[+] Sentinel Eyes Suburban Sydney in Aussie Expansion

Michael Streicker’s first trip to Australia in 2001 was an accident of history. The president of the US accommodation giant Sentinel Real Estate had planned a holiday to the Middle East with his family—his mother, father and three sisters—but then a friend told him about the surfing at Margaret River in Western Australia. They changed plans and headed to the southern hemisphere. Streicker is not certain but believes he’s been back to Australia 20 or 30 times since—trips that have had little to do with surfing. Or even the ocean. The US chief was back in Australia, again, this week—this time in Melbourne for the opening of the company’s first build-to-rent facility in Victoria and its third operational building in the country. “One of the things that’s important for us is to make sure that our investors ultimately see the rationale for building housing in Australia,” Streicker told The Urban Developer in a wide-ranging interview. “I think everyone can agree that the more supply into the Australian housing market, the better at this point.” Sentinel’s latest accommodation began life as the Briscoe and Company Ltd’s iron yard. Architect’s Rothelowman effectively encased the seven-storey building and its 172 apartments and ground-floor retail within the heritage-listed building. But while Melbourne might be the unofficial capital of Australia’s early foray into build-to-rent, Sentinel’s own entry—almost a decade ago—was in Perth. ▲ Sentinel’s latest accommodation at West Melbourne. Main picture of Michael Streicker by Timothy Burgess, Image Play Sentinel Fund Manager Australia was set up in 2010, primarily to raise capital for export to the US, but by 2012 the New York-based parent company—with $14.3 billion in real estate assets under management—was seriously looking at build-to-rent in Australia. It acquired its first property in January of 2015, paying a reported $6.35 million for 2340sq m at 72 Price Street in the trendy Perth suburb of Subiaco. Today that is the first two phases of The Elements development—one building of 93 apartments and another of 80. The company has development approval for a third building in the area and is in the application process for a fourth. When finished the project will count a total of about 365 apartments. “As long-term investors, we view this as a cyclical property type,” says Streicker, “although sometimes it doesn’t feel like that in Australia, it generally is. “Our perspective was if we purchased land in WA now, in 2015, it was going to take us a series of years to actually develop a product. And then we’d come to market at a time when the economy had recovered. “And we can offer it at pricing that is relatively comparable to anything that’s existing in the market and we feel like that’s going to end up being an attractive rental yield. “And that’s exactly what’s happened so far.” Since then, it’s been something of a sprint, with around 1600 apartments either completed or in some stage of the development process. ▲ Sentinel’s first foray into Australia's build-to-rent market, The Elements in Perth’s Subiaco. In October last year Sentinel won approval for its Queensland debut , a 300-apartment development on a 1.4ha site next to Robina Stadium on the Gold Coast. In March it announced it would deliver 250 premium and sustainable build-to-rent units on a 4000sq m site in Adelaide’s Bowden Precinct . In July it acquired a second Victorian site—this time 6528sq m at 23-47 Villiers, North Melbourne. And it has development approval for 174 apartments at 194 West Coast Highway, in the beach-front Perth suburb of Scarborough. With assets in Perth, Adelaide, Melbourne and the Gold Coast, Sentinel’s aspirations are clear. It wants to be a national build-to-rent provider. Sydney remains the critical missing link. “Yes, at this point we’re actively looking for land sites in New South Wales,” Streicker says. “And so, our expectation is that we will be a national apartment provider here in Australia but we’re simply missing that point in NSW.” He acknowledges Sydney’s stubbornly high property prices are a challenge. For Sentinel, and its investors, it is all about the yield. “We recognise that a city like Sydney should have a lower income yield,” he says. “The difficulty with that is if you start demonstrating the income yields are low in this asset class, then folks will say, well OK, it’s just a low-yielding asset class. “We very much want to be in Sydney or in NSW but in order to demonstrate the viability of this asset class we felt like investing in other cities first, which have high relative yields. ▲ Suddenly the US accommodation giant is at a sprint. Sentinel has won approval for this nine-storey building on the Gold Coast. “Now we feel we can begin to take that next step where we say, in NSW we’re going to have to accept modestly lower income yields. But that’s OK because that’s typical for any major supply-constrained city in the world.” Sentinel has two strategies to combat Sydney’s property prices. In the first instance it will look to put more build-to-rent facilities at suburban locations rather than follow the trend thus far, whereby most build-to-rent can be found inner city or in fringe locations. “In terms of urban-versus-suburban, our very strong belief is that the build-to-rent product is one that can work, and effectively in the US it does work very well, in suburban locations,” Streicker says. “And so as we look to build out our portfolio, whether it’s in Victoria or elsewhere, we’re very interested in looking at suburban locations. That’s something that that sort of motivates us.” And Sentinel is looking to put up mid-rise buildings with fewer apartments. ▲ Sydney, and its high property prices, is proving a more difficult market to enter. “The type of product that we feel would be more appropriate for what we do typically is more mid-rise types of assets and so that’s what we would ultimately like to develop in the Sydney market. “And I think one of the places that we look to for affordability on is making sure the cost of construction is moderated,” he says. “It is far more expensive to build a highrise tower than it is to build a medium-density product here in Australia.” Sentinel says two major European-based pension funds are supporting its build-to-rent activity in Australia— British Telecom’s pension scheme, Federated Hermes, and the Dutch not-for-profit cooperative fund manager PGGM. Streicker would like to see more investment from within Australia but the sector’s tender years remain a barrier. “We are actively trying to raise money in Australia,” he says, although he won’t be drawn on where that capital might come from. “One of the challenges in Australia is that because this sector is so nascent, there’s not a lot of evidence as to valuations, as to yield, as to all the financial metrics that folks like to see in order to be comfortable with investments,” he says. ▲ Sentinel’s strategy is to build medium-rise, with fewer apartments. “The global investors have those metrics from other markets. “The Australian investment community doesn’t necessarily have that same experience … and at this point they’re saying, you know, ‘We’d like to see more evidence before moving forward’. “It doesn’t have to happen in a day or in a week but, you know, we’ve been here for over a decade, we’ll be here in another decade. “These things take a long time to come to fruition but I think it continues to be an attractive property type to invest in and we do see growth.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. 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[+] Sentinel Eyes Suburban Sydney in Aussie Expansion

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