Build-To-Rent in the Australia Property Market

 

Build-to-Rent is a relatively new concept to the Australian property market. Let us shed some light on how BtR is relevant in Australia and highlight it’s appeal to the investors.

Currently Australian property market is in a very interesting place. Cyclically speaking it is cooling down, which is to be expected after a period of strong capital growth. The measures taken by the Australian Prudential Regulation Authority to restrict lending to investors and the banks’ lowered risk appetite for lending have resulted to the anticipatory credit tightening and consequently helped the property market to move to the next stage of the cycle.

However, as the same environment of tight credit and low interest rates was already in place when the property was peaking, we can anticipate fewer mortgage defaults and businesses will still be able to borrow funds to grow and create jobs.

This means the market is in for a soft landing as the supportive fundamentals of a strong economy, jobs growth and population growth will underpin our property markets.

As the media is pondering on the topic of the market recession, some investors take point and look at the opportunities, such as BtR.

 

According to Knight Frank’s extensive research, the make-up of housing in Australia is going through fundamental changes and manifesting new trends.

Highlights from the Knight Frank Multihousing – Tenant and Investor report:

  • Of those surveyed, 41 per cent rent by choice, while 64 per cent said they expect to still be renting in three years’ time.
  • Over the past 25 years, the number of households living in a rented dwelling across Australia has increased by 1,065 million, the equivalent to 42,000 new rented dwellings a year.
  • In comparison, the number of households who own their dwelling outright has increased by less than 270,000 over the same period.
  • For renters aged 34 and under, location was more important than the size of the property.
  • Access to key transport links was a key priority for 30 per cent of those under the age of 34 when choosing where to rent.

The report shows that the rented accommodation is coming to the forefront due to the increasing demand. To some of the people choosing to rent, this is a result of lack of access to funds needed to acquire a property. For others, such as the millennials, renting is a lifestyle choice.

Tapping into the rental market is hard for the individuals, because of the reduced tax incentive and restriction on lending. Institutional investors, on the other hand, have a longer investment horizon, prefer stable returns and have financial leverage.

BtR has a developed into a desired and established asset class in the US and UK.

In 2017, the burgeoning build-to-rent market and comprising purpose-built blocks of rental homes have attracted USD 4.3 bn[1] in investment. Knight Frank predicts that £50bn will be invested into the Build-to-Rent sector by 2020[i].

In fact, the reports on the first Build-to-Rent property sector are published. The research has been produced by Savills, commissioned by the British Property Federation (BPF) and will be published quarterly. According to the research, the number of Build-to-Rent homes completed, under construction and in planning across the UK has increased by 30% in the last year. There are now 117,893 Build-to-Rent homes across all stages of the development lifecycle, compared to 90,761 at the end of the first quarter of 2017.

When looking specifically at the number of completed Built to Rent homes, the total has increased by 45%, growing from 14,371 to 20,863, in the same period. This figure is even higher for the number of Build-to-Rent homes under construction, which has increased by 47%.

The number of homes provided by the Build-to-Rent sector continues to grow in both London and the regions but the regions now have a significant lead over London in green lighting developments with 62% per cent of all Build-to-Rent homes under construction.

The emergence of Build-to-Rent had some serious government backing, which undoubtedly played a key role in the development of the sector. Build-to-Rent is now regarded as being a welcome addition to the private rented sector

 

Multifamily – the name BtR goes by in the US – has performed solidly since 2010 and the originations volume is expected at $258 m in 2018[2]

According to Knight Frank, a small sample of Australia’s demand profile mirror that of their findings in the UK, where they survey over 10,000 tenants annually.  These results provide further evidence and support that the build-to-rent sector has the potential to develop and thrive as an alternative accommodation sector in major Australian markets.

According to JLL’s analysis, the U.S. multifamily market is halfway through the peaking phase as of Q1 this year.

Chicago, Nashville and San Francisco are the closest to the precipice; Austin and New York City have just entered the falling phase and Houston is near the top of rock bottom.

The markets that have the longest legs left in their peaking phase are Minneapolis, Orlando, Phoenix and San Diego.

New product is still delivering, adding 1% or more to the inventories of 34 of the 38 markets JLL tracks. This has put a little weight on rent growth which has remained at 2.3% for three consecutive quarters.

JLL expects that fundamentals will hold steady as units continue to deliver throughout the year. Roughly 600,000 units are under construction, according to Q1 research. JLL’s prediction is the consensus in the market. Unmet demand is predicted to fill the new units coming online and keep rent growth steady.[1]

 

In the history of development of the BtR concept in UK and US,  there were two main driving factors for the growth of the sector.

Firstly, there is a great demand from the generation Rent (people in their 20s and 30s). Young professionals are looking to rent for many reasons: high housing prices make entering the market hard, there is limited access to funding and frankly, the millennials prefer the mobility and freedom that renting allows.

Secondly, the growth of sector is spurred by the interest of long-term institutional investors. Overall the yields across the property market are moderating and institutions are looking for a stream of stable income that BtR provides. In UK in particular, the government has taken interest in the sector because in addition to providing stable and predictable income, it also helps meet housing targets.

BtR in Australia is poised to grow and become a significant part of the property market as the research shows many similarities with the countries where this has already happened. For now, some clarifications are required in regards of taxation treatment, availability of funding and government involvement. However, according to researches, the fundamental factors will drive the necessary change and BtR is likely to emerge fully as an asset class in Australia in the next decade.[2]

Given the current fundamental market conditions and opportunities they present, it is clear why we, STARIN, see and seize the great opportunities of growth of the BtR concept in Australia. GRE8, one of the first fully compliant with current regulation blockchain powered real estate backed investment funds, is our way to extend the privilege of participation to our investors.

 

 

Sources:

[1] https://www.housingwire.com/articles/43494-jll-research-most-multifamily-markets-are-peaking

[2] http://www.jll.com.au/australia/en-au/Research/Build%20to%20rent%20residential_Australias%20missing%20sector%20September%202017.pdf

 

 

Disclaimer

The information shared does not provide legal advice. In any token sale, there is a host of legal requirements to consider. Please consult your own securities lawyer.

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