[+] Headwinds for Build-to-Rent as Capital Plays Hard to Get

Home’s boss Christian Grahame came through the door of The Urban Developer Build-to-Rent Summit about 8.40am, turned left towards a queue waiting for the first coffee of the morning and said to no-one in particular: “This is going to be all about capital.” He was right. About 300 delegates to the day-long summit on the banks of Melbourne’s Yarra River heard the darling of Australia’s residential sector is facing headwinds. Construction costs of course, together with labour shortages and government taxation policies, are all combining to make build-to-rent projects difficult to stack up. And that’s making investors wary. A dozen speakers—build-to-rent developers, operators, builders, financiers, agents and the researchers—were all quick to point out these aren’t the struggles that have beset build-to-sell exactly, but challenges none-the-less for a sector which on paper at least, is having a bumper year. The statistics say so. In a keynote address setting up what was to follow, Colliers national director for residential capital markets Robert Papaleo said by the end of this year there will be about 11,000 completed apartments—almost double that of December 2023. ▲ Home’s Christian Grahame: It’s all about the capital. That number, he says, will grow to about 24,000 by 2028. Across Australia there are 33 finished projects. Another 36 assets are under construction, 15 of which will be completed this year. Another dozen will be finished by the end 2026 or beyond. More important, said Papaleo, seven platforms in 2024 will deliver their first asset. “We haven’t seen that scale of new openings ever before,” he told his audience. “And we’re going to see a lot more. And the industry really needs to step up and prove that it can actually generate the right investment returns to garner ongoing support from not only the international investors already here, but new entrants. “And importantly, particularly domestic entrants.” Australia’s build-to-rent stock ▲ Australia’s build-to-rent stock is projected to almost double between December 2023 and December this year. (Source: Colliers) And there-in lies the challenge for the sector. While the Albanese government’s National Housing Accord seeks 1.2 million homes in the next five years, or about 240,000 a year, the industry’s net delivery is between 160,000 and 170,000. Sydney remains the top Asia-Pacific destination for international capital, closely followed by Tokyo. Melbourne and Brisbane are in the top five. But the housing issue is a global one. “There’s plenty of intent, there’s plenty of capital washing around, it’s all looking for the right home and all looking to achieve the returns that they need to justify that investment,” Papaleo said. “These investors, particularly those out of the States at the moment, are looking on their own doorstep, and seeing opportunities aplenty. “So you’ve got to really make a strong case for them to consider coming to the other side of the world, and placing their capital here.” Cameron Laird agrees. ▲ Colliers’ Robert Papaleo: We haven’t seen that scale of new openings ever before. Head of business development and investment at the Australian arm of the Singaporean real estate investment trust CDL—a developer with assets in three separate international markets—Laird is suddenly competing for capital from within his own company. “So, they [CDL] are looking at spreading their risk around the globe where they see opportunities,” Laird said. “And at the moment, CDL would rather put money into the UK than Australia. We compete pretty hard, but it is really tough to get that capital.” Laird shared a panel discussion with other major players in the sector, Local founder and co-chief executive Matt Berg and Hines head in Australia David Warneford. Berg described the current climate as a result of “easy money versus hard money”. “It’s probably the reason why there were a whole bunch of platforms announced in 2021 and 2022, and now there are a lot less than that,” he said. Total build-to-rent completions in Australia ▲ Source: Colliers “I’ve guessed there’d probably be two or three times more platforms than there are today if interest rates hadn’t moved… it’s really bloody hard at the moment to actually get a project to stack. “You have to innovate, you have to risk manage, you have to structure a transaction, you have to work with the capital on it, and there has to be a point of difference about what you’re doing,” Berg said. Warneford was more blunt, saying a message needed to be delivered to Federal and State governments. “Politically, our industry is funded by offshore capital,” he said. “And by continuing to ratchet up land taxes, and not delivering on really efficient structures, it just makes the capital really nervous in an environment that’s already challenged.” Warneford is referring to withholding taxes on Managed Investment Trusts (MIT), typically a way in which overseas capital invests in the Australian build-to-rent sector. ▲ Local’s Matt Berg, Hines’ David Warneford, and CDL’s Cameron Laird. We’re competing for overseas capital, they say. Last month the Federal Government introduced long-awaited tax incentives designed to encourage investment, but the industry does not believe the new legislation goes far enough. Home’s Grahame pointed out in the past five years $20 billion in capital flowed into the Australian sector. Eighty per cent of that was from overseas. “No one perfect thing is going to turn the tap back on,” he said. “What will make a change is a lot of little things, like MIT, because you need those trusts for the foreign capital, and that will make a difference. That capital flow can happen again.” Jeremy Quinn is a principal with the build-to-rent advisory service Franklin St. He accuses the Government of “saying one thing and doing another”. “The proposed MIT changes are different to what were probably announced a year ago,” he told the summit. “And they have taken work to get through the system and have probably given reason for capital to pause, as opposed to commit to new projects today.” ▲ Mirvac‘s LIV Indigo at Sydney Olympic Park. Some 36 assets are under construction. Sydney investment house AsheMorgan development director Mat Stoddart agreed, saying government policy and the uncertainty around MIT was challenging. Twelve months ago AsheMorgan lodged plans for Melbourne’s biggest build-to-rent development . To be known as District Living (pictured top), its more than 900 apartments will sit across two buildings on the city’s edge. “The big feedback we’ve had from the District building is, and it’s obvious, the markets crave certainty and having uncertainty around big ticket items like with-holding taxes…well, you’ve got to find ways to take away that uncertainty because it’s hard to build in the extra profit to hedge against it.” Australia’s build-to-rent sector is a young one, and that brings with it teething problems. According toQuinn, only 5400 of the 3.32 million rented homes across Australia are institutionally owned—about 0.16 per cent. By comparison that figure is 12 per cent in the United States, and about 6 per cent in Britain. It’s one reason Australia’s superannuation funds have been slow to join overseas investors in the sector—they’re waiting for evidence of fundamentals. One build-to-rent developer—Assemble—has bucked that trend and counts both the health employees superannuation fund HESTA and the country’s biggest industry fund, AustralianSuper, as investors. ▲ Jeremy Quinn of the advisory service Franklin St. Government policy, he says, is giving overseas capital reason to pause. Assemble managing director Kris Daff conceded it had taken a long time to convince the funds to invest with them. “Probably the most important thing for the industry funds is to be able to invest in housing solutions as a primary lender, with really good returns for the members because that’s their fiduciary responsibility,” Daff said. “And they’re very interested in housing solutions that are income appropriate for the members.” That means affordable housing. Of the 370 homes in Assembles Kensington project —4km north-west of Melbourne’s centre—20 per cent will be social housing and another 20 per cent heavily discounted for essential workers. Projects like that attract GST concessions, lowering building costs. Colliers’ Papaleo believes Australian super funds will come to the party but defends their current stance. “They’re not required to solve an economic issue,” he told The Urban Developer outside the summit. “They’re empowered and regulated to make sure they act in the financial interests of their members. “And for now they are watching and waiting to make a prudent investment based on evidence of a transaction that supports and validates what the thesis is.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

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