Build-to-rent trend takes centre stage as housing crisis bites
The new sector is ripe for expansion but governments must put the right structures in place to ensure the market grows.
There is a sense of optimism that the emerging build-to-rent sector can transform the housing rental market and provide much-needed housing supply.
While we are a decade behind Britain, a recent summit hosted by FuturePlace on the specialist asset class revealed the consensus building among institutional investors, developers, financiers, government representatives and community housing providers.
Both domestic and global capital is lining up to invest, the supply pipeline is growing, and both federal and state governments have implemented tax incentives to bolster project viability – though additional measures are still required.
As one key speaker said: “The demographics don’t lie. Press the button. Be brave”.
Australia’s population had a remarkable surge of 563,205 individuals in the year ending in March, equating to an annual growth rate of 2.2 per cent. Demographers predict the annual growth rate will exceed 600,000 for the calendar year of 2023.
While a portion of this increase can be attributed to the rebound from a slowdown in net migration during the Covid pandemic, the population is expanding at a faster pace than the housing supply can accommodate, placing significant pressure on a housing sector already grappling to keep up with escalating demand.
It’s also the supply numbers that don’t lie and support the industry’s case. During the 2022-23 financial year, a mere 174,400 dwellings were built. Unfortunately, this trend is not expected to improve anytime soon.
Building approvals are now 30 per cent lower than they were one year ago. This reduction in approvals is poised to exacerbate the housing supply shortage in 2024 and 2025, jeopardising the ambitious goal set by Prime Minister Anthony Albanese to build 1.2 million homes over five years.
While the BTR sector is just 0.2 per cent of the total value of the residential sector, it is growing rapidly. The number of completed dwellings doubled by year-on-year in the third quarter of 2023, consultant EY said.
There are 12 completed BTR dwellings (3986 dwellings in total), with another 43 projects under construction (14,083 dwellings) and 27 projects in the planning stages (8602 dwellings).
Melbourne is the market epicentre, with about 60 per cent of the current total supply pipeline. Lower land costs compared to Sydney and strong population growth are fuelling BTR projects in the city.
Currently sitting at an estimated $20bn in size, EY estimates the institutional market could grow 15-fold to $300bn within 15 years if the federal government provides the right conditions including MIT and GST concessions.
The sector will also set new operational and service standards and transform the rental experience.
As taller vertical buildings become increasingly prevalent in the build-to-sell apartment market, owners corporations comprising volunteer owners with limited experience are also grappling with how to manage high-rise structures that are worlds apart from simple walk-ups.
I anticipate a growing number of build-to-sell apartment complexes with major building and safety issues due to poor construction and ongoing maintenance practices that will require significant investments to rectify and ultimately lead to a poor rental experience for tenants.
Investors and operators also need to take a whole-of-life consideration when investing in BTR projects. In contrast to the BTS market, where properties are built, sold, and the developer’s involvement ends, BTR operators recognise the enduring nature of these assets.
Well-designed, well-constructed, and efficiently operated BTR assets with a commitment to sustainable design and practices, and that can adapt to changes in tenant preferences, will be crucial to retaining their value over the long term.
Cutting corners during the development stage can give rise to future issues, ultimately leading to increased ongoing operational costs and capital expenditure throughout the asset’s life cycle.
It also important to maintain a healthy balance of staff with good, hardcore property experience, people who know the rental legislation well, and people who can deliver exceptional customer service.
The talent search is therefore stretching beyond the property sector to the hospitality, retail, and student accommodation sectors.
Technology is another key consideration, as operational efficiency and service excellence come to the fore. In mature markets, there are plenty of sophisticated digital options, which can be taken off the shelf. But we do not currently enjoy this luxury in Australia.
While early projects are focusing on premium assets, offering up-scale services, luxury amenities, and a rental experience comparable to a luxury hotel, as the market matures, there is growing interest to find ways to contribute to the supply of affordable housing.
This is a welcome development.
However, state governments must recognise BTR as a legitimate component of the housing sector and implement planning reforms that consider rezonings and expedite development approvals. Additionally, reducing the tax burden on BTR will play a vital role in strengthening the sector’s capacity to provide affordable housing.
I expect there will be substantial growth in the BTR sector over the next decade as a larger component of our population rents longer, and they expect well-maintained, high-quality rental housing that is professionally managed and operated.
This demand is expected to rise not just among the younger population but also among single families, couples, and individuals of all ages and life stages.
At the same time, institutions will place greater emphasis on sectors such as BTR that offer robust underlying fundamentals and the potential to deliver quality risk-adjusted returns.
Now is the time to press the button.
Adrian Harrington is a non-executive director of Liverty Housing, NSW Chair of Housing All Australians and senior adviser to Lighthouse Infrastructure
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