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Build-to-rent set to take off in Australia

Australia’s build-to-rent (BTR) sector is set to grow to 55,000 dedicated units by 2030, with growth set to mirror that of the UK from 2015 onwards.

According to Knight Frank’s Breaking the Shackles report, discovered there are about 8350 BTR properties under construction across the nation at the moment, with a further 12,900 approved for development in the near-term.

But even once the 55,000 units are constructed, BTR will still only make up 1.5 per cent of Australia’s total rental supply, highlighting the potential for the living solution to be significantly scaled.

Knight Frank Chief Economist and report author Ben Burston said after a long gestation period, the BTR sector in Australia had sprung to life and the quantum of committed and planned development was increasing fast.

In Melbourne, 4920 BTR units are under construction, with a further 8250 approved, followed by Brisbane with 1743 under construction and 2567 approved.

In Sydney, 1529 BTR units are being built, with 965 more apartments approved for construction. 

To date, development has focussed on one- and two-bedroom apartments, representing 36 per cent and 44 per cent of overall apartments respectively.

“A wave of construction activity is now underway, with the pipeline most advanced in Melbourne and Brisbane, but activity is picking up across all major cities,” Mr Burston said. 

“The current groundswell of activity points to a sustained expansion in total stock, and by 2030 BTR is expected to have emerged as a critical part of the housing supply mix, with Australia set to mimic the UK’s BTR journey over the past decade.”

The acceleration in Australia’s BTR sector mirrors the beginning of the expansion phase that occurred in the UK from 2015 onwards. 

“Over the following eight years to 2023, total UK stock has expanded from 11,312 to 82,636 units, reflecting average growth in the total stock of BTR units of 30 per cent per year, or 9,450 units,” Mr Burston said.

 “Our forecast of 55,000 dedicated BTR units in Australia by 2030 implies an annual delivery of 5900 units as supply accelerates from 2024 onwards. 

“This is slower than the UK in terms of annual unit delivery but a similarly rapid expansion in proportionate terms.” 

Mr Burston said the underlying demand-side drivers for the BTR market have been in place for some time, but a combination of cyclical and structural supply-side impediments have, until recently, held back development. 

“However, many of these constraints have either abated or been removed and the sector appears set to expand rapidly over the next decade,” he said. 

“Given the size of the market for rental accommodation, investors and developers are able to access a market offering the potential for large-scale capital deployment, while the community stands to benefit from a much-needed additional source of supply to help address Australia’s structural undersupply of housing.”

Mr Burston said there was a clear role BTR could play in balancing supply and demand in the housing market and solving the rental crisis.

He said BTR would facilitate  faster growth in rental supply beyond the sole reliance on the existing build-to-sell model with mum and dad investors providing housing. 

“The BTR model aims to align the interests of investors seeking to secure long-term income streams closely linked to inflation, with the interests of tenants, and over time this will result in a more diverse product mix that promises to improve the service offering and widen the range of options for renters,” he said.

“In coming months, the pipeline of potential development is likely to expand further as developers seek to position themselves to benefit from the current surge in rental growth, although the actual quantum of schemes under construction may be slower to accelerate until construction cost pressures ease.” 

Knight Frank Head of Alternatives Tim Holtsbaum said across the globe investors were seeking greater exposure to alternative sectors, and the residential ‘living’ sectors were at the front of the queue, led by BTR.

“For the first time, residential is the most sought-after sector for global investors targeting the Asia Pacific region, and Sydney and Melbourne are the preferred locations,” he said.

“Investors are gravitating toward the residential sector partly because of its defensive characteristics, specifically the ability to adjust rental income streams more quickly than other sectors in response to inflation. 

“They are also assured by the relative resilience of residential rental performance during market downturns, with rents rarely falling in any major city. 

“Investors are seeking out resilient markets with long-term growth potential and the lack of an established BTR sector in Australia presents an opportunity to deploy capital into build-to-core strategies with the ability to achieve significant scale over time.” 

Mr Holtsbaum said the change in the managed investment trust (MIT) regime made BTR more viable for offshore investors and would add further impetus to the current expansion. 

“However, global limited partner (LP) investors generally wish to partner with local developers as general partners (GPs) for their experience sourcing suitable sites and delivering schemes that appropriately cater to specific locations and demographic profiles,” he said.

“This presents challenges to create deal structures that align interests between parties that differ greatly in size and expertise. “LPs are naturally attracted to large schemes which have potential to deliver greater efficiency and larger scale deployment, but these also imply the need for a large financial commitment from local developers.” 

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Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.

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