The Viability of Build to Rent

Will the build to rent residential sector challenge Australia’s dominant strata investment model and re-define the "great Australian dream"?

Amidst the discussion surrounding the growing scheme, a new research paper from JLL was recently released to examine the current strong interest in the sector in Australia, why it hasn’t worked in the market until now and the factors that should make it different this time.

The paper, Build to Rent Residential: Australia’s Missing Sector, said for build to rent to establish itself as a viable sector in Australia, parameters around residential investment and ownership will need to continue shifting.

JLL estimated that if Australia were to reach a relatively moderate level where build to rent represented 10 per cent of all institutional investment in real estate, this would translate to around $40 billion. This figure is still less than one per cent of all Australia’s residential housing stock institutionalised.

Their report noted that while it was too early to predict the growth profile of the build to rent sector in Australia, there was the potential to be very large and to grow relatively fast, as has been case in many other market globally.

[Related reading: Australia’s Housing Future And The Build-To-Rent Approach; Mirvac To Launch Australia’s First Build-To-Rent Development; Build-To-Rent: A $300 Billion Proposition?]

JLL Asia Pacific's director of research strategy Dr David Rees said the existing dominant model of private investment in strata titled rental stock, which is driven by capital growth and post-tax returns, has driven gross residential yields down to a level where it is hard to make build to rent investment competitive.

“However this model, which is built around small-scale private landlords, is likely to be less rewarding to investors in a future low inflation, low interest rate environment," he said.

The sector also lacks the flexibility to respond to the growing diversity of tenant demand as the profile of renting households changes.

“Evidence from offshore markets illustrates how build to rent landlords are able to offer a wider range of services such as recreation services and security of tenure, including flexibility in longer-term leases and professional management of properties,” Dr Rees said.

JLL head of Australian residential research Leigh Warner said there was a number of challenges remaining for the sector to overcome in Australia.

"However, we believe that there are some powerful trends that are working on both the tenant demand side of the equation and in fuelling investor appetite for the product that will help overcome these challenges and see the steady rise of the build to rent sector in Australia over the next decade.

“Demographically, there will be strong growth in key renter target market segments in Australia over the next decade, particularly 25-35 year olds and ‘empty nesters’," he said.

Warner said that growth creates a very favourable demand backdrop for build to rent to succeed.

"In our view, some of the potential benefits of stock specifically designed and operated with renters in mind will also help drive demand once consumers are educated on what these benefits are," he said.

“On the other side of the equation, there is a strong ‘pull’ factor driving interest in the sector, which is very strong latent investor appetite for the product.

"Large global pension funds and sovereign wealth funds are attracted to the stability of income the sector offers and the counter-cyclical nature of the income profile.

“The stability and counter-cyclical performance of the sector have been demonstrated by the performance of the rented sector through the Global Financial Crisis.

"Australian investors are also getting familiarised through investing in the sector in other countries and, with returns in other core real estate sectors now seemingly ‘lower for longer’, the relative returns of build to rent in Australia are now more closely aligned with these sectors.

“The bottom line is that longer-term Australia will not support enough new assets in the office, industrial and retail sectors to satisfy internal and external investor demand for prime grade real estate assets. Build to rent is one of the few alternative sectors that offer large investors the scale they will need,” Warner said.