The build-to-rent (BTR) approach to property investment is fast gaining momentum in Australia. And it might just be the answer to the uncertainty many young people are feeling about securing affordable, long term housing in this country.
With major city real estate markets making a resurgence after a very brief (almost inconsequential really!) slowdown in the cycle, we’re again seeing alarmist headlines about the affordability crisis all over the media.
Gen Y’s and Millennials in particular, are facing potential barriers to affordable accommodation options in the future, as more and more are squeezed out of home ownership contention and corralled into longer term tenancies.
How do BTR investments work?
BTR investments are designed specifically for longer-term rental accommodation, and have been popular in the US for some time.
Typically owned by institutional investors and developers, prospective occupants are encouraged to take out long term, and hence more secure, tenure. This provides additional security over and above traditional, stock standard rental accommodation, which can be bought and sold from under tenants, potentially forcing them to relocate with greater frequency.
Known as a “multifamily” sector in the States, the BTR phenomena has proved popular with institutional investment managers looking to diversify client portfolios, as it’s considered a relatively resilient and consistent asset class.
In fact, over the last four decades the average annual income returned from BTR investments was an impressive 6.8 per cent. Even throughout the GFC, returns remained comparatively solid at 5.5 per cent.
Is BTR the answer to affordable housing?
While there’s no doubt the BTR industry is cashing in on the continued “noise” surrounding affordability issues here in Australia, it’s perhaps too soon to tell whether the industry will have a positive impact on the future of property accessibility.
A major social concern has been the lack of affordable housing around our bigger cities in particular, for lower paid but necessary professionals like teachers, nurses, police and ambulance officers and firefighters.
Some industry commentators are suggesting that the emerging BTR sector could be pivotal in addressing long term accommodation issues surrounding these “key-workers”, over the long term.
Chief Executive of the Property Council of Australia, Ken Morrison, is one of BTR’s local champions. He believes this investment approach could quickly gain momentum, as we’ve always been enamoured with the idea of building new homes to occupy, and developers have been actively constructing housing to on-sell for many years.
“Australia has had the ‘build-to-sell’ model for many decades, and our policy settings are base don that,” Morrison told the Financial Review earlier this month. “But with more people renting, our cities getting bigger, and people wanting more choice in their housing options, it’s clear that there’s a demand for this type of product. Now we have to make sure that the policy frameworks are there so that we get the supply to match that demand.”
Australia’s first “genuine” BTR project opened on Queensland’s Gold Coast earlier this year, with UBS Asset Management, Australian builder Grocon and global real estate Giant JLL converting 1251 apartments in the former Commonwealth Games Athletes Village into a $550 million village of rental units.
Hot on its heels is the Element 27 Building in Perth’s Subiaco, which opened in October, with the Pavilions project at Sydney’s Olympic Park and two sites earmarked for BTR development projects in Melbourne for 2020; one opposite the Queen Victoria Market and another at the Docklands precinct.
Long term considerations around the BTR sector
Morrison says while this bustle of activity is promising, there are still a few potential sticking points when it comes to growing the local BTR market on a “level playing field”, namely around prohibitive government policy.
Land tax, withholding tax rates for foreign institutional investors and the GST treatment of BTR models are all areas that need to be carefully considered, specifically around this housing approach.
Then there’s the concern that BTR is being touted as some type of miracle panacea for ongoing housing affordability issues.
Head of social housing finance, Europe and North America at NAB, Michael Carr said local planning authorities could use the growing BTR sector to put certain restrictions on developments, enforcing that a certain portion must be used for social and affordable housing.
“There will be a reasonably complicated negotiation, which will involve a number of drivers, but the objective from the planning authority is to get as much social/affordable into that development as they can.”
While this might be welcome news for social commentators who feel housing is causing growing inequity among our population, head of real estate, corporate and institutional banking at NAB Michael Carr, points out one rather prominent fly in the ointment.
“The interesting point here is that the BTR model is built around a premium rent being paid, because you’re providing all sorts of shared amenities – it could be a pool, a fitness centre, a concierge, a rooftop garden. That model assumes that you;’re going to be able to charge premium rent, which is diametrically opposed the the concept of social and affordable housing.”
This dichotomy, between public and social policy around affordable housing, and the private developers establishing themselves as players in the growing BTR sector here in Oz, is casting doubt as to whether build to rent dwellings will give governments the much needed affordable housing supply they’re hoping for, without having to actually pay for it.
Either way, this is a sector that’s well and truly taking off. Watch this space!