Dispelling the myths of premium build-to-rent

When people in the property industry hear about build-to-rent, the first thought that often comes to mind is brand new apartments in polished towers designed with a high level of amenity and services to attract high rents.  

This is certainly a perception that “BTR” buildings attract “premium” rents, an often-misunderstood term which has helped push the wider BTR asset class towards a broader viewpoint of being a luxury product for affluent residents.   

In truth, there’s more to BTR than just an elegant play on words. As a sector that’s still in its infancy in Australia, it’s critical to understand the breadth of appeal of BTR so that the asset class can demonstrate the positive results and appeal to a range of cohorts that have already been validated in overseas markets.  

Where the confusion comes from 

Most people tend to describe an object of higher quality with the word “premium”. It’s a common practice which doesn’t escape the realm of property, with the property industry’s developers, local investors and lenders often associating the term with what they get in a BTR asset.  

The “premium” BTR term has been used by the market to describe the higher percentage in rent that a BTR dwelling will attract when compared to a build-to-sell (BTS) product in a building accompanied with a range of owners or landlords, fragmented property management and an Owner’s Corporation or Body Corporate arrangement. This higher rental pricing is due to the value-add to a resident in a BTR offering when compared to one in the private rental market. 

The “premium” aspect accounts for the difference in offering including professional management, design, the functionality of amenity, sense of community, resident focus and security of lease tenure - all of which are delivered through single ownership and professional management. 

And it’s this hyperfocus on using the word “premium” to describe BTR assets that has created a narrow view of it as a product for the well-heeled or a type of accommodation that is unattainable to the mass market.    

Understanding BTR rents 

Successfully establishing a BTR project requires careful consideration of the targeted audience through demographic and psychographic analysis. Such measures are taken to ensure that the project proposal meets the needs and requirements of the market with a high level of consideration around affordability, hence creating value to residents. Affordability and targeted cohort will vary for each platform, investor, groups and assets.  

While BTR rents will always be higher than that in the private rental sector, via the nature of what’s offered in a BTR building, they will still be affordable to the targeted cohort based on the extensive analysis undertaken.  

These are some crucial details to keep in mind: 

• Higher rents do not necessarily correlate to higher returns, as high-end or luxury buildings may see higher volatility during times of uncertainty and lower levels of occupancy. Additionally, the ongoing cost to deliver a high-end offering will likely come at a higher operating cost. 
• Base rents can be subjective as they’re being compared against the private rental market which itself is unsophisticated and can possess inconsistencies. This is primarily due to the combination of individual owners and individual property managers dictating the rent variances where two identical properties with the same specifications may be priced differently. 
• Conclusively, it’s difficult to make comparisons as the private rental market is largely controlled by ‘mum and dad investors’ and rental prices can be very inconsistent. 

BTR segments explained 

When it comes to BTR, there is no universal mould and as the market evolves, there will likely be an emergence of various scales and models to consider.  

CBRE currently considers three emerging classes: 

1. Mid-market 
2. Upscale  
3. Luxury 

This is a scale that is similar to what’s observed in the hotels sector. Each sector has a progressive hierarchy, with the renter demand pool likely to change the higher one moves up the scale. This particular hierarchy is also based on the rental pricing. It’s important to note that each class demonstrates its own strengths and weaknesses in its own context and economic climate. 

CBRE’s Valuation and Advisory Services team have identified these classes through observations and learnings of various groups' platforms.  

Variances in product  

When it comes to rentals, “premiums” can range depending on the product being offered and the local competing stock. Research in the United Kingdom shows that modern BTR developments attract a premium of at least 10% over rents within the private rental market for buildings with a high level of amenity and professional management.  

However, this could range from 1-2% to as high as 15%, 20% or even 25%, and is likely to differ depending on location, configurations, offerings, inclusion in rents, availability of services, management platforms and communities formed. Because “premiums” are linked to the private rental market rate that’s being adopted, it’s being linked to a variable. This in turn means that careful consideration should be made when reviewing evidence, assessing rents and applying a premium if any, as there are variables across every step to assessing rents.  

Experts would argue that instead of the word “premium” dominating the conversation in regard to rents, the real focus should be on “rental value”. The customer offering in a BTR building is distinct and different to a BTS building. It is therefore logical that sophisticated customers have the ability to translate the differences into a dollar amount in which they are willing to pay for the extras and experience. 

What this means for valuers and pricing rents 

Given the variances mentioned, it’s important to understand how this translates for valuations and setting rents. Valuers need to understand the key differentials between various groups and what exactly is reflected in the rental pricing.  

More specifically, these are the crucial questions valuers need to address: 

1. Has the appropriate methodology been used to determine the higher rental?   
2. Is the evidence supportive and does it make sense?  

Understanding the differences is not as simple as comparing or assessing the premium to a BTS ‘median’ rent for the local suburb or Local Government Area. 

Ultimately, like any emerging sector, it will be an ongoing learning curve and one that becomes easier to navigate as more data becomes available and more BTR buildings become operational. And with that, there will be an expectation that the fixation on the word “premium” will be replaced with “rental value” as valuers are able to make more accurate comparisons between BTR versus BTS, bringing a likely expiry date to the word “premium”.