Property consultancy Knight Frank has released insights from its latest data highlighted in the Australian Horizon 2024 report.
Throughout the sector, debt has been a defining issue. The living sectors have grown quickly across the country; however, developers are increasingly facing this issue. The residential supply and demand imbalance and a small development pipeline have further exacerbated the need and popularity of the living sectors, however, myriad cost pressures on developers are slowing the pace of delivery.
Amongst the living sectors, Build to Rent has proved to have the greatest potential to scale up, but higher funding costs, a lack clarity over the implementation of long-awaited MIT reform, and uncertainty over potential changes to Thin Capitalisation rules are all making it more difficult to underwrite new developments.
In 2024, Knight Frank expects sustained demand for Build to Rent but for this to be more concentrated among larger global investors seeking long term exposure through partnership arrangements with local developers.
In the current climate, investors with a lower return hurdle will be best placed to meet more challenging feasibility criteria and deliver schemes at an appropriate yield on cost, while investors seeking higher returns will gravitate to other asset types within the living sectors.
Moreover, there has been a significant increase of interest from Japanese investors, with Daiwa House and Mitsubishi Estate partnering with Lendlease and Mirvac/Clean Energy Finance Corporation respectively to invest in major Build to Rent schemes in Melbourne.
Despite the challenges of higher interest rates, the Build to Rent sector in Australia is now emerging with a wave of construction activity now underway. The acceleration in development throughout 2023 mirrors the beginning of the expansion phase that occurred in the UK from 2015 onwards, Knight Frank state.
An estimated 8,350 dedicated Build to Rent apartments are under construction nationally (September 2023) and a further 12,900 apartments are approved for development in the near term. The pipeline is most advanced in Melbourne and Brisbane, but activity is picking up across all major cities.
By 2030, Knight Frank forecast that around 55,000 dedicated Build to Rent apartments will have been completed. This would imply an annual delivery of 5,900 apartments as supply accelerates from 2024 onwards, slower than the UK in terms of annual delivery but a similarly rapid expansion in proportionate terms.
Private investors, syndicates, and other investors with opportunistic mandates will be attracted to the premise of Build to Rent, but in an alternative form that offers greater flexibility and the ability to invest at smaller scale and within the commercial residential planning framework that avoids the GST and MIT complications that can impact the feasibility of Build to Rent.
