As more Build to Rent schemes enter the market, it is becoming clear that traditional square metre rates for calculating rents and returns fall short.
By Nicole Hiddlestone, Build to Rent Leasing Strategist, Infolio Property Advisors
A competitive and cluttered marketplace in Melbourne is driving deep discounting and seeing savvy renters shopping around Build to Rent schemes to find the one with the best incentives to drive their move.
This puts the financial model built at the onset of a project at risk – and it is easy to understand why – owners are scrapping financials to deliver leasing rates that meet pressing bank requirements, when really, a smarter strategy based on utilising an advanced financial model purpose built for Build to Rent – not traditional Build to Sell – would remove the pressure and desperation we’re seeing in market at present.
We’ve seen townhouses discounted by up to $200 per week because the pricing was based on square metre rates and didn’t shift for months. This can create major financial strain on a new entrant.
Most Build to Rent schemes’ original financials are built on the traditional square metre rate model. It’s a blanket approach. But this isn’t how rental properties are priced.
Renters pay more for the right floor plan. A slightly better positioned window that provides a better viewline can command more than the apartment next door that is the same size.
There are nuances in renting buildings that can be leveraged to drive better returns. But when you apply a square metre rate model, it can fall short. In some cases, we’ve seen developers miss out on an average $150 per apartment across a building.
There is no set formula for success. At the early stages of a project, developers should be engaging Build to Rent leasing specialists to review floor plans and forecast rental rates, providing more certainty to the financial model. It’s where margins can be made.
The biggest risk to a Build to Rent project is the lease up, as there is huge financial exposure if a project isn’t leased up at a high rate. Getting pricing right is imperative.
A specialist leasing partner can help developers build a financial model that meets funding requirements during lease-up and generates revenue long-term.
Through the review of floor plans, more margin can be extracted in many cases, and more accurate revenue predicted based on apartment layouts, rather than traditional Build to Sell square metre rates, which are outdated in the innovative Build to Rent space.
A specialist project leasing partner can help clients understand the different financial models, including long-term staff overheads to manage renewals and provide the service Build to Rent renters expect.
In this fast-growing segment of the property industry, it is time to transform the way success is calculated and move on from the traditions of old.
