[+] Build-to-Rent Groundswell ‘Distorting’ the Market

It’s not an easy substitute but apartment developers are increasingly diving into the burgeoning build-to-rent asset class in the face of challenging market conditions. The problem is the deep pockets of the big global institutional investors are driving up the price of development sites. Build-to-rent represents a small share of the housing market in Australia. Analysis by EY has notched it up at 0.2 per cent of existing housing stock in Australia. But over the past 12 months build-to-sell developers have shifted to the build-to-rent market in an effort to “keep the doors open”, according to Hamton Property Group executive chairman Paul Hameister. Speaking at The Urban Developer’s long series in Melbourne, Hameister says market economics are being distorted by the rise of build-to-rent in Australia. “I think [build-to-rent] is being driven by offshore institutional capital rather than fundamental economics, and it’s completely distorted what should have happened to the price of development sites,” Hameister says. ▲ Hamton Property executive chairman Paul Hameister at The Urban Developer’s Melbourne Long Lunch. Main image: Coronation Property’s Mason &amp; Main, designed by Woods Bagot. Build-to-rent driving up prices Hamton Property Group is a pure play build-to-sell development firm in Melbourne, with billions of dollars worth of projects in the pipeline. And despite the flight to build-to-rent from many within the sector, Hameister is staying the course. “I don’t get build-to-rent, I’m not ever going to do build-to-rent,” he says. “I reckon a lot of residential developers have turned to build-to-rent just to keep the doors open and keep the staff employed. “I think without build-to-rent the consultant industry would have been devastated in the last few years.” It’s a sentiment echoed by Time &amp; Place co-founder Tim Price, who says he cannot get the build-to-rent model to work. “We spent probably about a year working with a substantial institutional partner to build a build-to-rent platform, and probably came out the other end a little bit wounded because I couldn’t find the answer,” Price says. “We decided that in our build-to-rent space we were really doing turnkey outcomes for substantial institutional investors who don’t want to take development risk.” Price says the house view is that you need to be comfortable with developing scale at reduced margins. “I tend to agree with Paul, we started looking at it because the build-to-sell market was under a bit of pressure and we’re always curious as to whether there was something we hadn’t seen yet in the modelling,” he says. Price says policy settings need to be sharpened to underpin the supply constraints in the market, particularly around GST provisions in mixed-use developments. Why is everyone getting into build-to-rent? Altus Group president of cost and project management Niall McSweeney says with the right policy settings there could be a further 150,000 build-to-rent homes on the market in the next decade. McSweeney says build-to-sell developers are increasingly moving into the build-to-rent space to try to unlock the value of their sites. ▲ Altus Group president of cost and project management Niall McSweeney. Feasibilities for build-to-sell apartment towers have grown increasingly challenging in the face of rising construction costs and labour constraints. “Developers are keen enough to (take on funding from institutional capital) because they don’t have to meet certain thresholds or pre-sales in order to proceed,” McSweeney says. “With the current inflationary environment and interest rates, holding costs are becoming more of an issue and money costs more. Holding costs are really hurting people and it’s quite hard for volume sales.” And while it is US and European build-to-rent giants knocking on the door in the Australian market, McSweeney says we should be looking to other markets, such as the UK, where the product is newer and more relevant in the local context. McSweeney says Australia’s build-to-rent offering is more akin to developing and managing a hotel. But he also believes there could be space for a more affordable end of the market in the future. More construction pain in the pipeline Salta Properties chief operating officer Emma Woodhouse says the vertically integrated builder-developer is growing its build-to-rent portfolio. Earlier this year Salta Properties won approval for a 473-apartment build-to-rent development on the Yarra riverfront on Melbourne’s fringe. The purpose-built development will be built across three lots nestled between the river and the eastern edge of the Victoria Gardens shopping centre. And it is a long-term develop and hold play for Salta Properties, which is looking to the population growth on the horizon. Woodhouse said industrial and build-to-rent remained appetising for capital. “Things are tightening up and metrics are getting a bit harder, but there is certainly ongoing interest in those two sectors,” Woodhouse says. “We are getting contacted through partners and agencies looking to invest in our projects. And while things may be challenged in the market Woodhouse said there were “green shoots” emerging in Melbourne. “I think there’s still challenges in the market. We all felt the pain of the last 14 interest rate rises and we all want certainty,” Woodhouse says. “We know that there’s huge population growth, we know that residential projects and product is going to be in demand. But making all those fundamentals work with all the challenges is pretty tough. ▲ Salta Properties chief operating officer Emma Woodhouse at the Melbourne Long Lunch. “I think we’ve got another 12 months of (construction prices) still being quite tough.” And it’s a view that resonates across the industry but Time &amp; Place’s Tim Price is optimistic about the future. “The mood (in the market) is optimistic but uncertain and probably lacking confidence. Because, I think, each of those cornerstone moments of your feasibility or your kind of certainty around legislation … there’s lots of grey,” he says. “You’ve got to take the philosophy that problems make you happy. So we’re very happy at the moment … deliriously happy. The reality is we’ve all got various versions of the same issue. “Everyone’s across construction costs and holding costs, privates likes us who leverage ourselves pretty hard, when you’re holding things and there’s interest rate rises, those sorts of conversations are difficult.” Developers across Melbourne’s build-to-sell sector all agree that prices need to recalibrate in order for the residential market to flourish once more in the undersupplied city. You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

[+] Build-to-Rent Groundswell ‘Distorting’ the Market

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