Article | Intelligent Investment
Build-to-rent: Ensuring success beyond just occupancy
Why project stabilisation is crucial in assessing the long-term potential and viability of build-to-rent or multifamily assets
November 3, 2023
In this article, the Valuation and Advisory Services Living Sectors team wants to shed light on the important elements of project stabilisation and its role in assessing the long-term potential and viability of build-to-rent or multifamily assets.
We believe these are the core components of stabilisation which will contribute to the overall stability and success of a property:
- Occupancy Level
One of the primary indicators of stability is achieving and maintaining a high and consistent level of occupancy. While the threshold may vary, a generally accepted benchmark is an occupancy level above 85%. This demonstrates both the desirability of the property and its ability to attract tenants.
- Rental Rates
Another crucial aspect is the establishment of rental rates that are consistent, stable, and predictable. This includes factors such as various typologies, incentives (if any) furnishings, car spaces and ancillary services. Setting the right rents from the outset is of utmost importance.
- Professional Management
Efficient and effective professional management is essential for project stabilisation. The presence of well-defined processes, systems, and experienced management professionals contributes to the smooth operation of the property. When a property is efficiently managed, it requires no additional support and has a proven track record of consistent costings as well as performance.
- Lease Renewals and Turnover
Consistency in lease renewals and turnover rates is a significant indicator of project stabilisation, particularly during cyclical market conditions. A consistent average fixed lease term demonstrates reliability and a stable tenant base.
An established community and a clear resident profile within a property is a testament to its stability. When a property attracts and retains occupants who contribute to a vibrant and engaged community, it solidifies its stability and success.
- Cash Flow Stability and Predictability
Cash flow stability and predictability are essential for assessing the long-term viability of a property. While rapid market movements and resetting rents can pose challenges, studying historical performance can inform and offer insights into the probability of future stability.
In any emerging market, the stabilisation process can be one that is challenging, particularly with lack of existing operation assets in a local content to draw upon market acceptance of the product and stabilisation strategy. In addition to this, our market currently has challenges relating to above average residential rental growth and movement in expenses such as statutory costs, utilities and insurances.
This is why we believe project stabilisation plays a vital role in real estate ventures, ensuring success and predictability. By striving for stabilisation, real estate professionals can secure consistent performance and profitability in a dynamic and ever-changing market like today’s.
While we only have several operational assets across the country, establishing stabilisation will:
- Help establish trust and credibility in a new market
- Drive confidence in the sector
- Reduce market uncertainty
- Encourage further investment
All of these points are critical for attracting investors and other stakeholders into the build-to-rent, multifamily, and living sectors.