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Big players continue to bank on build-to-rent

Sentinel Real Estate's Element 27
6 min read
Sentinel's Element 27 promises to be a stylish addition to the Perth suburb of Subiaco. Image: Sentinel

Big players continue to bank on build-to-rent

Cashed-up institutional investors and large-scale developers continue to sharpen their focus on build-to-rent, with United States headquartered Sentinel Real Estate Corporation and ASX-listed Mirvac and among those making recent major moves.

Cashed-up institutional investors and large-scale developers continue to sharpen their focus on build-to-rent, with United States headquartered Sentinel Real Estate Corporation and ASX-listed Mirvac and among those making recent major moves.

A fledgling asset class in Australia, the build-to-rent sector is considered to be a key element in addressing housing undersupply and affordability, particularly in hot capital city property markets.

As its name suggests, build-to-rent differs from traditional multi-residential development in that the developer funds and builds the project with the intention of owning and leasing the units rather than selling them.

While it is a relatively new approach for Australian players, developers and institutional investors alike have been attracted to the possibility of replicating the low-risk, stable returns on offer in the United States and across Europe.

Micheal Streicker, president of New York-headquartered Sentinel, told Australian Property Investor Magazine that the risk profile of build-to-rent fit well with its anticipated investor base.

“The typical build-to-sell project is a riskier investment with shorter time horizons for investors,” Mr Streicker said. 

“Different investors have different risk appetites, and we believe there is a place in a portfolio for both types of investments.

“A typical US institutional investor, for example the US equivalent of a superannuation fund, has approximately 25 per cent of its real estate portfolio in US rental apartments.  

“As the Australian market matures over the next few decades, we expect domestic institutions to behave similarly.”

Sentinel, which began developing Australia’s first build-to-rent community in the Perth inner city suburb of Subiaco in 2012, recently received development approval for the final stage of the project, known as Element 27.

Once completed, Element 27, which has an end value of $124 million and was designed by local firm Hillam Architects, will comprise 264 apartments that will be a considerable boost for tenants struggling to find properties in Perth’s ever-tightening rental market.

The final building will be five-storeys containing 91 apartments, with a wide range of energy and water efficiency measures designed to ensure it is attractive to tenants seeking to lower their utility bills.

Sentinel, which currently has more than $10 billion in real estate assets under its management, has a 1,000-unit development pipeline in Australia, with its next project to be built at 164-168 Roden Street in West Melbourne.

The developer also announced plans this week to build a second Perth build-to-rent precinct, in the beachside suburb of Scarborough.

Sentinel’s latest plan comprises a 21-storey tower containing 175 apartments, located on the corner of West Coast Highway and Manning Street, around 200 metres from Scarborough Beach. 

A development application has been lodged and will be assessed by planning authorities in coming months.

Mr Streicker said key drivers behind the company’s decision to develop in Perth ahead of other Australian markets was WA's population growth and economic growth.

“When we start a development, we are anticipating what the location will be like 3-5 years into the future,” Mr Streicker said.

“We viewed the economic pull-back in WA as an ideal time to enter the market given the reduction in costs.  

“Because of how new developments are typically financed, we also saw the market as one with limited new supply entering the market, which leads to an attractive competitive environment.  

“At the time when we began to review locations for development, DevelopmentWA was the most forward thinking governmental agency in Australia when it came to BTR. 

“They were interested in spending time with us to understand how our business model worked and willing to consider the benefits of the property type for its schemes.  

“Perth is also a lovely city and WA has some of the best natural attractions in Australia, which will continue to attract residents from all over the globe.”

Meanwhile, one of Australia’s biggest home-grown players in the sector, Mirvac, recently announced a collaboration with privately-owned Melbourne developer Milieu to create a 527-dwelling build-to-rent project in Melbourne’s Inner North.

A planning application was lodged this month to build a project called Albert Fields on a one-hectare plot in Brunswick, where Mirvac and Milieu amalgamated seven separate parcels of land.

The developers consulted closely with the local community to shape their vision for the development, which is scheduled to be complete by 2024.

Mirvac head of commercial property Campbell Hanan said while the project team had a strong vision from the outset, the community consultation had solidified its direction.

“We set out to understand the needs and challenges faced by tenants and the surrounding neighbourhood including park users, community groups and businesses, as well as issues relating to landscaping, ecology and affordability,” Mr Hanan said. 

“The insights gleaned are invaluable, and we’re thrilled to reach this milestone in bringing Albert Fields to life as a place where residents will live on their own terms.”

Albert Fields will be managed by Mirvac’s build-to-rent platform Liv, which is operating a similar development in Sydney’s Olympic Park.

Mirvac’s build-to-rent pipeline has an end value of around $730 million, comprising three projects in Sydney and Melbourne.

Also this month, Vellum Funds Management and Urban Property Group broke ground on the second project in Vellum’s Places-Build-to-Rent Fund, which was launched earlier this year.

The $78 million project, known as Navali and located in Sydney’s Penrith, comprises 163 apartments, 10 of which have been designed specifically for NDIS recipients, while another 10 have been designed for affordable living.

Vellum managing partner Binuo Erth said she expected Navali to build on the success of the fund’s first project, Highland, which she saw as a model for the entire sector in terms of community-focused design and social responsibility.

“We are committed to making sustainable & responsible investment, providing positive impact with our projects for the long-term and believe they offer the very best living to the local community,” Ms Erth said.

Construction on Navali is expected to be complete by the fourth quarter of next year, while UPG is providing a 1-year rental income guarantee to participants in the fund.

Vellum is projecting gross rental yields of around 5 per cent at Navali.

The new projects come at a time that state governments across the country are being urged to help unlock the full potential of the sector.

Earlier this month, national law firm Allens joined forces with economics and town planning firm Urbis to call for urgent policy action to support build-to-rent developers.

Only New South Wales has an incentive system in place to support build-to-rent, with the state government offering land tax discounts of 50 per cent for projects of at least 50 units in the Sydney metropolitan area.

Estimates by Urbis show that stimulation of the sector to comprise a 10,000 unit pipeline could support an average of 3,500 jobs per year in the construction phase.

Building that up to 50,000 units would support up to 19,000 jobs per year, in addition to an average of $2.9 billion in Gross Value Added.

Allens Real Estate partner Tim Chislett said it was clear that build-to-rent offered a solution to Australian housing supply and affordability issues, which remain despite the suspension of international migration.

“Now more than ever, we need policy change in this sector, requiring a strong commitment from all levels of government to reduce barriers to BTR viability,” Mr Chislett said.

“If policy settings allow, BTR development will get cranes in the sky more quickly than any other asset class, promoting economic recovery from COVID-19 while addressing Australia's ongoing housing crisis.”

Urbis director Mark Dawson said build-to-rent was the quickest solution to increase housing choice and capacity at scale in Australia.

“Despite current reduced migration rates, Australia still has a considerable housing demand gap that needs to be plugged. 

“BTR provides an opportunity to increase supply, improve housing options and ensure Australia remains a liveable and resilient country into the future.”

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