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Well-established in the United Kingdom and United States, the build-to-rent property development model is gaining traction in Australia .<\/p>\n
Different to the traditional build-to-sell<\/strong> approach which dominates the Australian property landscape, build-to-rent \u2013 sometimes called \u201cmulti-family housing\u201d \u2013 is touted as a way to provide steady income for investors and security of tenure and better conditions for renters in a growing, ever-tightening rental market.<\/p>\n In Australia, nearly a third, or 32%, of households are renting, well up on 20 years ago, when renters only represented about a quarter of households.<\/p>\n Build-to-rent projects are large-scale residential developments, almost always high-rise blocks of apartments<\/a>, where all the properties are owned and managed by a single entity to be rented out over mid to long-term periods.<\/p>\n The approach is different to the conventional build-to-sell model, where a developer builds an apartment block, then sells off each individual apartment or unit, which the buyer or a tenant they select might end up living in.<\/p>\n The sector is still on the small and immature side in Australia, especially when compared to the United Kingdom and the United States, where it has a strong foothold.<\/p>\n Industry experts say it\u2019s growing and gaining recognition as a viable investment and rental option, predominately in Melbourne and Sydney, where there\u2019s now several completed projects and more in the pipeline.<\/p>\n Due to their longer leases, build to rent<\/strong> schemes are popular with those that are looking for security.<\/p>\n<\/div>\n<\/div>\n Stephen Fitzsimon, the head of growth from Melbourne Real Estate, which has numerous build-to-rent projects<\/a> including Montague Square and Piccolo House in South Melbourne on its books, explained how it works.<\/p>\n \u201cApartment blocks<\/a> are usually designed and built with a view to maximising sales of the final product; the individual apartments; whereas with build-to-rent, the project is based on maximising residents\u2019 enjoyment and liveability, as the developer retains ownership of all<\/em> the apartments and offers them for longer term rent,\u201d he said.<\/p>\n Both smaller private investors familiar with residential development and larger listed<\/a> entities are developing build-to-rents in Australia, with the \u201cbrand\u201d of developments set to become a selling point, Mr Fitzsimon said.<\/p>\n For tenants, living in a build-to-rent is different to a standard apartment block<\/a>, where every unit can be owned by someone different, he said.<\/p>\n \u201cBuild-to-rent developments not only offer<\/a> longer leases, up to three years \u2013 which gives tenants the security of knowing the owners\u2019 daughter won\u2019t want to move in one day and leave you without a place to live, for example \u2013 but also amazing facilities in their buildings, like gyms and yoga rooms, rooftop spaces, even dog-walking services.\u201d<\/p>\n In many build-to-rents, tenants are allowed to paint<\/a> walls and hang pictures and keep pets. Annual rent increases can often be locked in when signing.<\/p>\n From a tenants\u2019 perspective, there are a number of benefits to this new model. There\u2019s greater security of tenure and more flexibility and choice than a regular lease, as well as access to services, hotel-like amenities and a \u201ccommunity experience\u201d.<\/p>\n Mr Fitzsimon said security of tenure is one of the biggest upsides for tenants. He said because build-to-rent developers have a long-term strategy, they\u2019re happy for longer leases, sometimes as long as three years. This is in stark contrast to the private rental market, where one year is standard.<\/p>\n Dr Diaswati Mardiasmo, chief economist for PRD, said because build-to-rent leases are longer than most private rentals, tenants avoid the 12-month \u201cleasing cycle\u201d \u2013 which can leave them looking for a new place every year in some cases.<\/p>\n Build-to-rent developers often promote the community element of the model. Dr Mardiasmo said it\u2019s a drawcard for tenants.<\/p>\n \u201cA community living culture (which sees) the sharing of space, means tenants automatically create friendship and form relationships. Therefore these people are not just your neighbours but also your community,\u201d she said.<\/p>\n Christian Grahame, the head of Grocon\u2019s build-to-rent brand HOME, said the facilities offered in build-to-rent buildings, such as at HOME Southbank in Melbourne, due to open in January, set them apart.<\/p>\n \u201c(These can include) gym facilities, yoga rooms, spin studios, spa and treatment spaces, state-of-the-art co-working, and shared zones to hang out and entertain,\u201d he said.<\/p>\n \u201cProfessionally managed services will also give residents more time to focus on the things that matter by providing 24\/7 support, including on-site maintenance and same day service.\u201d<\/p>\n Amenities are often highly attractive within the build-to-rent developments.<\/p>\n<\/div>\n<\/div>\n As with any investment there\u2019s pros and cons for developers with build-to-rent projects too. There are a number of key benefits.<\/p>\n A consistent income stream<\/a> is at the top of the list, Mr Grahame said.<\/p>\n \u201cAs many investors are typically large, long-term asset holders, such as superannuation funds, they tend to be attracted to the steady income streams the build-to-rent model offers, as well as the ability to diversify their holdings alongside offices and other forms of real estate,\u201d he said.<\/p>\n CBRE\u2019s head of residential research Craig Godber said the consistency of build-to-rent income means investors minimise cyclical volatility seen in other types of investments.<\/p>\n \u201cAlso, in economic downturns, the residential asset class outperforms commercial\/industrial asset classes,\u201d he said.<\/p>\n The amenities build-to-rents offer mean developers can boost their returns, because more rent can be charged, Dr Mardiasmo said.<\/p>\n \u201cMost build-to-rent developments\u2019 rental price is about 10% higher than the suburb\u2019s median rent, unless it\u2019s an affordable housing<\/a> component, and a-la carte or subscription fee levels (are payable).\u201d<\/p>\n With a build-to-rent there\u2019s an opportunity to minimise costs in both the build phase and ongoing, Dr Mardiasmo said.<\/p>\n \u201c(This could include) having maintenance facilities on a retainer that can do a bulk fixing job or wholesale prices for apartment fit out,\u201d she said.<\/p>\n While longer leases and the ability to put a stamp on their home appeals to many potential build-to-rent tenants, there are downsides.\u00a0<\/strong><\/p>\n Build-to-rents typically charge a price premium because of the associated services and amenity.<\/p>\n Dr Mardiasmo said depending on the way the developer has structured amenity inclusions and access to facilities, it may mean tenants end up paying for things they don\u2019t use or value.<\/p>\n With fixed lease lengths, some build-to-rents have break fees, Mr Godber said, which can be downside.<\/p>\n Dr Mardiasmo agreed. \u201cShould your circumstances change and build-to-rent living no longer suits you, you are locked in for a longer period than 12 months.\u201d<\/p>\n Build-to-rent is still a relatively fresh idea in Australia and as with any real estate project, there are good and bad to be found.<\/p>\n Mr Fitzsimon said for this reason, potential tenants need to do their homework when choosing a building. It\u2019s important to understand the deal on the table and read the fine print.<\/p>\n It\u2019s not just tenants who need to approach build-to-rent with caution. There\u2019s downsides developers need to know about too.<\/p>\n While build-to-rent is common and popular in other parts of the world, it\u2019s still a new concept in Australia, Mr Grahame said. That means developers need to overcome any nervousness in choosing to invest and then help build trust in the model.<\/p>\n \u201cInvestors and managers of Australian build-to-rent properties need to demonstrate the advantages of this new housing choice by delivering outcomes that live up to the promise,\u201d he said.<\/p>\n As build-to-rents can be more expensive than the median suburb rent, and more often than not target a specific market, developers potentially face higher vacancy rates, Dr Mardiasmo explained.<\/p>\n \u201cThis depends on the demographics \u2013 and changing of demographics \u2013 in the area (where the development is located).\u201d<\/p>\n Locking tenants into longer leases isn\u2019t all upside, as there\u2019s a risk of missing out on rent increases.<\/p>\n \u201cYou may be missing out on potential rent increases (ie market value rent) as you have locked in your renter at a certain price for a period of time,\u201d Dr Mardiasmo said.<\/p>\n Build-to-rent might be new and relatively immature, but it\u2019s on an upwards trajectory, according to Dr Mardiasmo.<\/p>\n \u201cIt\u2019s building momentum, especially now we have a rental shortage and vacancy rates are extremely low in many places. We are seeing more and more build-to-rent projects being approved or planned,\u201d she said.<\/p>\n There are dozens of build-to-rent developments in varying stages of development across the country.<\/p>\n More often than not, build-to-rent investors have been in the space for a while, often in other countries where the model is more established, Dr Mardiasmo said.<\/p>\n \u201cThey\u2019re looking to expand to Australia, and partnering with local Australian developers who have tacit knowledge, to take advantage of opportunities within a market. It can also be long-term developers who are looking to diversify their portfolio, to offset any risks against build-to-sell stock,\u201d she said.<\/p>\n Big offshore players include funds and firms such as Greystar, APG, Ivanhoe Cambridge, GIC, UBS, Blackstone, Morgan Stanley, Oxford, Hines, Frasers and Sentinel, while on the domestic front Grocon, Homecorp, Investa, Qualitas, Gurner, Vellum, Urban Property Group, Mirvac, Cromwell and Meriton are in the space.<\/p>\n The tenants attracted to build-to-rent vary from development to development, Mr Fitzsimon said.<\/p>\n \u201cLocation, that is based on where people want to live, is always important, but it also depends on the style of building and the \u2018brand\u2019 of the building, which is becoming more of a factor.<\/p>\n \u201cSome build-to-rents, for example, are predominantly aimed at students, so they don\u2019t have the greatest finishes, where something like Piccolo House in South Melbourne is catering for very high-end tenants, someone who is happy to pay $800 a week rent,\u201d he said.<\/p>\n Dr Mardiasmo said build-to-rents typically appeal to young professionals, who want to live and work in a city.<\/p>\n \u201c(The demographic) also includes downsizers or empty nesters who no longer want a big house to maintain and but still want to enjoy a lifestyle. It\u2019s definitely not for a demographic looking for a lot of individual living space and big back yard.\u201d<\/p>\n The answer is both yes and no. While some people suggest build-to-rent could help deliver affordable housing<\/a>, whether or not it actually will is up for debate. Dr Mardiasmo said it all depends on how affordable housing is defined.<\/p>\n One of the ways it could is through government subsides, ensuring some apartments are available at discounted rent.<\/p>\n \u201cQueensland is a great example, where Mirvac\u2019s Newstead and Fraser\u2019s project in Fortitude Valley will deliver a combined 240 (from a total of 750) apartments at discounted rent, subsidised by state government. So, approximately 30% of the stock is at a discounted rent.<\/p>\n \u201cThat rent is \u2018affordable\u2019 in the sense that the rental price is discounted; it\u2019s lower than the advertised rental price,\u201d she said.<\/p>\nBuild-to-rent could present an alternative to home ownership and it\u2019s a concept private real estate<\/a> funds<\/a>, developers and superannuation funds are increasingly looking at.<\/div>\nWhat is build-to-rent?<\/h2>\n
\n\nHow does build-to-rent work?<\/h2>\n
Benefits of build-to-rent for tenants<\/h2>\n
1. Greater security of tenure<\/h3>\n
2. Living in \u201ca community\u201d not just a building<\/h3>\n
3. Amenities, amenities, amenities<\/h3>\n
\n\nBenefits of build-to-rent for developers<\/h2>\n
1. Steady income stream<\/h3>\n
2. Potential better returns<\/h3>\n
3. Ability to minimise costs<\/h3>\n
Disadvantages of build-to-rent for tenants<\/h2>\n
1. Having to pay top-dollar<\/h3>\n
2. Risk of being locked in<\/h3>\n
3. Fear of the unknown<\/h3>\n
Disadvantages of build-to-rent for developers<\/h2>\n
1. Risk of investing in an emerging concept<\/h3>\n
2. Possible higher vacancy rates<\/h3>\n
3. Missing out on rent increases<\/h3>\n
The build-to-rent landscape in Australia<\/h2>\n
Build-to-rent developments in Australia<\/h2>\n
Who owns build-to-rent developments?<\/h2>\n
What are the demographics of build-to-rent tenants?<\/h3>\n
Is build-to-rent the same as affordable housing?<\/h2>\n