Should investors be concerned with the build-up of build-to-rent?

Developers continue to add to their build-to-rent pipelines, but does the flow of billions of dollars to boost the supply of rental properties and increase competition for tenants create risks for individual investors?

While still a fledgling sector in Australia, build-to-rent, where developers build dwellings for the purpose of leasing them rather than selling them, is considered to be a key element in solving Australia’s housing supply and affordability issues.

Considerable momentum is building in the sector, with a host of international and local developers converging on build-to-rent projects to tap into the nation’s innate need for more rental properties.

One of the latest to bolster its build-to-rent plans was diversified developer Pellicano, which recently increased its pipeline of projects by three, with its upcoming developments now worth in excess of $1 billion.

Pellicano’s newest plans comprise 410 build-to-rent residences across three projects in Victoria and Queensland, which will be managed under its Pellicano Living brand. 

In Victoria, Pellicano has pledged to deliver 172 new rental properties in Oakleigh South, while in Queensland its projects comprise 86 apartments at Kangaroo Point and 152 apartments in Woolloongabba.

The developer already has around 400 build-to-rent dwellings under construction across four projects in Victoria and Queensland.

As more developers advance projects, their focus has been turning to ensure the developments cater to a rental-focused lifestyle, according to i2C managing director Brian Jende, who is leading design works for Pellicano’s Oakleigh South development, known as Fieldworks House.

“We’ve worked across two dozen build-to-rent projects at various stages in the last twelve months, and the design certainly shifts to cater to a broader spectrum of residents; in particular the prioritising of retail, amenity and essential services, all of which are easily accessible at Fieldworks House,” Mr Jende said.

“Residents can look forward to a range of shared amenities including a residents’ lounge, indoor recreational spaces, a large private dining room, rooftop barbecue and relaxation areas, and a large co-working facility.

“In addition, there is an 1800sqm podium level that will provide a range of outdoor spaces curated to form the residents’ own urban parkland, featuring communal gardening facilities and large grassed areas for activities – all intended to provide a green oasis that complements the modern vertical-living community.”

Those amenities are commonplace in build-to-rent projects, as developers seek to provide tenants with higher levels of amenity than what’s on offer at typical investment-level apartment complexes.

In early September, United States-headquartered Greystar Real Estate Partners and architecture firm Fender Katsalidis received planning approval for what will become Australia’s biggest build-to-rent project in Melbourne's South Yarra.

As well as the usual features such as a pool, gym and recreational areas, the 625-unit development will include a ground level retail and hospitality precinct and a new pedestrian laneway to provide easy access to South Yarra train station.

Chairman of the Property Investment Professionals of Australia, Peter Koulizos, told Australian Property Investor Magazine that level of amenity would certainly attract tenants.

However, Mr Koulizos urged investors to act cautiously when considering participating in build-to-rent investment schemes to secure a long-term source of rental income and a hands-off property management experience.

Mr Koulizos said there were several factors involved investing in a build-to-rent scheme rather than buying a dwelling and leasing it in the traditional manner that made it a risky proposition.

“The risk, or part of the risk comes from the fact that you’re really investing in the management company, and you’re hoping that the company that manages it does the right thing, because if they don’t do the right thing, what are your options,” Mr Koulizos said.

“And also there is no security. One of the great things that I like about investing in property is the fact that you have the title.

“Let’s say you spend $500,000 on buying something and you get a $400,000 loan, even though you don’t own most of it, the bank does, you have security there, and in five years’ time, if your loan is still $400,000 and the house is now worth $600,000, you have got $200,000 worth of equity which you can use to go and buy the next one. 

“But if you invest in build-to-rent, banks are not going to lend on it. Banks might lend on the cash flow but they’re certainly not going to lend on the equity. 

“Even if the property doubles in value, you are just a unit holder, you do not own the real estate.”

Mr Koulizos said individual investors tended to gravitate towards detached houses rather than apartments, with institutional investors and large-scale developers more suited to take on the inherent risk of managing units, particularly in the inner city.

“I am not a big fan of people investing in apartments full-stop,” he said.

“The numbers show time and time again that they have very limited capital growth and you can be in an oversupply situation very quickly.

“I know it’s very rare, but a crisis like COVID hits the apartments market harder, because a significant pool of the rental market is gone.

“Hopefully that’s one of the things that you considered before buying an apartment, there is a real possibility of getting into an oversupply situation very quickly, just like we have had with COVID. 

“Particularly in the CBDs, a significant proportion of inner city apartments are rented by international students.

“If you don’t have international students, then a significant portion of your pool of tenants has disappeared. 

“Even though property is screaming ahead all over the country, you can’t say the same for the value or the rent for apartments.”