Amid a backdrop of high housing costs and a growing rental population, build-to-rent development is expected to gain more momentum in key locations, particularly in Sydney and Melbourne, new research shows.
A growing pool of more than three million households will drive the Pacific region’s nascent build-to-rent sector if developers can provide the right product and amenity, says CBRE's latest build-to-rent report.
The number of renter households in Australia has increased by 500,000 over the past decade, up to 31 per cent from 27 per cent.
While in New Zealand renter households have increased by 120,000, a rise to 34 per cent from 30 per cent.
Compounding the case, CBRE head of build-to-rent research Benjamin Martin-Henry says overall home ownership rates have been decreasing.
“Particularly in the 15-24 and 25-34 year age brackets, with declines of 30 per cent and 26 per cent respectively in Australia between 1995 and 2014,” he said.
“These results, while not being particularly surprising, highlight the problem for younger generations coming of age in a time of the new norms of lower economic growth, lower wage growth, high underemployment.”
It’s in this environment CBRE’s head of advisory Kelwyn Teo says build-to-rent development is expected to gain more momentum.
“But location will be key – particularly in markets such as Sydney and Melbourne,” he said.
REA Group chief economist Nerida Consibee echoes this sentiment.
“Anywhere where it’s expensive to rent where rents are going up quickly, should theoretically do well from build to rent,” she said.
The highest proportion of renters in Sydney and Melbourne are in some of the most desirable and ultimately more expensive locations.
“Given the current high cost of land in these areas it will be difficult — but not impossible — to make build-to-rent developments stack up through a combination of key metrics including occupancy, stabilised rental growth and operational efficiencies,” Teo said.
“As land cost will still be a key factor, particularly in Sydney, we anticipate most developments will initially be in more fringe locations and, crucially, they are expected to be in and around population growth corridors or employment hubs supported by a good public transport systems such as Parramatta, Macquarie Park and Liverpool.”
The US has the most advanced build-to-rent market in the world with 21 million residences.
“If you look at the US it’s the largest property asset class, larger than office, industrial, or retail,” Consibee said.
“So it's seen as a good investment with stable returns. But in Australia we have a problem that yields are very low. We have a problem getting yields to stack up,” she notes.
Due to the United Kingdom being a relative newcomer to the game, with 30,000 existing units, the CBRE report uses the UK's market as a guide, with the mix of build-to-rent renters, including:
Younger independents aged 18-24: 22 per cent.
Flexible professionals, no children aged 25-44: 26 per cent
Budgeting families aged 25-44: 29 per cent.
Reconciled with renting aged 45 and upward: 23 per cent.
Implementing BtR across Australia and New Zealand
While the build-to-rent is still in its infancy in Australia, Consibee says it's not going to be a strong growth sector until government incentives improve.
“Improve in the same way they are available in the US and the UK, or alternatively until rental returns start to improve, which again, doesn't seem like it will happen anytime soon particularly in Melbourne and Sydney,” she said.
Teo says a key driver of build-to-rent take-up in the Pacific would be professional management, which he likened to a hotel or student accommodation, where the tenant was the customer and the focus of the operator was to increase retention.
“Developers also need to be cognisant that different products appealed to entirely separate demographic and socio-economic niches.”
Another driver of sector growth in the Pacific region is competitive rental markets in metropolitan cities like Sydney, which often require renters to attend multiple inspections for often sub-standard accommodation.
“In the US and the UK, large-scale build-to-rent providers allow renters to drop into a leasing suite, talk to an agent or do an online virtual tour of various apartment styles,” Martin-Henry said.