The international heavyweights of the institutional build-to-rent trend are riding a perfect storm that is creating strong tailwinds for the rise of the asset class in Australia.
But despite the prevailing market fundamentals blowing in its favour, the sector’s push to establish a foothold in Australia is not without its challenges.
Investa Property Group, partnered by Canada’s Oxford Properties, and US-based specialist Greystar are among the global players actively expanding their build-to-rent development pipelines in Australia, both with a strategic focus on the country's major gateway cities.
Earlier this year, Investa launched its build-to-rent management platform Indi with plans to invest $5 billion in apartments.
It also received development approval for the first build-to-rent building in the Sydney CBD—a 39-storey, 234-unit tower above the southern entrance of Sydney Metro's Pitt Street Station.
Investa’s build-to-rent fund manager, James Greener, who will take part in The Urban Developer’s Build-to-Rent vSummit on August 26, said the group’s strategy was to reach 5000 apartments as an initial portfolio scale in the key target markets of Sydney and Melbourne.
“Sydney is now the third most unaffordable city in the world and Melbourne is number six and the gap between wage growth and house prices is just getting bigger and bigger and Covid has accelerated that,” he said.
“That in itself is an issue but it’s exacerbated by a couple of other things.
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“Firstly, the supply of new units and build-to-sell development has stalled because people were not buying off-the-plan and banks weren’t lending. So, there’s a forecast huge undersupply of new units in 2022-23.
“Couple that with the fact that when we return to some sense of normality and international borders open the level of inbound migrants to Australia is expected to even exceed pre-Covid levels.
“That’s kind of a perfect storm...so there needs to be an alternative and in 2023-24 we’re going to see a huge supply of build-to-rent assets actually come on line following the development period.”
Greener describes the current rental experience in Australia as “extremely sub-standard and skewed in the landlords favour”.
“It’s not a tenant-friendly model at all and I think if you provide the growing number of renters in Australia with an alternative they will jump at it with both feet.".
He said young Australians— in particular, the millennials aged between 25 and 44—“no longer see renting as a dirty word”.
"More than 50 per cent of them are already renters and their ranks are growing, partly through lifestyle choice and partly because they can’t afford to buy."
Nevertheless, he said there are challenges for the burgeoning build-to-rent sector in getting a foothold as an institutional asset class in Australia— with the issues focused “mostly around the tax landscape”.
“As an asset class it is not being recognised fairly alongside other commercial property sectors from a federal tax perspective...and that’s creating a pretty significant impost,” he said.
Greystar Australia managing director Chris Key, who will also be a part of The Urban Developer’s Build-to-Rent vSummit, agrees.
“It’s still very nascent and still has plenty of challenges in terms of its progression to being a fully-fledged institutional asset class in this country,” he said.
“The reality is Covid hasn’t necessarily accelerated the forces behind build-to-rent.
“Arguably on one hand it has made it more challenging but on the other hand in global markets it has helped to prove the case in terms of its resilience
“So the fundamental tailwinds that drive the investment thesis still remain.
“But I guess the challenge has been that you've still got hurdles in terms of planning and, in particular, tax...and it's just going to take time and patience.”
Greystar has secured $1.3 billion—its largest capital raising to date—to support new projects being rolled out within Australia’s emerging build-to-rent sector.
It has two seed projects, both in inner-Melbourne, comprising a total of 1325 units, and another project in the planning that will boost its pipeline to 1800 units.
““Large-scale institutional build-to-rent is not an easy thing to unlock anywhere but Australia is probably one of the hardest markets," Key said.
"However, we're still committed to growing our business and our portfolio and we continue to chase opportunities here.”