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Aussie BTR market spurred on by economic headwinds and tight rental market

By Kyle Robbins
21 March 2023 | 10 minute read
nora wild leigh warner reb dirc6v

Having withstood several headwinds presented throughout 2022, JLL is reporting several favourable factors are driving the sector’s growing momentum for the year ahead.

Build-to-rent (BTR) projects, which attracted $3.5 billion in capital between January 2021 and last September, are expected to grow further throughout 2023, with experts at international real estate consortium JLL attributing this trend to a myriad of conditions, including an unlikely improvement in rental conditions in the medium term, increased BTR popularity, and international economic uncertainty.

International economic pessimism could play favourably for the sector by boosting Australia’s attractiveness to overseas investors, who may also be coaxed into the market by ever-increasing residential rent increases.

Despite facing the twin challenges presented by rising construction and financial costs, JLL’s head of residential research in Australia, Leigh Warner, believes BTR developers “have a significant competitive advantage over build-to-sell developers in not having a lengthy selling period where construction and finance costs are not locked in.”

“This has meant BTR operators have been in a strong position to bid for major high-density development sites over the past year or so,” a trend which he explained “has been particularly evident in Melbourne where more sites have been available.”

Having weathered challenges posed throughout 2022, JLL revealed the overall BTR pipeline between 2023 and 2025 has expanded from 13,600 at the end of 2021 to 20,515 a year later.

According to JLL, the number of apartments under construction fell slightly in the final quarter of 2022 due to several completions; however, 5,413 units remained under construction at the end of the year. A further 5,944 had received planning approval and 9,158 are in early planning stages.

Melbourne dominates Australia’s future supply pipeline with 63 per cent of planned supply. Interest in Brisbane (25 per cent) grew significantly last year, leading it to boast the second highest share, while the challenges of making projects work in Sydney are reflected in a lower share of the pipeline.

JLL’ head of alternative investments in Australia, Noral Wild, explained that “leasing interest has generally been very strong for the new units completed in 2022, along with other existing BTR developments, reflecting the tight rental market.”

“We anticipate site acquisition opportunities to increase in 2023 as vendor expectations adjust to the reality that higher interest rates are affecting demand and pricing for sites (from all sectors).”

“This adjustment will likely see the number of opportunities increase for those well-capitalised BTR operators who are in a position to build their pipeline and market share, perhaps in the second half of the year,” Ms Wild concluded.

Broadly speaking, JLL identified the key trends for the BTR sector in 2023 as including:

- A clearer picture via greater operational data and analysis of project leasing metrics, rents, and the types of amenities and features that work best

- New players emerging in the BTR space

- Even greater government support through taxation measures and planning regulation in the face of rising political pressure to address imbalances in the rental market

- A wider geographic focus for new developments

- Site acquisition opportunities for BTR operators in the second half as vendor expectations adjust to the reality that higher interest rates mean much lower demand and prices

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