Build to Rent and Build to Sell – Market Observations

There is now also a shortage of traditional build to sell apartments/units (BTS) due to an ongoing slowdown in apartment/unit approvals and project commencements.  But strong population growth and increased downsizing by baby boomers is expected to only increase demand for projects offered by well-capitalised developers. High net worth investors can now partner with institutional investors and well-capitalised developers in new BTR and BTS products in the major markets of Sydney, Melbourne and Brisbane via new investment funds with the assistance of The Polar 993 Group.

What is Build to Rent

The concept of build to rent property concept is well established in America and Europe. BTR is generally offered in apartment complexes where the developer will retain ownership of the entire complex. The apartments are all rented and BTR gives tenants the security of being able to stay in a rental apartment for many years on a long-term lease. Often tenants of BTR apartments will be long-term or permanent renters. 

BTR apartments are not immune from the cost pressures which impact traditional dwelling construction, but they have the advantage of not requiring the extensive pre-sale agreements which are often demanded by financiers before they provide funding for a development.

International comparisons

BTR is booming in the UK and it is now one of the fastest-growing segments of the property market, as the number of units planned in the sector has risen by over 40 per cent over the past 12 months.

There are now almost a quarter of a million BTR homes across the UK that are either finished, in the construction stage or in planning according to the respected voice of the UK property sector, the British Property Federation. In America’s major cities, demand for BTR housing is also growing dramatically. According to the US National Association of Home Builders, new BTR units under construction increased 42 per cent last year.  

Many more BTR communities are expected to be established between now and 2030. In the UK, the US and Europe, these developments are predominantly
owned by pension funds and institutions.

The Australian opportunity 

Oxford Economics Australia research says build to rent development will become the biggest asset class in new property development by 2030, eclipsing offices, student accommodation and logistics.

New BTR project commencements are forecast surge to $10 billion in calendar year 2030, up from about $2 billion in 2022, as governments incentivise institutional and high net worth investors to help with the country’s chronic housing shortage. 

At the same time home ownership levels in Australia are expected to continued to fall, building on a decade-long trend.

Tax incentives

While negative gearing has ensured Australia has more than 1 million “mum and dad” landlords owning investment properties, one of the highest levels in the world, the Federal Government has increased tax incentives to the burgeoning BTR sector to deal with a chronic shortage of new housing and declining affordability.

The Federal Government is seeking to incentivise institutional investors to own this rapidly emerging asset class, highlighted by the 2023 federal budget halving the 30 per cent withholding tax levied on foreign investors in the sector and increasing the annual depreciation rate applied to such investments to 4 per cent from 2.5 per cent.

Prudent similar policy from the State Governments is also required.

Positive population trends

Australia’s population grew by 1.9 per cent in 2022, its fastest rate in more than 13 years in part due to a post-pandemic migration boom, according to the Australian Bureau of Statistics (ABS). This was one of the highest levels in the western world, following a record decline during Covid. Net overseas migration was the major contributor to population change in all the states and the Australian Capital Territory.

Supply shortage

Build to sell has been the traditional category of dwelling commencements in Australia, but tough credit conditions in recent years caused by a tightening in bank lending standards has had a direct impact on dwelling prices, presales and new construction starts.

Australian approvals to build new homes tumbled to their lowest level in 11 years in April, as permits for apartment buildings plunged 16.5%. The trend has been weak for an extended period, with total approvals falling 24.1% from a year ago.

Capacity increase expected

Numerous projects in Australia’s $120bn government infrastructure investment program are being reviewed for value and significance, as an ongoing shortage of labour and soaring material costs continues to bite. The number of projects infrastructure pipeline has blown out from 150 to almost 800, prompting a recent review by federal Infrastructure Minister and Transport Catherine King into the spending.

In mid July Victorian Premier Daniel Andrews also confirmed the state will no longer host the Commonwealth Games in 2026.

Labour is therefore likely to return to the residential property market, as raw material price pressures also ease.

Partnering with the best

While soaring input costs and other pressures have forced a number of builders into insolvency over the past 18 months, quality developers with access to the best builders and the right processes have continued to thrive. Many of these developers are partnering with institutional investors and high net worth individuals on quality projects. Getting a seat next to an institutional player in a quality build-to-sell development is an exciting opportunity for private investors.

The Polar 993 Group is pleased to be able to assist high net worth investors to access opportunities in the local BTR and BTS property sectors.

While in the past local investors have not had access to these burgeoning global asset classes because the products have simply not been available, the tide
is now quickly turning.

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