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Building build to rent. How Australia’s top developers are looking to change the game

05-Dec-2017


One of the biggest stories in property this year is the potential for a new build to rent residential sector. Touted as both a solution to our housing affordability crisis and an alternative investment vehicle for cashed-up institutional investors, the case for build to rent in Australia, similar to the UK model and US multi-family housing, seems to make sense for everyone, developers included. 

However, it’s not just a matter of building more apartments designed to be rented out long-term. As a recent research paper by JLL pointed out, for build to rent to establish itself as a viable sector in Australia, parameters and policy around residential investment and ownership will need to continue shifting.

Aside from disrupting the present status quo of private investment in strata titled rental stock, there are strong disincentives for developers – high land borrowing and construction costs and long lead times to finish a project coupled high taxation such as land tax, GST, corporate taxes plus a multitude of local government developer levies, charges and fees. In other words, circumstances around developing build to rent projects in Australia’s large cities are far from ideal. 

Yet two of Australia’s biggest developers, Mirvac and Lendlease, are reportedly moving on the sector. JLL predicts the growth profile of build to rent to be large and fast, and worth $40 billion even as a moderate estimation. Discussion on how to make it happen is unlikely to go away.

MP Report spoke to some of Australia’s leading developers taking a different approach to pioneering the build to rent sector here. 

For developers Lateral Estate and Gurner, the goal is to emulate the hugely successful USA- style institutional investment grade ‘multi-family’ portfolios. In this model, the developer builds and holds all apartments as a single portfolio of amalgamated properties for the benefits of rental income and capital growth as a stabilised long term asset. Or, the developer builds and sells to an institution, who will hold the portfolio for the mentioned benefits. In an expensive and undersupplied property market, this type of build to rent initiative also works to provide an affordable housing solution on a mass scale. 

In Australia, the institutional investor benefits are not there yet for this style of investment-grade product to be feasible, largely due to government policy and funding disincentives.

For developers like Metro, build to rent means keeping to the more traditional approach of selling apartments off the plan to individual investors, and providing assistance and incentives to ensure rental tenancy or surety of rental income to those investors. Under current tax legislation this approach remains the more feasible option for Australian developers, but it doesn’t necessarily provide the support required for an undersupplied housing market and affordable housing solution.   

 

Tim Gurner, founder and director of GURNER™

The Victorian State Government’s ongoing intervention in Melbourne’s property market has reached a tipping point which is dangerously close to creating systematic supply issues for the market moving forward. 

The recent regulatory changes to stamp duty for off-the-plan property, lending to FIRB, and APRA restrictions to name a few have not just cooled the investment market – they have completely stopped it in its tracks. This is going to have serious ramifications in the future as supply dries up.

What is most concerning is the timing of these changes – right when our market is most vulnerable, which is a situation not dissimilar to the introduction of the mining tax that blew up WA.

There is no doubt we are teetering on the edge of a rental crisis. We have a genuine undersupply of apartments in Melbourne and with vacancy rates already on or under 1.5 percent these government restrictions will only cause more upwards pressure on rental vacancies and prices. 

Due to these serious concerns we have been investigating a build to rent model which we are introducing to the third stage of our Montague Street project. 

With the current regulations and the tax system the way they are structured, built-to-rent is virtually impossible for private companies to get the funding and cash-flow operating in a way that is comparable to a traditional apartment model, so we will be looking to the government to seriously re-assess the way it treats the GST and land tax for built-to-rent otherwise this concept will simply will not get off the ground. 

The State Government has a real challenge on its hands - in the last 12 months it has managed to grind the State’s economic engine to a halt with most of those ramifications to be felt in the next 18 – 24 months. With the property industry making up 46 percent of the state’s revenue, it is a very concerning state of affairs.  

 

Nick Andriotakis, Director Lateral Estate

So long as all tiers of government can provide some form of tax relief and other planning bonuses as happens overseas, there is wide scale potential for build to rent here. I agree with the listed developers that there should be some form of taxation or floor space incentives to make it more viable, and to give build to rent that extra lift. Because while interests are low now they will start to go up and these incentives can offset that.

It is an exciting space. The opportunity is good for the build to rent developer because it’s ground breaking and innovative, providing a new way of living for new generations of Australians who are prepared to rent long term before they own a house or apartment. This new generation also desires experience in living. They just don’t want to be a tenant, they want more than that. They want to feel connected and a part or a sense of community. They want a building or a community which has spirit and fabric in it.

But not all developers can do it. You need to be internally vertically integrated, and be able to internally fund the project because currently banks are reluctant to.

We have been planning build to rent developments for the last three years and have 300 apartments under construction and a committed land bank in Sydney of about 1200 apartments. Listed entities or syndicates who use an external builder will have multiple competing interests. Lateral Estate with its internal funding design and construct ability has only has two shareholders to answer to – so we actually look carefully at every project and develop, design and construct it ourselves. With build to rent we have a different attitude and we consider ourselves a builder of communities rather than a builder of buildings.

Our communities will have first class facilities and amenities like swimming pools, community rooms, gyms, yoga break out spaces, barbecues, gardens and some will have a concierge service. We envisage our build to rent buildings as communities with a sense of spirit not just a plain financial return.

 

Phil Leahy, General Manager Sales & Marketing, Metro Property

We have already built part of our business model around the build to rent concept. Our offering is an end-to-end complete package for investors. The areas that we are developing and building in are in the growth corridors of Sydney such as north and south-western Sydney. What we’ve been able to do is to communicate a very healthy investment story around those areas because of the new infrastructure being built. For example, in southwestern Sydney you’ve got upgraded motorways, new shopping centers, even a new airport to come. We’ve been able to tap into that investor base that doesn’t want to spend a million dollars in the middle ring but is interested in a healthy purchase price around $700,000 within their means.

We work with investors and letting agents to ensure properties are rented as soon as possible after settlement. In some cases, we provide a rent guarantee of a year or two.

We know rental yields are quite healthy in south-western Sydney, around 4% average rental yield, particularly when we are talking about lower density properties. There has been a massive shift away from high density so in Sydney we are not building any units in the current market cycle. We’ve moved towards townhouses and terraces and have been able to attract more investors to that type of product.

We are well and truly on the road to the whole notion of build to rent. The pros for investors are a low cost of buying as the stamp duty that you pay is on the land value and not on the total amount. There is an immediate upfront saving for an investor there. For it to work investors need comfort around the building process and a fixed price contract. We offer a full turnkey package with air con, flooring, landscaping, fencing etc. This is one of the biggest pros that gets our investors across the line in a build to rent scenario.

 

 


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