Build-To-Rent: A $300 Billion Proposition?

The Australian build-to-rent market is expected to see around $300 billion worth of residential assets owned by institutional investors within the next couple of decades, if the multifamily sector evolves comparably to the US.

According to a CBRE report, multi family developments are increasingly on the radar in Australia -- with the potential to drive a fundamental shift in the funding mix for residential projects. Build-to-rent has already gained traction by major companies, including Lendlease, Mirvac, Stockland and shopping-centre giant Westfield, who have indicated it will pursue build-to-rent schemes in both the US and Britain.

The sector reportedly represented approximately 15% of properties with five or more units in the US – a position obtained after 25 years of growth.

In total, it accounts for 20%-25% of the US$2 trillion in institutional property investment in the US – ranking it as the second largest investor allocation after office property.

“Factoring in that 35% of Australia’s population rent, if the market here evolved to the level of the US, up to 5% of the country’s dwelling stock by value could be institutionally owned in several decades,” CBRE Head of Australian Research Stephen McNabb said.

“In today’s dollars, that represents circa AU$300 billion worth of residential assets or around 300,000 apartments.

“Investor and consumer objectives have combined to make market conditions more supportive of build to rent residential than those in the past,” McNabb said.

[Related reading: Australia’s Housing Future and the Build-To-Rent Approach]CBRE said they are currently developing a paper which highlights that higher service levels will be critical to attracting tenants from the existing private rental market if the build to rent model is to succeed.

It also notes that while build to rent will take pressure off existing housing stock, it won’t, by itself, be a panacea for housing affordability.

“There will, however, be economic benefits in reducing household debt and the potential to transform financing of the sector away from traditional intermediated finance for development and end-product purchasers,” McNabb said, adding that the Federal Government would need to consider how zoning and tax changes can provide certainty to the asset class.

Funding will be another key consideration according to Simon Cowley, of CBRE’s Debt and Structured Finance team.

“In the early phases, the capital stack will be formed mainly through equity rather than debt,” Mr Cowley forecast.

“It will entail institutional investment via either the forward-funding or forward-commitment route, via joint ventures with developers and through partnering with asset managers with expertise in this sector. This will be the quickest route for institutional investors to get scale, and by partnering with expert asset managers, they will gain efficiencies in building a platform/brand and start to mitigate the gross – net deductions of managing these projects.”