Foreign Capital Still Dominates BtR but Things are Changing

Foreign capital may be what drives the Australian property industry but for the build-to-rent sector, things are changing. Advisory firm Franklin St’s advisory head Edward Quinn told developers at The Urban Developer ’s Build-To-Rent Summit in June that most conversations around build-to-rent capital focused on institutions. “What often gets missed is this: 22 per cent of the capital in our market right now is Australian and private, or alternatively, only 7 per cent of invested capital is from our own superannuation industry,” Quinn said. “The rest is foreign. “This is changing, and we’re seeing this through projects permitted and in planning.” He said that private capital was starting to have an impact on the sector. “The market has been lifted by the privates,” Quinn said. “Nearly one dollar in every four has been privately funded, and it shapes the profile of early stage projects. “This capital is family offices, private developers, private funds who are prepared to take on early planning risk, generally seeking high returns on the way in and on the way out.” Private capital is often used within the sector at the front end of projects, to acquire sites and create the build-to-rent platforms before institutional capital is sought for other parts of the project’s lifespan. But, Quinn said, some of the movers in private capital were now involved in the entire project knowing that once completed they could, if need be, divest the assets to buyers. “These are private developers, and they’re using private capital to move quickly and more flexibly than sometimes the institutions can, and while the strategies vary, they share a common theme: develop and stabilise,” Quinn said. “These groups take planning, construction market risk, to stabilise their assets, knowing that there is a takeout buyer if and when they choose to divest. “In many ways, private capital is doing the hard yards leading the way into new delivery strategies.” Defensive hedge Most investment still comes from overseas with many viewing inflation, interest rates and political risk as the main issues impacting institutional investment. “Australian build-to-rent is being viewed as a defensive hedge against these risks,” Quinn said. “It’s seen as a more stable income [than] in the office and more socially aligned than in industrial so while sentiment is somewhat cautious, there is interest. “The structural drivers for build-to-rent housing under flat rental pressure and population growth are still in our favor.” ▲ Franklin St advisory head Edward Quinn speaking at The Urban Developer Build-to-Rent Summit in June. Location remains key Quinn also drew attention to another rising trend: a shift away from the CBDs . “Until recently, most build-to-rent projects in Melbourne were CBD-adjacent— 4 to 5km out at most — now we are seeing that boundary start to push further outwards in a meaningful way.” Quinn said. “ Locals’ project in Box Hill is due to deliver 425 units next year, and is 14km from the CBD. “Then we have a West Preston project with 174 units, around 8km out. “These are all significant institutional growth projects and they’re showing that build-to-rent is starting to find its feet outside the core Melbourne CBD-adjacent suburbs.” Quinn predicted new projects would fill a 4-to-8km ring out from the CBD. “It is well located, has good access to transport and will provide rental housing to established markets,” Quinn said. “This shift is both strategic and organic. It reflects where renters want to live, where planning is opening new doors, and where feasibility still works.” Finding suitable sites for projects remains a concern but Quinn said data showed that it was possible given 60 per cent of projects nationally are within 5km of a CBD. “The average distance from the CBD for build-to-rent projects in Brisbane and Melbourne is 2.85km and 4.5km respectively,” Quinn said. “This theme has played out strongly in these markets where CBD adjacency has been possible.” For Sydney that average distance is more than 11 kilometres. “This is because the high proportion of projects are located in hubs such as Parramatta,” Quinn said. “This analysis shows how Sydney developers can then target secondary employment hubs to be able to obtain the land for development at regional pricing. “Seeing these projects complete should give us confidence that build-to-rent can and will function well beyond the CBD fringe.” ▲ Greystar has opened its second build-to-rent property in Australia, Haiku Claremont, at South Yarra, Melbourne. Strategies for BtR success Quinn also outlined several key strategies that developers were using. “Novus, one of the early moves in the industry, initially was using private capital to seed a portfolio,” Quinn said. “Novus is out again, raising for a fund, including three projects ready to go.” “The key here is Novus understands the benefit of derisking projects and getting the funding and the location right. “These projects are derisked, shovel-ready projects, no planning risks for the investor, targeting well located sites along new metro stations.” He said Beck Property was self-developing 350 units at Caulfield as compared to its earlier project, Realm Caulfield, which was forward funded. Model, a build-to-rent platform , is targeting 6 Green Star star ratings, mass timber construction and passivhaus design. For Greystar, Quinn noted that they were looking at mid-market, midrise product in middle-ring locations . He also said Kio was a new player in the market and could be the first institutional private equity funded platform for build-to-rent. “We have yet to see much commitment from the larger private equity groups, and this should drive product and proof of concept,” Quinn said. The last model was the builder-developer model, one that has had some success in the US. “Builder-developers, knowing that they can plug in a third-party manager, will develop and build these projects with the intent to sell on stabilisation and maximise their return,” Quinn said. “Builder-developers, as well as private developers, now have the ability to fund these projects themselves with an increased availability of debt. “There are a number of groups exploring this in Australia, and we’re big supporters of this model.” ▲ Model ’ s Rory Hunter: We look at projects through the lens of value, and that reframe changes the whole discussion. Third-party operators Quinn said the rise of third party operators would continue. “As build-to-rent evolves and matures away from the reliance on major platform-funded operators and developers, third-party operators will step in,” he said. “We’re seeing it already with Lendlease, Aware, Indi and Blackstone all outsourcing their operations.” To operate as well as develop and hold assets requires developers to have enough units to make it financially viable. “To have that under your own business, you’re going to need a minimum of 5000 units to get that scale and efficiency,” Quinn said. “Such a high barrier to entry means it is limited to major global investors, and the capital is dictated by scale. “Using third-party operators means developers don’t have to hit high numbers of units before revenue can come in ... investors can enter the market with one to 200 unit-projects, scalable, branded operations, all outsourced,” Quinn said. “New capital is unlocked from family offices and smaller institutions to develop operators, grow scale across owners, and open doors for private developers to develop through stabilisation.”

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