Boom or Bust for Australia’s Build-to-Rent Sector?

Mark Donnelly – Director, Investment Advisory Services (APAC)

SYDNEY –  Since the start of the Coronavirus pandemic, development of the Build-to-Rent (BTR) sector in Australia has slowed. Could this be an indication of where the sector is headed or is the pandemic BTR’s panacea? It’s tough to tell. With so many permanent changes to come in all areas of life, there is certainly potential that Coronavirus could alter attitudes towards BTR developments in general. BTR quality, security-of-tenure and tenant flexibility are a few of the areas in which we might see the narrative shift in the coming months.

As swathes of the global workforce continue to work from home, it’s understandable that many have spent time attempting to transform their current space into an area that works as an office, a home and perhaps a classroom. For many tenants, making those changes will not be feasible. BTR developments, with their resident lounges, Wi-Fi access, breakout areas, roof terraces and onsite co-working spaces, are much more adaptable and offer amenities better suited for the ascetic lifestyles we’re all currently living.

With so many areas of our lives tied into one space, the level of service received throughout the shutdown will undoubtedly drive opinions of the BTR sector, and renting in general, once this is all finally over. With many landlords currently facing financial pressures due to missed rental payments or loss of employment, repairs and maintenance expenditure are unlikely to be a priority. As most of the global workforce continues to work from home, many renters are likely to experience this lack of support and assistance. These circumstances are only going to be exacerbated as vacancies rise and rents fall. SQM’s latest data shows asking rents in Sydney have fallen 2.9% (MoM), 8% (QoQ), whilst the vacancy rate rose from 2.9% in March to 3.9% in April (34% increase). Whilst tenants may enjoy downward pressure in rents, the experience of renting from a distressed landlord is unlikely to be worth the upside.

Conversely, maintaining high-quality standards and responding quickly to repairs and maintenance requests unveils the value BTR can offer. A landlord focused on delivering excellent service to their residents while maintaining the fabric of their asset is a recipe for growth post-Coronavirus. BTR landlords won’t be immune to the financial challenges being faced by tenants, but (as well-capitalized and professionally managed operators) they’ll be better placed to absorb decreases in rental revenue whilst still delivering high levels of service.

To the benefit of many renters, BTR possesses higher levels of security-of-tenure as compared to other residential (rental) products. Tenants can rest easy knowing that they are renting from an institutional operator whose primary focus is keeping the building full of tenants paying rent. Most private landlords, on the other hand, are accounting for personal factors such as employment, support of their families, mortgage payments, etc., which creates volatility.

Whilst the current cocktail of stimulus packages (Job Keeper and Job Seeker payments) and mortgage holidays may be keeping the sector stable momentarily, there is rightful concern around what might happen after these supports are removed. It’s likely we will see many landlords fall behind on mortgage payments, strata fees, and council charges, which could lead to insolvency for many. In such a scenario, widespread property selloffs and largescale tenant displacement are probable.

Mobility and freedom to move where the jobs are puts tenants in a stronger position than owners. Property ownership (whilst usually associated with capital gain) comes at the cost of restriction and lack of flexibility. Considerations regarding lead-in time for prepping and marketing a property, the correct time of year to market, the costs of selling, and any charges that may arise with breaking fixed mortgage terms all must be factored in while also asking, “what sale price will I achieve?” Tenants, on the other hand, don’t have these restrictions. If they choose to move, they can pay a lease-break fee and go. Coronavirus may have caused some to reconsider job security and perhaps even the sectors they wish to work in. This flexibility could be all the more desirable as some commentators expect Coronavirus to result in unemployment doubling from circa 5% in March 2020, to 10% in June 2020.

Additionally, Coronavirus has sparked major change in attitudes towards homeownership. Structural damage to the market has led to soaring house prices while requiring that potential buyers be highly leveraged. Not everyone can or wants to save a deposit to buy a house. With median house prices in Sydney currently c. $890K, buyers require a deposit of $178K at 80% LTV. There is also high risk of equity deterioration, adding another layer of disincentive. For those not already on the property ladder, this could prove a burden not worth bearing.

Rather than saving up a deposit, this money could be invested or spent on lifestyle choices, including renting a high-quality, purpose-built property with a range of features and amenities included in the rent. Taking into account BTR quality, security of tenure and tenant flexibility, we believe the journey is well underway for build-to-rent to become a core asset class in the Australian market.

If you’ve like to discuss our thoughts on the sector in further detail or better understand how we assist you in delivering a BTR asset in Australia, please contact us for more details.

Mark Donnelly, mdonnelly@trimontrea.com, +61 (2) 9160 4164