Are the tectonic plates shifting for Build to Rent in Australia?
New research paper examines the current strong interest in the ‘Build to Rent’ sector and why it is gaining momentum
Will the Build to Rent residential sector challenge Australia's dominant strata investment model and re-define the 'great Australian dream'?
A new research paper from JLL, titled 'Build to Rent Residential: Australia's Missing Sector' examines the current strong interest in the sector in Australia, why it hasn't worked in the market until now and the factors that should make it different this time.
Build to rent (or multi-family housing as it is known in the US) generally refers to multi-unit residential dwellings built and designed specifically to be rented out by a longer-term single landlord (institutional or private).
The JLL paper states that for build to rent to establish itself as a viable sector in Australia, parameters around residential investment and ownership will need to continue shifting.
JLL's Head of Residential Research in Australia, Leigh Warner said, "There does remain a number of challenges for the sector to overcome in Australia. However, we believe that there are some powerful trends that are working on both the tenant demand side of the equation and in fueling investor appetite for the product that will help overcome these challenges and see the steady rise of the build to rent sector in Australia over the next decade.
"Demographically, there will be strong growth in key renter target market segments in Australia over the next decade, particularly 25-35 year olds and 'empty nesters'. This growth, coupled with clear trends toward higher proportions of the population renting and living in apartments, creates a very favourable demand backdrop for build to rent to succeed. In our view, some of the potential benefits of stock specifically designed and operated with renters in mind will also help drive demand once consumers are educated on what these benefits are.
"On the other side of the equation, there is a strong 'pull' factor driving interest in the sector, which is very strong latent investor appetite for the product. Large global pension funds and sovereign wealth funds are attracted to the stability of income the sector offers and the counter-cyclical nature of the income profile.
"The stability and counter-cyclical performance of the sector have been demonstrated by the performance of the rented sector through the Global Financial Crisis. Australian investors are also getting familiarized through investing in the sector in other countries and, with returns in other core real estate sectors now seemingly 'lower for longer', the relative returns of build to rent in Australia are now more closely aligned with these sectors.
"The bottom line is that longer-term Australia will not support enough new assets in the office, industrial and retail sectors to satisfy internal and external investor demand for prime grade real estate assets. Build to rent is one of the few alternative sectors that offer large investors the scale they will need," said Mr Warner.
JLL's Director of Research Strategy – Asia Pacific, Dr David Rees said, "The existing dominant model of private investment in strata titled rental stock, which is driven by capital growth and post-tax returns, has driven gross residential yields down to a level where it is hard to make build to rent investment competitive.
"However this model, which is built around small-scale private landlords, is likely to be less rewarding to investors in a future low inflation, low interest rate environment. The sector also lacks the flexibility to respond to the growing diversity of tenant demand as the profile of renting households changes.
"Evidence from offshore markets illustrates how build to rent landlords are able to offer a wider range of services such as recreation services and security of tenure, including flexibility in longer-term leases and professional management of properties," said Dr Rees.
Mr Warner added, "The build to rent sector has the capacity to attract significant investment funds to the residential sector, leading to an increased supply of apartments as well as greater diversity in the type of product available to tenants. With a less volatile construction profile, the build to rent sector can contribute to increased stability on the residential sector as well as contributing to improved housing affordability. In theory, the build to rent model does focus a lot more on the income return and less on capital growth than the prevailing strata model, so the sector's rise in itself should assist in allowing yields to rise slowly over the longer-term."
How big could Build to Rent Residential be in Australia?
JLL estimates that if Australia were to reach a relatively moderate level where Build to Rent represented 10% of all institutional investment in real estate, this would translate to around $40 billion. This figure is still less than 1% of all Australia's residential housing stock institutionalized.
The JLL report notes that while it is too early to predict the growth profile of the build to rent sector in Australia, it does have the potential to be very large and to grow relatively fast, as has been case in many other market globally.
"The US 'multi-family' sector is now a deep, mature market. In the UK, Build to Rent is still a relatively new market and accounts for only around 4% of institutional real estate investment, but the sector is growing rapidly.
"Internationally, analysis of the US, Japan and the UK shows that build to rent residential has broadly delivered comparable returns to other sectors over the past decade, particularly on a risk-adjusted basis," concluded Dr Rees.