Much of the first quarter was spent visiting our investors and developments in the UK but also further afield in Australia and the US. These trips have provided great insights into the similarities and differences in how the Build to Rent sector is evolving in these markets; and the potential opportunities for investors.
By Will Gibby, Fund Director, Global Real Estate, Federated Hermes Limited
Australia has thus far been slower to adopt the Build to Rent model than the UK market. However, the sector is clearly now on a growth trajectory – driven by a confluence of demand side pressures – to become a critical component of Australia’s housing stock. As in the UK, the supply of housing stock in Australia falls significantly short of demand, contributing to very low vacancy rates but also increased pressure on affordability. In 2023, Housing Australia (formerly the National Housing Finance and Investment Corporation) forecast in its ‘State of the Nation’s Housing’ report that Australia is facing a national housing deficit of approximately 175,000 homes by 2027, with around 59% of the shortfall expected in the unit market.
Accessing institutional capital is one way to fund this increase in housing supply, which would improve affordability and ease rental shortages. While the Build to Rent sector is still relatively nascent in Australia, as it grows, there are pertinent lessons that we can learn from the UK. These will help the sector to become more established and deliver positive outcomes for residents, the environment and investors.
According to recent data from EY’s Australian Build to Rent Sector Update, the current size of Australia’s institutional Build to Rent market is estimated to be A$21.71bn, with only 17 projects operating so far across the country, but with an estimated 75 Build to Rent projects in construction or in planning nationally, and 9,380 Build to Rent units expected to become available to Australian renters in 2024. International investors are taking note – attracted by the defensive characteristics and diversification benefits offered by rental income streams in a high inflation environment, 35% of these existing and proposed apartments currently backed by global capital either directly or through joint venture partnerships.
The Australian Government has commenced a short review on draft legislation (ending 22 April 2024) for eligible Build to Rent Managed Investment Trusts to claim a 15% withholding tax rate, intended to stimulate the supply of new Build to Rent housing. Eligibility requires 10% of the dwellings in a project to be offered as affordable tenancies at a minimum of 25% discount to the rent charged in similar residences within the project. However, the measure is not retrospective and existing assets that were in operation at the time of the last year’s Federal Budget announcement will not be eligible.
Having been at the forefront of establishing this sector, we are disappointed to see that the proposed legislation in relation to withholding tax rate is not retrospective and excludes all the previously operating Build to Rent projects in Australia. We are hopeful that during the consultation period (ending 22 April 2024) the views of the those who have pioneered the early development of Build to Rent in Australia will be listened to.
To date, we have seen most investment taking place in Melbourne, and to a lesser extent, Brisbane, which largely reflects the more attractive land prices and availability of large sites available for development, especially in the city centre. In February, alongside our development partners Sentinel Australia, we attended the official launch of The Briscoe, a 172 apartment Build to Rent development in West Melbourne. We were able to draw on our extensive experience of delivering to let residential properties in the UK to support the development of The Briscoe, ensuring it is aligned with our Net Zero Carbon Pathway. In addition, Hestia’s mid-market ethos can be seen throughout The Briscoe, offering amenities that enhance community as opposed to being purely aspirational.
The Build to Rent sector is expected to continue to grow in the coming years, with Australia’s tight rental market, strong population, and economic growth relative to other advanced economies expected to drive the Build to Rent sector from 2024 to 2026 according to JLL research. At the end of 2022, there were 5,413 Build to Rent apartments under construction, a further 5,944 Build to Rent dwellings that had received planning approval and 9,158 Build to Rent units were in the planning stage – with most of these projects located in Victoria (60%) and New South Wales (20%).
So far, the Australian Build to Rent market remains relatively small scale and fragmented, but with a strong pipeline driven by structural changes, offering huge opportunity for international investors to deploy capital and deliver much needed housing in the coming years.
The views and opinions contained in this document are those of the author and may not necessarily represent views expressed or reflected in other communications. This does not constitute a solicitation or offer to any person to buy or sell securities or related financial instruments.
