‘It’s Massive’: On Mission to Prove BtR Green Equals Gold

When Rory Hunter pitched his sustainable build-to-rent concept to investors, he’d get the same response almost every time. “All of the investment managers would say, ‘We love it, but for us to get through our investment committee, we need the quantitative test. Show us numbers. Show us why this makes commercial sense’,” the MODEL chief executive tells The Urban Developer . This led Hunter to commission research from JLL’s Risk and Value Advisory teams to show how build-to-rent developers could achieve higher rental premiums and cost savings by using high sustainability standards. The six-month study examined established markets across Scandinavia, the European Union, the UK and the US. It found that sustainable developments can charge rental premiums of 5 to 10 per cent while cutting operating costs by $1000 per apartment each year. MODEL’s Abbotsford projects would serve as the Australian proof-of-concept for applying these findings. Hunter is not your typical developer. In his early 30s he bought and developed Song Saa Private Island, one of the world’s most sustainable eco-retreats, off the coast of Cambodia. ▲ Hunter’s Song Saa Private Island project established his credentials in sustainable development before entering Australia’s build-to-rent market. This gave him strong credentials in—and a yen for—sustainable development. Hunter says the research validates his thesis that sustainability represents “a smarter way to make money” rather than only being an ethical choice. His white paper, Tomorrow’s Too Late argues that developers must prepare “for a future that is very different from today … hotter and far more uncertain at a climate level [than] policy and regulation is going to change”. It was very much focused on disproving that it’s too expensive to build sustainably, he says, and that it was more than “ ‘it feels right’ but rather ‘this is how much more money you’ll make’.” That vision supports MODEL’s goal to lead the next generation of sustainable housing. It starts with a pipeline of 700 highly sustainable build-to-rent apartments in inner-Melbourne. Hunter’s targets are bold: all projects will use adaptive reuse or mass timber construction and aim for Passivhaus certification. This would cut embodied carbon by at least 50 per cent and enable operations to target Net Zero, he says. ▲ MODEL’s Rory Hunter: We look at projects through the lens of value, and that reframe changes the whole discussion. “I’m very aware these are ambitious aspirations but so was building one of the world’s best resorts in my early 30s. I’m a firm believer of dreaming big, and we’ve been really excited about the momentum that we are building,” Hunter says. The JLL researchers set out to understand how sustainable build-to-rent assets perform compared to conventional buildings in mature markets across the globe. The findings show four key value drivers that make a strong case for developers to use green building standards. Rental premiums are the main benefit, with Green Star certified buildings achieving 5 per cent higher rents in Australia, while properties with 8+ NatHERS ratings command 6 per cent premiums. “In the US, for example, LEED certified multi-family (equivalent to our six-star Green Star) delivers a premium compared to an equivalent non-certified building of 8 to 10 per cent on rental revenue,” Hunter says. Global studies show green certification rental premiums ranging from 1.8 to 10.5 per cent across different markets. Hunter says these premiums reflect more than just environmental credentials. Hunter says tenants are willing to pay these premiums because “not only will they save $1000 a year per apartment through lower ongoing utility costs, but there’s also the health benefits like air quality, filtration, great acoustics. The tenant’s wellbeing is key, which drives higher occupancy”. ▲ Rendering of the 17-storey Johnston Street development that serves as proof-of-concept for MODEL’s sustainable build-to-rent approach in Australia. Operational cost reductions are another significant advantage. Green Star buildings achieve 20 to 25 per cent energy savings, equivalent to $1137 in annual cost savings per two-bedroom apartment in Sydney. Energy-efficient properties with 8 Star NatHERS ratings deliver 16 per cent energy savings for both base building and apartments compared to conventional developments. Passivhaus certification offers even greater potential, with international evidence suggesting utility savings of 50 to 70 per cent and average annual energy savings of $700 per apartment in Australia. A US case study identified 63 per cent utility savings worth $US1488 an apartment annually, projected to offset 80 per cent of incremental construction costs. Enhanced occupancy rates provide additional returns, with Australian Green Star certified assets achieving 2.5 per cent higher occupancy rates on average. Sustainability focused build-to-rent developments can achieve stabilised occupancy rates of up to 98 per cent. Delete “Occupancy rates are much higher. There’s more demand, stickier tenants, people live there longer. They’re healthier, and they’re happier,” Hunter says. Capital rate compression is the fourth value driver, which Hunter says is “probably one of the biggest insights” from the research. While evidence remains limited in Australia’s emerging build-to-rent sector, Nordic transactions have seen 10-60 basis points compression for high-quality sustainable projects meeting European Union targets. The research also shows the downside risk of conventional development. Office market data shows that assets missing energy efficiency expectations experience yield softening, which he says indicates long-term strength for compliant properties. “When you layer in that you can charge a bit more, your costs come down, higher occupancy, and lower cap rates, and compare that against the base case. All of a sudden, the returns—the internal rate of return you can deliver over a seven-year horizon—are 400 basis points higher. It’s massive,” Hunter says. The construction cost premium for these sustainability standards appears manageable. The research shows aiming for Passivhaus standard builds are decreasing, now estimated at just 2-4 per cent above conventional construction costs for experienced teams, while Green Star certification adds an average 1.3 to 3 per cent to project costs. ▲ Mixed-use design integrates retail and dining at street level, enhancing connectivity to Victoria Park Station, Hunter says. These costs are offset by operational savings and higher rents, the research says. Hunter’s Abbotsford projects apply these international findings as proof of concept, targeting “world-leading sustainability credentials”, including 6 Star Green Star, 9 Star NatHERS, Passivhaus certification and Mass Timber Construction standards. “This is really a first of its kind in Melbourne. It’s the tallest mass timber building in Melbourne. This is the first large-scale apartment building to be mass timber, aiming for Passivhaus certification, six-star Green Star, nine-star NatHERS, and positive embodied carbon,” he says. MODEL has a second Abbotsford project on the go, in the former Schweppes Cordial factory on Lithgow Street, where he’s aiming to create 180 Passivhaus-certified apartments. Both projects are part of MODEL’s new $600-million Regenerative Decarbonisation Fund, which Hunter says “offers a pathway to align investment portfolios with broader climate goals and the changing regulatory environment”. MODEL’s approach also unlocks financing advantages, Hunter says, including access to sustainability-linked loans offering 5-10 basis points in cost savings and previously untapped ‘dark green’ equity funds focused on sustainable investments. ▲ Green facades and mass timber construction combine sustainability and biophilic design at MODEL’s Johnston Street development. Mass timber construction offers additional benefits including 30 per cent faster construction times while targeting Hunter’s goal of 50 per cent reduction in embodied carbon. The broader market opportunity looks substantial. Australia’s build-to-rent market currently represents just 0.2 per cent of the total residential market with about 9200 operating units. This compares to 12 per cent in the United States. “For the first time, an independent report puts a dollar value on the addressable market. We’re talking about a potential $1.332 trillion asset class,” Hunter says. “Anyone who says built-to-rent is on the periphery—no, it will be the biggest sector in real estate in Australia within our lifetimes.” National residential vacancy rates of 1.3 per cent, with Melbourne at 1.8 per cent, indicate significant structural undersupply supporting build-to-rent growth. ▲ From fossil fuels to sustainable living: Passivhaus-certified apartments are planned to rise from a former petrol station at the Johnston Street site. Hunter positions sustainability as a competitive advantage. “We’ve got to compete with Mirvac, Lendlease, Greystar—we’ve got to be different. They can do pretty much everything except match the ambition of our ideas. “Historically, you’d look at a project in residential in Australia through the lens of cost. We look at it through the lens of value, and that reframe changes the whole discussion.” Hunter took the risk to prove sustainable development works better, and now other developers don’t have to. The numbers are there—green building isn’t a gamble any more, it’s good business with proven returns. “We’ve distilled it all down, put it into our underwriting, and this is a huge opportunity to demonstrate to Australian institutional investors that this is just a smarter way to make money,” Hunter says.

‘It’s Massive’: On Mission to Prove BtR Green Equals Gold

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