Australia's $9.6 billion Build to Rent market poised for rapid growth

 

Megan Neil, Senior Journalist, Real Estate.com.au First published 14 Jun 2022, 9:01am

Megan Neil, Senior Journalist, Real Estate.com.au First published 14 Jun 2022, 9:01am
Australia's Build to Rent (BTR) market is about to experience significant and rapid growth, according to new analysis that predicts the number of units will jump almost tenfold to 16,000 by 2027.
Cushman & Wakefield research found the burgeoning BTR sector, currently worth about $9.6 billion based on the 40 projects under construction, is "set to explode" over the next few years.
"Build-to-rent in Australia has reached a turning point," Cushman & Wakefield's director of metropolitan markets Marcus Neill said.
"The number of constructed units is set to double each year to 2025 and grow nearly tenfold over the next five years.
"Victoria is currently the epicentre of build-to-rent, and we expect it to play a key role in absorbing fundamental housing issues."
The BTR model, where the developer maintains ownership of the project once construction is complete for the purpose of renting it out, typically involves large-scale apartment complexes owned by major investors.
According to the research, there are currently only 1859 apartments operating across six BTR projects in Victoria, New South Wales, Queensland, and Western Australia.
But there is a strong pipeline of developments backed by institutional investors. The report found construction is expected to peak in 2022 with 12,848 units being built, as 14 major institutional investors develop 40 BTR projects.
With new developments expected to add to the construction pipeline, Cushman & Wakefield predicted the number of completed BTR apartments will reach 15,977 by 2027, based on existing projects alone. PropTrack economist Anne Flaherty said Australia has lagged in adopting the BTR model, which is already well established in the United States and Europe. The build-to-rent model, already well established in the United States and Europe, is expected to grow in Australia.
 

The build-to-rent model, already well established in the United States and Europe, is expected to grow in Australia. Picture: Getty

Ms Flaherty said BTR could hold the key to increasing rental supply in Australia, although there are challenges to overcome if the development model is going to take off here.
"There is a current undersupply of rental properties in Australia, and a growing recognition by government that more needs to be done," she said.
"Australia's population is forecast to grow by 3.5 million over the next 10 years, and a growing proportion of the population are renters. "Boosting the supply of rental accommodation is essential, and removing barriers to entry for BTR developers could be part of the solution."

Influx of BTR players during pandemic

The number of BTR groups active in the market jumped from 12 to 35 between the end of 2020 and early 2022, Cushman & Wakefield head of metropolitan markets Lukas Byrns noted. "We have witnessed a dramatic influx of investment into the BTR sector since 2020 and a sharp increase in active groups," Mr Byrns said.
"They are typically backed by both domestic and foreign capital and are aiming to develop portfolios of up to 5000 units over the next five to seven years."
The Cushman and Wakefield reportsaid the recent deluge in planned projects in Victoria is set to drastically change the BTR landscape in Australia.

Home Southbank, the first BTR project to be completed in Melbourne, is now leasing apartments. Picture: realestate.com.au/rent

Victoria will go from having one operating BTR development to account for nearly two-thirds of the total stock of BTR apartments in Australia within the next decade, it said. The existing stock of units in Queensland, NSW, and WA is also expected to increase, albeit on a smaller scale.
The report said Australia's population growth will likely result in demand for at least 300,000 rental units by 2029. Cushman & Wakefield NSW research manager Sean Ellison said it is unlikely the current supply of Australian housing will absorb forecast demand, pushing rents higher.
"Population growth supporting tenant demand, higher rents increasing investor returns, and a significant amount of capital targeting Australian housing are all tailwinds for build-to-rent over the next decade," Mr Ellison said.
Several major operators are active in the BTR space, including Mirvac, which last month started construction on its fourth BTR project, the $400 million LIV Aston project in Melbourne. Mirvac CEO and managing director Susan Lloyd-Hurwitz said the group has about $1 billion in BTR properties currently under construction nationally.
"Mirvac is committed to providing Australians with a more diverse range of housing options and improving the supply of homes in sought-after urban locations, with a target to deliver 5000 LIV apartments to be operational by 2030, providing a compelling alternative to traditional home ownership," she said.

. An apartment for lease in Mirvac's first build-to-rent development - LIV Indigo in Sydney's Olympic Park. Picture: realestate.com.au/rent

The obstacles to BTR in Australia

The Cushman & Wakefield report noted a number of barriers remain for the development of BTR in Australia, including a lack of federal tax concessions, rising construction and land costs, and a lack of financing transactions occurring to date.
Ms Flaherty said Australia's tax rules have acted as a significant barrier to entry for institutional investors looking to develop BTR. The build-to-rent market is tipped for strong growth, but a number of obstacles remain to the sector's development.

Picture: Getty

"In contrast to other countries where BTR is taxed in much the same way as other forms of commercial real estate, in Australia the sector is subject to the higher rates of tax associated with residential properties," Ms Flaherty said.
"In Australia, this reduces the appeal of BTR relative to other forms of commercial real estate and hinders development.
"In recent years, state governments have sought to encourage more BTR activity by addressing some of these barriers."
The NSW and Victorian governments have introduced 50% land tax reductions for the BTR sector to help establish the industry in those states, while the Queensland government has a BTR program in partnership with the construction industry. WA's budget last month included a new 50% land tax concession for eligible BTR developments from July

 

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