Build to rent: Mark Story A new option for investors
A revolutionary approach to affordable housing is poised to reshape the residential investment market
While building apartments with the express purpose of renting them out as a long-term asset is the largest property sector for investment overall in the US, most Australians have never heard of it. However, with affordability issues eroding Australia’s passion for home ownership, there are signs that the build-to-rent model (aka multi-family asset class) is about to take off.
Unlike Australia’s traditional build-to-sell strategy where there are multiple owners in an apartment block, in the build-to-rent (BTR) model the whole project is bought by one owner and leased out. With 2016 census data revealing that 30.9% of the population now rent, and Choice data indicating that 40%-plus have been in the rental market for over a decade, build-to-rent opportunities are clearly worth exploring.
From cradle to grave
The BTR model is simply a larger and more professionally managed version of property investors buying a single dwelling and renting it out. Assuming the US-based BTR model takes off locally, the renter experience – which as competition grows may include bolt-on goodies – promises to be a lot better than renting off mum-and-dad investors.
Admittedly, BTR is not exclusively a millennial story. However, research by loan comparison site Lendi, which reveals that 56% of Australians aged between 18 and 34 don’t believe they’ll ever own a property outright, suggests Australia is ripe to create communities of cradle-to-grave renters.
The tax treatment for those bringing these projects to market has prevented communities of lifelong renters from flourishing in Australia. However, the tide is slowly turning. From July 1, 2017 managed investment trusts (MITs) are allowed to develop or acquire affordable housing to hold for rent. To further encourage investment in new and existing affordable rental housing, the federal government, as of January 1, 2018, increased the capital gains tax (CGT) discount from 50% to 60%.
However, it’s clear that institutional investors/developers want a wider remit for tax breaks beyond BTR solely for social housing purposes. As a result, the NSW and Victorian governments have also been looking at ways to encourage large developers, including interested parties such as Mirvac Group, Lendlease, Frasers Property, Stockland and Grocon, to invest in apartment blocks that would be entirely available for rent.
Momentum building
Regardless of whether state and federal governments provide tax and/or other relief, Bob Faith, the founder of large US-based BTR player Greystar – which is eyeballing opportunities here – is adamant that Australia’s BTR sector is unstoppable. Assuming Australia’s BTR model is able to attract the average level of institutional capital in the US, Bryan Reid, of index compiler MSCI, estimates that it would equate to 30,000 new BTR apartments nationwide over the next decade.
Some large Australian financial institutions are no stranger to BTR, with REST Superannuation having 3000 BTR apartments from Boston to Austin, operated by Greystar. Rival super fund First State Super has also been in consultation with several major developers, including Lendlease, about BTR property investments. The fund’s 800,000 members, who predominantly include public sector employees such as police, firefighters and nurses, could potentially be offered lower rents than with apartments built to be sold.
Meanwhile, Grocon, in conjunction with investment manager UBS, is credited with having introduced the BTR model to Australia with its development within the Commonwealth Games athletes’ village on the Gold Coast.
The Games village redevelopment of 1252 dwellings, comprising one- and two-bedroom apartments and three-bedroom townhouses, is the country’s first large-scale institutionalgrade multi-family project, with homes rented to long-term tenants. With the Gold Coast project behind it, Grocon is working on its
next BTR project in the heart of Melbourne’s Southbank, with more than 410 apartments over 62 levels.
Other BTR developments across Australia include Salta Properties’ 260 units at 699 Latrobe Street in Melbourne’s CBD. Salta also plans a 400-plus apartment BTR residential project in Richmond.
In Sydney, Fortis Development Group is building purpose-built rentals in Double Bay, while in Perth Singapore-based Mead Point plans to convert the Sunmoon Resort at Scarborough Beach into a 45-suite BTR project. On a smaller scale, Sydney developer Rose & Jones retained ownership of all 16 apartments at its Bondi Beach development The Drift and has offered them as rentals.
Lifestyle decision
In light of Australia’s changing demographics, Damian Collins, of Momentum Wealth, says demand for long-term rental is no longer all about social housing for the “working poor”. With Grocon’s Southbank development at Docklands earmarked for executive-style tenants, it’s also clear that developers want BTR to cater for a broader structural shift that’s seen long-term renting become the lifestyle choice of millennials, young families and downsizers.
Collins suspects that executive tenants at Grocon’s Docklands development, and likewise at Salta’s Richmond development, where there’s big demand for apartments, will be combined with a commercial element to boost rental income and improve otherwise questionable investment returns.
While BTR investors in the US and UK are seeing returns of between 4% and 7%, in Australia they remain uncertain. Sam Tarascio, Salta’s managing director, admits that getting closer to its targeted 4.5% upfront yield from Australia’s BTR market requires offsetting a lower residential yield with a better-yielding commercial element.
Mirvac Group, which recently announced plans to enter Australia’s BTR market, also expects to achieve an “economically viable” 4.5% rate of return on future projects. Assuming it can, it will successfully outperform net yields of 3% to 4% that mum-and-dad investors receive on their investment apartments.
Win-win situation
Even if housing affordability forces more would-be buyers to become long-term renters, Fortis director Dan Gallen says the trade-off is their ability to live in a location of their choice, plus the stability of two- to three-year lease agreements. On the flipside, institutional investors/developers also benefit from BTR being the most stable and least volatile housing during an economic downturn.
Unlike in the US and Europe, where BTR leases are considerably longer, Collins doubts whether they will extend much beyond three years in Australia. Nevertheless, Salta’s Tarascio has already hinted that the developer would be willing to offer leases as long as 10 years in a development specifically designed to cater to the needs of long-term renters, which in Australia are usually constrained to between six and 12 months.
However, leases could potentially be significantly longer than 10 years, with the affordable housing group PowerHousing Australia revealing that an investment bank it recently met with is dealing with clients who want 100-year investment yield pricing.
Investors’ new mind-set
Given the negative gearing and CGT benefits, it’s hardly surprising that mum-and-dad investors are attracted to residential property. However, if commercial yields fall and a future Labor government eliminates negative gearing – and a consequential rent rise pushes net yields closer to 5.5% – Collins believes BTR projects could become much more compelling for developers and investment trusts alike.
That’s especially true, he says, once the federal government offers structured tax incentives for these projects.
Assuming there’s a perfect storm brewing for BTR to flourish, Nicholas Proud, CEO of PowerHousing, says investors may become more attracted to investing in residential property through investment trusts than owning an investment property themselves.
“As well as receiving rental income, [mumand-dad] investors would also enjoy the liquidity of being able to sell down quicker than taking years to sell an investment property on the residential market,” says Proud. “And there’s also no need to deal with that inevitable Sunday evening call to fix the plumbing when it breaks.”