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The build-to-rent (BTR) sector, viewed as a key answer to the nation’s rental crisis, reportedly has $15.85 billion in institutional capital either already raised, allocated, or pledged to its development.
Institutional funding targeting the Australian property market has increased significantly in the past 18 months, with the BTR sector earmarked as a major recipient of this capital, according to new research from Savills.
The report found the sector is set to benefit from an increase in “forward funding” and a boost in foreign investment to add to the 40,000 apartments either completed or in the pipeline.
Paul Savitz, director of operational capital markets at Savills, said, “Assuming that this $15.85 billion in capital is leveraged with debt, this could potentially support the delivery of 52,800 new homes by 2028.”
According to Savills, “forward funding’s” popularity is expected to increase in coming years, with the scheme’s involvement in funding 75 per cent of investment in the sector’s United Kingdom market over the last five years setting a strong precedent for the Australian market.
He explained that this investment “will contribute to the government’s targets for housing delivery and help deliver much-needed rental housing stock to Australian cities struggling in the rental crisis.”
CoreLogic’s Quarterly Rental Review for March 2023 found the national residential vacancy rate was 1.1 per cent, with Adelaide (0.3 per cent) and Perth (0.6 per cent) the two tightest markets.
Australia’s supply and demand imbalance is no secret, with the National Housing Finance and Investment Corporation (NHFIC) reporting the national housing shortfall is expected to hit 100,000 over the next five years, and is a primary driver of interest in the nation’s build-to-rent sector.
Savills reported this shortage of rental supply, mixed with strong rental growth — CoreLogic revealed rents hit record highs in 2022 — has applied upward pressure on rents, further increasing the allure of the nation’s rental sector.
Even with significant economic headwinds forecast on a global and domestic scale in the near-term future, BTR remains an attractive asset class with Savills’ head of operational capital markets, Conal Newland, explaining that the sectors’ “resilience within the current economic climate, in particular, its ability to match rising inflation, has allowed it to remain highly feasible.”
Additional tailwinds benefiting the BTR sector, according to Savills, include increased occupant demand, ongoing supply issues, rising post-pandemic migration, and challenges to home ownership, particularly prescient in Australia’s major cities.
Mr Newland explained that “the rate of annual consumer price index (CPI) reached 6.8 per cent in February, compared to 22 per cent growth in apartment rents over the same period, while the transitory nature of tenancy allows investors to regularly rebase their rents in line with the market.”
Tenant responses to current rent increases remain concretely unclear, though the sustained return of international students and skilled migrants, coupled with waning supply, “will put further upward pressure on rents,” he added.
Investor interest in the BTR sector has increased over the last 12 months, with data from Savills for 3Q22 revealing two-thirds of European investors were likely to invest in BTR in Europe and the Middle East in the next year.
Moreover, in the US, the BTR sector accounts for 35 per cent of all transactional volume in the past three years. In Australia, it accounts for around 2 per cent of the national investment, although this figure could rapidly increase with rental demand forecast to remain more robust than off-the-plan sales.
Investors have broadened their Australian BTR horizons, with Savills revealing Melbourne boasted 60 per cent of all BTR apartments either in planning or already operational, but that figure has dropped to 53 per cent, with investors shifting their focus to Brisbane with hosting the 2032 Olympics, significant public infrastructure spending, and a fast-growing population key factors contributing to the city’s market share increasing to 20 per cent.
Mr Savitz explained, “Sydney remains the hardest city to navigate [given] land values remain elevated, and this continues to impact on financial viability.”
Heading into the future, Savills explained that “forward funding” developments “will become the primary route to market,” adding that “low-geared investors can take advantage of current challenges in the debt market.”
“Residential sales are waning in terms of forthcoming pricing and supply, and BTR can look to increase its share of construction starts and further support housing delivery nationwide,” the report concluded.
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