[+] Local Steps Up to Plate on Affordable, Social Build-to-Rent

Build-to rent platform Local is putting its money where its mouth is with a significant investment in affordable and social housing. As part of the broader investment Local is making in the BtR sector, the anticipated Impact Housing commitment will be more than $182 million through its established pipeline over the next 12 months. The developer, which launched in 2021 with backing from Macquarie Asset Management, is investing in major affordable, social and disability housing components in its developments, bucking the trend in Australia’s current build-to-rent market that leans heavily towards the high-end luxury market. “One of the key drivers for [Matt Berg] and I to Local was that with the clients we had and groups we were advising, we noticed early on it was a very luxury-centric focus that everyone had,” Local co-founder Dan McLennan says. “It’s not that we didn’t think targeting that luxury market would be successful but we thought it was a niche, rather than where the biggest demand was. “Where we have seen build-to-rent be so successful around the world is in that middle range.” Balancing altruism with feasibility While developers understand the need for social and affordable housing , getting the numbers to stack up has proven difficult, although there have been smaller projects, such as Unison Housing’s recently completed North Melbourne project. But where there’s a will there’s a way, according to Local. “We saw that as an opportunity that wasn’t being addressed and wasn’t a focus for the sector at the time” McLennan says. “We saw a huge need for it and we believed within build-to-rent there would be a big cohort of people who would have a big focus on the values of their landlord.” Value-based buying decisions are on the rise, crystallised by the move towards locally sourced products during the pandemic and the values of the incoming Gen Z. It is something Local has seen extend into real estate. ▲ Dan McLennan founded Local with business partner Matt Berg. It now has 900 apartments under construction in Melbourne. “The way people care about and buy because of their values—whether it’s their ice cream, make-up or boutique groceries, whatever they’re focused on—there’s a movement in other sectors that didn’t exist as much in real estate,” McLennan says. “Your rent doesn’t just need to go into paying off someone’s mortgage, it can also go towards creating an inclusive community, and now a customer is able to select a product that might help solve the housing crisis.” Local has a baseline rule that 10 per cent of its projects will be allocated to what it calls ‘impact housing’; a financially viable mix of social, affordable and specialist disability accommodation. Of course, to attract investors and staff, Local had to get affordable and middle-range build-to-rent to ‘stack up’. Making it add up Local has put time and effort into working out complex models to ensure projects are feasible and attractive. “We certainly had to be very disciplined in our acquisitions and in terms of cost,” McLennan says. “We’re working a little harder to incorporate or have a product that isn’t chasing that luxury end of the market. “Undeniably there’s some features that we’ve made a call on for our projects that we haven’t included, which we may have included if we were chasing a higher end of the market. “Our projects still include great amenities, coworking spaces, wellness areas; all the typical build-to-rent features. “However, we’ve also been mindful of our operating costs. Some of those higher-end groups, it’s a bit self-fulfilling; if you want to be inspired by a hotel in terms of level of service, it takes certain costs like labour, and that then puts pressure on your rental income. ▲ Local’s Kensington development at the corner of Macaulay and Stubbs streets has a campus-style layout of 477 apartments across six buildings. “But we’re clear we are not a hotel or hotel-inspired and are aiming to offer great quality on a pound-for-pound basis. “It will be better value for money than our peer group but also have the added benefit to create inclusive communities that include a provision of social and affordable housing simply through where they live.” This focus on inclusive communities has proven more attractive than the Local team initially expected, and to be beneficial in unexpected ways. “What we undersold was firstly the level of engagement of financiers in the proposition. But we think it’s made it more financeable and it’s increased the quality of people we’ve attracted to the organisation.” Investor appetite sharpens While build-to-rent has stacked up at the higher end, there are major risk-related benefits to more affordable build-to-rent, McLennan says. “When someone talks about stacking up from a returns perspective, what are you looking for? If you’re looking for higher returns, you’re going up the risk curve. “Going up the risk curve in the world of build-to-rent is more towards luxury and more inner-city developments, where the tenancy market is potentially more transient so you churn through more tenants. “We’re attracted to a market base that is diverse from a starting point but also probably isn’t as transient. “If you’re leasing a good product and below market rental, why would someone want to move? If you’re managing it well and have strong, resilient cashflows, that thematic itself as a pure investment proposition is attractive and a counterbalance to the higher end.” ▲ The government’s Housing Australia Future Fund aims to deliver 20,000 new social housing and 10,000 new affordable homes, including for frontline workers. But the world of investment is changing too, says McLennan. “Investors will differ in their points of emphasis—some are more interested in environmental sustainability, others accessibility and affordability, but I’ve yet to come across one with no interest, and if that is the case, then they’re not the investor for us either. “Sometimes it can be factors relating to creating housing opportunities for members of a fund, for instance. “What is interesting is that there is a strong base of growing investors, not just Australian but international, interested in that affordable spectrum. “The luxury build-to-rent product is perfectly valid and should be generating a higher return, but is somewhat higher volatility. “We’re down the risk curve, so we can generate attractive returns for investors.” Government lends support Hand-wringing over the housing crisis has translated into movements at government level, establishing the $10-billion Housing Australia Future Fund and the National Housing Accord, which set an initial “aspirational” target of a million new homes over five years from mid-2024. This and other schemes and plans at federal and state level have indicated governmental willingness to engage with the housing crisis but more needs to be done, McLennan says. “I’m definitely an advocate for more government support and I think the way forward is tailoring that support in a way that is more carrot than stick; incentives rather than trying to tax people into outcomes,” he says. “Social housing of course involves significant discounts and it requires government support. We’ve innovated our solution with specialist disability accommodation because you get more revenue from that to offset any losses on our social aspect. “Affordable housing makes lives better, while social housing changes someone’s life. We wanted to do that and be able to demonstrate social housing can be successfully integrated with market housing and that’s what our partnership with Women’s Property Initiatives is about.” ▲ Women’s Property Initiatives chief executive Jeanette Large with corporate and ESG head Clare Tayt at the Kensington development. Local’s initial $52-million investment will deliver 75 social housing residences under its partnership with Women’s Property Initiatives (WPI), a not-for-profit community housing provider that provides affordable accommodation to women and children in need in Melbourne. The first tranche of 33 apartments for women and children experiencing insecure housing will be delivered at Local’s 40-storey, 421-unit Kensington project in 2024. Also under construction is 245 Normanby Road, South Melbourne, which will have 41 social impact homes when it completes in 2025. “From our perspective, we would love more government support and to do more of this, but we thought it was critically important to do what we could do, even if it would create additional challenges in executing it. “We didn’t see them as insurmountable and were proud of what we’ve achieved so far, we think that’s really important. “We know there’s a housing crisis and a shortage of housing across the board so we want to do something that tries to provide a solution rather than just say ‘we’re going to provide additional market housing and that’s our contribution’, and wait for the government to solve the crisis. “It’s incumbent on the industry to do what it can rather than looking to the government all the time. “We’re setting the expectation for market players to do what we’re doing, and we’d like to see someone copy us or do even better.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. 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Mon 23 Oct 23

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