Although the market for build-to-rent (BtR) is maturing in places such as the UK, it has yet to take off in Australia.
Australia’s softening property market and ongoing demand for new housing are the right conditions to establish a BtR sector in Australia, according to UK BtR specialist and managing director of Bespoke Property Group, Andy Leahy.
BtR is where a developer receives backing from an institution, such as a superannuation fund, to keep an apartment block and rent it out via a management company. The result is long-term income for the investor and usually greater security for tenants through longer leases and potentially more affordable rents.
It’s different from the build-to-buy model currently common in Australia where apartments in large blocks are owned by individuals and investors.
Leahy, who helped former UK Prime Minister David Cameron’s government write the legislation for BtR as an asset class, says the Australian market is where the UK was about seven or eight years ago.
But investors are warming to the idea, he says.
“I would suggest investors would be keen, and you have your own institutions here ready to do it.”
He says the key to its success is a secure regulatory environment where investors have certainty that things won’t change.
“The worst thing for investment is volatility in the regulatory environment – people have to feel things won’t change much in future, so it’s worth investing.”
The major policy hurdles are around planning and tax. Leahy says its critical to recognise BtR as a distinct asset class with its own approval system.
Sustainability and affordability
BtR is hooked into the modular housing sector in the UK, largely because it speeds up the pace of delivery and therefore rental income starts coming in earlier. There is also greater freedom in the design of the buildings because they are largely unrestricted by client demands.
Modern prefabrication techniques lead to less waste in construction and more reliability in design and environmental performance.
Because BtR is all about avoiding tenant turnover – and expensive agent fees – tenants generally benefit from increased amenities. Instead of penthouses on the top floor, for example, there’s usually outdoor recreational spaces. On the ground level there are things such as concierge, storage and coffee shops – all designed to keep the renter happy.
Leahy says that although retail on the ground floor was once seen as a waste of money and space, that mentality is disappearing and developers are becoming cleverer about what goes in on the bottom floor.
He also says some BtR brands are looking at interesting things such as outdoor gym areas and Amazon delivery drop off areas.
For prospective tenants, Leahy says the rents can be more affordable than the private rental market. Because it isn’t classed as affordable housing, it attracts people who wouldn’t otherwise be eligible for affordable housing but don’t want to buy.
He also says the BtR demographic is shifting. It is no longer just attracting young millennials seeking the mobility and flexibility; BtR is also attracting downsizers.
“We are getting the elderly moving in and staying for a considerable time.”
This is because they realise they don’t need their big family house, and have kept enough money for old age, and are interested in enjoying life rather than having to maintain a property.
The UK experience
BtR came to the fore in the UK after the Global Financial Crisis in 2009, with policy makers looking for ways to encourage housing construction and energise the economy.
BtR suddenly became an appealing proposition in this environment, which was characterised by low interest rates and lower investor expectations about yield.
Leahy says it made sense that local government pension schemes were among the first to jump aboard, with the model designed to bring in constant and reliable rental income from tenants.
Some of the key policy changes that led the way for UK’s BtR sector were lowered tax rates paid on BtR investments and reduced infrastructure requirements for developers.
Now that the necessary tax and legislative changes have been made in the UK, the market has skyrocketed. There are 142,999 BtR units either completed or planned across the UK, according to the British Property Federation.
Sydney-based property development company Coronation sponsored Leahy’s visit to Sydney last week, which was hosted by the Committee for Sydney. The developer is in the process of bringing forward proposals for a BtR development in Western Sydney.
“Like London, Sydney is facing a challenge in meeting its housing need and BtR represents a new way of thinking about delivery to meet that need,” Leahy said.
“It is good to see the emergence of BtR in Australia and I hope to play some small part in helping it grow and thrive in the coming years.”