‘Inhospitable’: Small-Scale BtR Faces Uphill Battle

Australian build-to-rent has so far been a case of ‘go big or go home’. Economies of scale at the financial and operational ends lend themselves to large project, with Australia’s institutional build-to-rent market estimated to be worth $21.7 billion. There are 17 projects operating so far across the country with 75 projects in the works. It is expected 9380 build-to-rent units will become available to Australian renters in 2024, according to global investment manager Federated Hermes, an indication of the size of many of these existing projects. But smaller and more regional build-to-rent could fill a gap in the market for diversity of housing and allow local developers a foot in the build-to-rent door in their backyards. This is, however, proving a challenge due to issues such as NSW’s build-to-rent land tax concessions, which are limited to projects of more than 50 units, according to Angus Property Group principal Theo Onisforou. “For me, that’s discriminatory in favour of the large funds and institutions, rather than local developers,” he says. Benefits of building smaller Onisforou, who has delivered build-to-rent projects of fewer than 50 apartments at Newtown, St Peters and Bowral, has recently filed plans for a small-scale build-to-rent project in the NSW Southern Highlands town of Moss Vale. The project at 10 Illawarra Highway would deliver seven single-level terraced homes; an example of how a developer is circumventing construction cost issues with a smaller, regional project. “The taller the building is the more expensive it is, and therefore without scaffolding, cranes and lifts, as required on a larger scale, you’re saving a fortune per square metre,” Onisforou says. ▲ A render of the Angus Property Moss Vale project, designed by Antoniades Architects. “I am now building as much as I can lowrise so there are no crane and lift fees, added to the fact that the fees that the City of Sydney charge for work zones and hoardings are mind-blowing. “They talk about costs of construction and often the main beneficiaries of any project is the City of Sydney because those work zone fees are so expensive.” This makes the smaller end of the build-to-rent scale more financially attractive, Onisforou says. “Overall, they are much cheaper to build per square metre, and Southern Highland rents are not much less than Sydney these days,” he says. “The feasibilities are so much better, as well as adding to the objective of many councils, which is having a variety of housing types.” Diversity is key US-headquartered investment manager Federated Hermes is closer to the institutional end of the market but has experience of the more mature UK build-to-rent space. “As the market matures, diversity will follow,” Federated Hermes global real estate fund director Will Gibby says. “More housing stock is required throughout the entire range of demand in order that land and capital does not overly focus on a specific part of the market and inadvertently put pressure elsewhere.” Perhaps controversially, Gibby says that the lesson from the UK experience is “to not overly focus on amenity provision and focus on need-based demand”—a space where smaller, more affordable projects and/or those in regional areas might find traction. ▲ As the market matures, diversity will follow: Federated Hermes’ Will Gibby. “Over the long term, data will be more readily available on operational costs of comparable properties and, as such, the associated costs of amenity provision relative to stability and net growth in income will come more under the spotlight,” Gibby says. “This will also enable the industry to accurately estimate net operating income, which will allow it to move away from generic assumptions.” Gibby says that larger, high-end schemes within areas of higher GDP growth can, in turn, impact values and salaries. “The higher end projects are a reflection of these assets and locations being perceived as more liquid since those dynamics help preserve investors’ capital over the long-term,” he says. “That said, the direct link between stability of income and needs-based demographic demand should mean that views around capital value preservation are widened over time to incorporate mid-market homes within less central areas.” The issues holding back small build-to-rent On the ground, developers such as Onisforou have experienced more practical issues given the lack of build-to-rent projects and council experience of them in regions such as the Southern Highlands. As well as exclusionary taxation regimes that, Onisforou says, put most small-scale projects out in the cold. “The council does not comprehend this new type of development because it’s never been done before,” he says. ▲ Angus Property Group’s 44-apartment build-to-rent project in Sydney ’s St Peters. “But it really shouldn’t be up to council planners to become a NIMBY when residents do not have a problem with the proposal.” As well, there is a major issue with the build-to-rent taxation incentives, he says. In NSW currently, eligible build-to-rent properties receive a 50 per cent reduction in land value for land-tax purposes but the eligibility pivots on size—projects must contain at least 50 self-contained build-to-rent homes. “It’s hard to find sites that accommodate more than 50 units when you’re trying to do infill development in existing suburbs,” Onisforou says. “I have recently built 44 apartments at St Peters, which was an old factory site we pulled down and you could not get any more units on it. “It’s build-to-rent but without the benefit of the land tax concession—why doesn’t it apply to everyone?” Given that construction costs can be fairly constant across markets of different sizes, state incentives on tax and infrastructure are required to target more regional projects, according to Gibby. Perhaps then we will see a more diverse range of build-to-rent supporting housing in Australia. 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