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Introduction to BTR

Build-to-rent (BTR) refers to a residential development in which all apartments are owned by the developer, often a managed investment trust, and then leased out to tenants.

BTR has become a hot topic globally, largely due to increasing housing demand and the evolution of the property investment sector. The remarkable success and phenomenal growth of the BTR asset class is well-known in the US and the UK, for example. Interestingly, the BTR concept did not exist in the UK before 2013.

BTR in Australia

Driven by rising unaffordability, lower home ownership and changing attitudes to property, BTR has become an effective solution to meet growing demand for purpose-build assets. An innovative and exciting opportunity, the Australian BTR market is backed by investors and favourable government policy such as tax concessions.

Demand for residential space in inner-city areas such as Melbourne and Sydney is increasingly competitive, reflecting the high price-point residential property has reached in large Australian capital cities.

According to PwC’s statistics release, Australia currently houses one-third of its population in the rental market and the data is much higher among younger Australians in capital cities. Around 70 per cent of 25 to 34-year-olds in Sydney are renters.

Some sizeable local developers such as Grocon, Lendlease and Mirvac have continued digging into the BTR model, to streamline their projects and adapt to current market conditions.

Win-win solutions for both developers and investors

For developers, BTR brings effectiveness in integrated property management whereby all rented units are owned or managed by a single landlord. On top of that, BTR caters to the needs of younger populations, who prefer flexibility and work closer to the capital cities, by providing housing in the well-located areas.

BTR is still in it’s developing stages in Australia with underlying growing potential. As a new investment vehicle, BTR helps promote ESG (Environmental, Social, and Corporate Governance) principals and benefits from state government incentives, such as the recently introduced 50% land tax discount by the NSW Government. The consistently high tenancy rate brings steady income to the developer rather than relying on initial sales.

Local and foreign investors now have the opportunity to enter the Australian housing market through fund investment rather than investing in full residences and BTR brings them alternative investment options with low risk and a stable income stream. Several superannuation companies and private equity companies have, in recent years, sought to invest in alternative sources of income in the Australian housing market, such as the recently launched Places Build-to-Rent Fund (Places BTRF).

Launched by Vellum Limited and Urban Property Group (UPG) in September 2020, Places BTRF aims to capture the rising investment sector which has now attracted AUD$132m capital, with an expected fund size growing to AUD$1bn in the future. The fund is the most recent response of Vellum Limited to the ready property sector, who has presences in Hong Kong, Mainland China and Australia for its professional financial advisory service. Located in Penrith, Highland and Navali are two BTR projects developed by the fund in line with NDIS design principles.

Case Study: Advantages of BTR Fund over Direct property investment

What are the advantages of BTR Fund compared to owning an investment property?

Investors have flexibility when entering and exiting the fund. For example, if they contribute a minimum investment of AUD$1m (for retail clients) into the fund, they have an option to exit in 2023 or pay AUD$100m (to wholesale investors) to exit within two years.

In the subscription, they are not required to pay a major deposit or loan. Greater property diversification of purpose-build properties have guaranteed lower risk, less volatile income stream. Residential properties investment may be an obstacle to most investors, however investors are greenlighted to invest in the sector via fund investment. Simultaneously, it’s an opportunity for co-investing with Australia’s well-regarded residential property developers UPG.

Who is it suited to?
  • Advisers – who seek property allocation for their clients without taking overweight positions;
  • High net worth investors – who seek stable and regular income and demand residential property investments, however could not afford to do so individually; and
  • Experienced property investors – who seek better alternative investment opportunities;
Observation – Current trend of BTR

Responding to demographic changes and the housing needs of local people, the market has seen emerging demands for BTR accommodation. According to Allen’s 2019 BTR report, the population of renters will climb to 3,463,000, with an increasing of 16.17% during the decade 2019-2029, with the highest increases in people aged 20-34 and 55+.

 

The acceleration of BTR development was most noticeable in 2019 and early 2020 due to fall in cost of capital and lower housing supply due to structural changes. Several new BTR projects were announced by major market players.

Prior to the global outbreak of COVID-19, new residential supply in Australia had been in a continuous decline to below 2018 levels, compared to 35% at the beginning of 2019. Some market researchers believe the undersupply in the rental market will push out to 2022, however the lower population growth will offset this. Furthermore, more US investors are looking at the Australian property market due to its enormous potential.

However, more listed companies and superannuation funds are jumping onto the BTR success story. Current trends show a clear transition from private owners to corporation owners in the high-rise sector. We see a number of Australian state governments boosting the industry, by introducing the tax exemptions. However, fundamentally the market may need more policy supports especially for foreign investors, to further accelerate the development of the sector.