Pipeline swells as big players push build-to-rent projects

Activity is intensifying in the build-to-rent sector, as a swelling pipeline of new projects from Australian and international heavyweights gets bigger in Melbourne and Sydney.

Research released this week by CBRE showed there were more than 11,000 build-to-rent units in the works across Australia, with more than 30 projects under construction or being planned.

More than 50 per cent of the new developments in the works were in Melbourne, CBRE’s recently-released Build-to-Rent Development Pipeline report said, while Sydney projects represented just over 25 per cent of the market.

While a fledgling sector in Australia, build-to-rent - where developers build apartment towers for the purpose of renting them instead of selling them - is a proven international model.

Known as multi-family housing in the United States, the sector is the second biggest investment class in commercial real estate, with 6.3 million apartments being built since 1992.

In the United Kingdom, the asset class is known as the private rented sector, and since its inception in 2012, more than 120,000 units have been completed or planned across the country.

Australia’s first build-to-rent project was delivered by US giant Sentinel Real Estate Corporation in Perth last year, with the 93-apartment project sparking a groundswell of activity in the sector.

Sentinel, which has created more than 36,000 build-to-rent units in the US, acquired a West Melbourne site last year, where it is advancing plans for its second Australian project.

Local players leading the way include Victoria-headquartered construction and development heavyweight Grocon, whose pipeline includes a $515 million, 380 apartment tower at St Leonards in Sydney, as well as a $220 million, 300-dwelling tower in Richmond, Melbourne. 

In Melbourne's Docklands, building and development giant Salta Properties has a $330 million, 260-dwelling tower in the planning process, while ASX-listed Cromwell Property Group is advancing plans for a $265 million, 330 apartment tower.

ASX-listed developer Mirvac Group’s pipeline is also burgeoning, with three projects in Sydney and Melbourne collectively having an end value of more than $730 million, and a fourth Melbourne build-to-rent development being planned. 

Mirvac head of residential Stuart Penklis told Australian Property Investor Magazine earlier this year that the first residents would start moving into the developer’s first build-to-rent project, Liv Indigo at Sydney’s Olympic Park, in September.

“The view is that type of product with the certainty of tenure will be quite attractive to tenants moving forward,” Mr Penklis said.

“Our build to rent team have publicly stated ambitions that we want to grow that portfolio to 5,000 over the next few years. 

“It is big in Europe and the United States, and from a Mirvac perspective, we certainly believe that institutional ownership of well-managed rental product has a market here in Sydney.” 

In June, Canada’s Oxford Properties lodged plans to build the first large-scale build-to-rent project in Sydney’s CBD, proposing a 39-storey tower at the Pitt Street Metro Station.

CBRE head of capital markets, office and BTR research, Benjamin Martin-Henry, told Australian Property Investor Magazine that considerable tailwinds that the presence of some of the biggest international and Australian developers boded well for the growing asset class.

“These developers are not going to hitch themselves to a failing sector, so having those big players involved certainly speaks volumes,” Mr Martin-Henry said.

“This is a new sector in Australia, but it’s been a tried and tested sector in the US for half a century and most of Europe as well has institutionalised rental properties.

“These guys have looked overseas and thought ‘this is a cash-cow, it’s like a bond for property really’.

“Regardless of economic cycles, people need rental accommodation, and during downturns people need more rental accommodation.”

Mr Martin-Henry said CBRE’s research showed a “perfect storm” of conditions for build-to-rent growth, including weakening residential supply and a structural shift towards the rental market, particularly among younger generations.

He said many younger people were prioritising lifestyle over home ownership, while the low affordability of housing close to the Sydney and Melbourne CBDs provided additional tailwinds for long-term rentals.

“Home ownership rates have been plummeting for the last 20 years, we’re probably at around 60 per cent, give or take a per cent here or there,” Mr Martin Henry said.

“House prices have basically outstripped wages growth two and half times, and I don’t see house prices correcting at all. We’re not going to see a 30 per cent decline in house prices anywhere, and that’s what’s needed to balance out wage growth and house prices. 

“You are just going to have more long-term renters, for the next 30 to 50 years, there are going to be a lot more people renting long term.

“So if you are building rental accommodation, residences and units that are designed for long-term rentals, it’s a win-win really. 

“I don’t see house prices correcting to make it more affordable for people, and the younger generation does not have massive deposits to put down. 

“They could probably cover mortgage repayments with wages, but you’ve still got to cover a $150,000 deposit to try and find somewhere, and most young people can’t afford that.”

Mr Martin-Henry said developers were also undaunted by the ongoing effects of the COVID-19 pandemic, even as vacant rental properties pile up in inner city Melbourne and Sydney.

The latest ANZ-CoreLogic Housing Affordability report showed advertised rentals in Melbourne’s inner city jumped by 57 per cent from March to June, while Sydney’s CBD and inner south both recorded a 53 per cent rise.

“There are two ways to look at this,” he said

“Because of the pandemic a lot of people have lost their jobs and a lot of people have moved back home to stay with their parents, but on the other side of that you have people that had earmarked this year and next year to buy a property, and they are no longer going to be able to buy a property so they will have to rent or longer.

“So it’s whether or not that balances out, really.

“I haven’t heard too many developers being concerned about it, mostly because you are going to have a lot more renters in the market over the next three or four years, because people have lost their jobs and they are no longer going to be able to afford to buy a house, but also because a lot of these projects aren’t under construction at the moment.”

Mr Martin-Henry said the other big reason that funds were flowing into the sector so rapidly was because of the changing value of traditional institutional investment destinations, such as office buildings or industrial property.

He said build-to-rent projects provided institutional investors with an opportunity to create sustainable developments, while also providing long-term income streams.

“It’s a combination of house prices booming since 2012, which has made it unaffordable for people, but also just the spread between residential yields, where mum and dad investors can get 3.5 per cent per year,” Mr Martin-Henry said.

“Whereas 15 years ago, offices would get about 6.5 to 7.5 per cent, that gap was too wide so people were better off sticking their money in offices.

“But as that gap has started to converge considerably, with build-to-rent assets yielding 4.5 per cent-plus since March while offices are yielding 4 to 4.25 per cent, people will look at putting their money somewhere else.

“I think it just took time for that yield cycle on offices to come down and get close enough to residential for these players to look at it and say ‘this is probably a better quality investment, let’s chuck $500 million at another asset class and diversify our portfolio’.”