rent, then?
I'll start by talking about what we're talking about with build-to-rent. Really we're talking about institutional ownership of residential for long-term rentals. And we're talking about a large scale of at least 100 apartments. That's the sort of minimum. And we're talking about professionally-managed stock. Typically, with on-site staff. This is the scale of built to rent. So we're not talking about smaller developments.
The current situation: I think these market dynamics that I'm talking about are a real opportunity for build-to-rent. There's less competition from those built-to-sell developers, particularly in that high-rise market at the moment. We haven't seen the site values correcting in a big way. But there's less competition. And with commercial development also stalling in many sectors, there's a lot less competition to acquire high density sites.
So this is a real opportunity for build-to-rent operators. There are a couple in the market that that is looking actively for opportunities, with a lot less competition.
The other important factor is near-term what we anticipate is the supply pipeline from the build to sell market to stay low over the next few years. And as borders, open demand will come back quite quickly. And that will lead to a shortage of stock.
It will take the build-to-sell market quite a long time to build up supply. So, the real opportunity there ... we think there'll be some real pressures. Most of the country is tight vacancy already - except for Sydney and Melbourne, we've got around 1 percent or below vacancy across the country. Rents are starting to grow. Things will come back with borders reopening in Sydney and Melbourne quite quickly, and we'll see some rental pressure.
The opportunity for build-to-rent is really to get in front of that queue for the next cycle and getting to that market early. Because you don't have that marketing period that the built to sell developments will have so they'll be in the market earlier and be able to capitalise on that opportunity, I think.
James, at Investa you’ve just launched a new build-to-rent management platform in Australia, called Indi. This has been in conjunction with the Canadian group Oxford Properties, which has a significant portfolio in the U.S. and had a huge role in institutionalising the sector in the UK. What are international investors seeing in Australia?
Before COVID, Australia ranked as one of the most desirable real estate investment destinations certainly in APAC, but also globally. Even pre-COVID, it was seen as the most transparent market in the region. So, in a post-COVID world, I think Australia just looks more attractive as a real estate investment destination than it did before. And that's largely due to how successfully it's managed to the pandemic, both from a health and an economic perspective. So, you've got investors that are comfortable with Australia's real estate investment track record in history. It's screened well, so you've now got large global investors, sitting back and assessing which sectors and what risk profile is the most appropriate for them in Australia. And it's in that analysis that we think build-to-rent in Australia looks very attractive. And I think that's evidenced by the recent activity that's stepped up, with groups like Oxford Properties really leading the charge.
Following on a lot of what Leigh said as well, I think broadly, there are four key pillars to what underpins the need for build-to-rent in Australia: So the first thing Leigh touched on and I agree with is just the lack of purpose built rental product. And that is directly linked to the current poor rental experience that the growing number of Australian renters have with the mum and dad landlords. And I can talk about my personal experience on that as well. Secondly, a significant purchase affordability constraint. So, the house price to income ratios is amongst the highest in the world. And house prices have just significantly outpaced rental growth and wage growth, which and that gap is only continuing to get bigger. Thirdly, the changing social and demographic drivers. So, there's over a third of Australians renting today. And that number is growing. And importantly and talks about our strategy as well and the key cohorts that we are targeting. More than half of millennials are now choosing to rent and again, that number is growing. And then fourth is Australia's population growth. It's forecast amongst the highest globally. So, the net overseas migration inflows into the country, expected to reach and even outperform pre-COVID levels once the international borders open up. And again, a big driving factor of those numbers are the millennials. And we know from our international experience, and certainly what Oxford see is that the millennials are just a key, the key target for this asset class.
My strong view is that investors do need more investment alternatives, because the core sectors of office, industrial and retail just aren't going to offer enough opportunities for investors to place the kind of money that they need to place long term. So, you've got to go wide. And then when you look at that subset of where you go wider, and you look at all those alternatives, there are some good potential business cases, the demand cases, but none of them has the size and scale that build-to-rent has. If we looked at this from the perspective of if we follow a similar growth path to the UK, if we followed that sort of growth path, by the end of this decade, we would be somewhere between $74 billion and $84 billion of investment in the sector. And that's rapidly catching institutional investment in industrial. It's not far behind industrial. That shows you the size and scale. Some good alternative investment opportunities can't rival those core sectors in size. Some of them will stay niche.
I want to reiterate, I agree with what Leigh said in terms of the scale of where this can go. It's absolutely the core asset class in the U.S - it's 11.5 percent of all housing stock. So, it's well and truly established, it's huge. Can we ever get there? We can dream. In terms of the UK, I think that's a much more relevant story. And I agree with what Leigh said again. If build-to-rent stock in the UK right now is around 1.7 percent of all housing, and that's after call it a decade, I think conservatively we could say that we'd achieve a modest one percent of housing stock by 2030. To Lee's point that's a $74 billion sector. That's a pretty attractive story when you start kind of pitching that too - and again, it's no surprise - groups like Oxford. They see that as attractive and that is why they're monetising the strategy.
James, Indi is targeting Millennials. Why is it that they are more interested in renting than buying? Owning property has always been part of the great Australian dream.
What we see internationally and what we experience here from the millennial consumer groups that we've spoken to, is they're the group that is more willing to travel, they're more willing to choose lifestyle over owning a property where they can afford to. They're at the age where they can make the most wage growth in their careers. And they generally career hungry. So for all those reasons, what you see in, in other kinds of gateway cities like London, New York, Washington - and we're certainly putting Sydney Melbourne into that camp as well - is that when the borders do open back up, these are the people that have seen how well Australia's fared through the pandemic, have seen the potential to further their career in Sydney and Melbourne. They will jump with both feet to get here. And if we can make that landing experience as seamless as possible, and give them a much better rental experience, certainly better than what I had when I landed here. I just think that is going to resonate so strongly through that age group.
This can be a circular argument because people will talk about changing attitudes and then they'll talk about affordability but the two aren't independent. There's a strong relationship. You change your attitude because of the circumstances in front of you. And I think that's what we've seen. And this is not an Australian trend. This is all around the world. I think we've seen a generation that has said, 'look, I don't want to do what my parents did, and live modestly on the urban fringe and then build my way up. I want to do things differently'. As James said, there's a desire to travel and to be career orientated. What's the sacrifice you have to make? Well,' maybe I rent for longer? I may not be giving up on the greatest Australian dream of owning a house at some stage. But I'm making a sacrifice. I want to rent for a longer period. So, I want a good rental experience, I want to be in the area that I want to live in, which is cool and that has great cafes and it's where my friends are. So, I rent for longer and I rent an apartment rather than being in a detached house'. So, there's a real attitude change that we've seen in many other countries, not just Australia. But it's a response. And it's a circular argument, as I said. It's a response to the circumstances that they're facing. So, I think it's very real. There's a nice little phrase of trading space for place. And I think people do want to be in the location where they live.
James, your renting experience when you moved to Australia is memorable for all the wrong reasons. Tell us about it, and also how living in a build-to-rent apartment would be different.
The entire kind of process from identifying through to moving in is a painful one. And that's exacerbated by the fact that when I moved here, I was along with many of the other Brits who'd heard of the Northern Beaches and Manly or I'd heard of Bondi. So really, my kind of target locations was limited and narrow. So, I think, firstly, things that come on to Realestate.com or Domain they're on there for all of two days before the agents are just inundated with offers over and above the asking price. You then must go through the rigmarole of these 10 or 15-minute viewing windows on a Saturday morning or a Saturday afternoon. So, you've got a group of say 20-30 people all looking for the same thing at the same price point. You might as well organise a minibus to take you from one place to the other because you bump into each other at every single inspection. So, it's demoralising. You're then putting your best foot forward bidding over and above what is advertised online to just get into what is effectively a blind kind of bidding war. Just to find out if you've got it or not when you move in.
There's no consistency. It's completely dependent on who owns that individual unit. Can you hang a picture? Chances are probably not. Is there something wrong with the property? Chances are probably yes.
51% of people who are renting are living in a home that needs repairs. Seven in 10 Australians who rent are concerned that a request for those repairs to be fixed would mean that their rent immediately increases. And one in 10 Australians who rent think that they will be forced to move in the next 12 months. So, put simply it's a model that gives all of the power and control to the landlord.
BTR completely flips that. We're giving the control back to the customers, the tenants. If you want a long term lease, have a long term lease, you want to personalise? Absolutely personalise. Gross rent, utilities included? That just makes things so much more convenient. So, I had a long and frustrating renting experience in Australia. I think I'd moved five or six times in as many years, which is extremely stressful and daunting in itself, especially when we made the move to Australia to further our careers and get stuck into the lifestyle of what Australia has to offer. Not to just continually find where I can live and continually move. So it hits a very personal string for me as well. So I'm a true believer that this asset class is going to resonate well.
Do you think that experience for renters may have improved since or even gotten worse?
I'm talking pre-COVID, which is where my renting journey kind of stopped. I don't think it was improving. I certainly think it was getting worse. There's just there's nothing that is looking to sway the balance of the control seats between landlord and tenant. The pendulum does not sit in the middle in Australia, it's way too far in the landlord's favour.
As I said, vacancy outside Sydney and Melbourne is tight. I'm Brisbane-based. I'm currently going into the market because I'm doing a renovation and I've got to move out for six months. Try getting a six month lease on a house with a dog. And that's another thing that James didn't mention. People with pets get discriminated against. That doesn't happen in other countries. In other countries, pets are welcome in rentals. I think this is starting to change generally. But I think Build-to-rent can help accelerate that change as well where there'll be no problem having a small dog or a cat in an apartment.
Pet-lovers will be celebrating the very idea of it, no doubt. Good luck with your rental journey, Leigh and thank you both for sharing your knowledge. All the best, James and Investa with the roll out of Indi.
I’m Rebecca Kent, host of JLL’s Perspectives podcast. Check out more episodes and read more about our guests at jll.com.au/perspectives-podcast.
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