Why is build-to-rent on a high growth trajectory?

Affordability of home ownership in Australia is officially amongst the worst in the world. That’s according to the latest findings from the 2022 Demographia International Housing Affordability report, which found that Sydney ranks second in the world for least affordable housing markets, beaten only by Hong Kong. Melbourne was ranked in 5th place. Andrew Purdon, Regional Director of Living Sectors Capital Markets explains that while there is evidence of some housing markets cooling as interest rates have risen, it is unlikely to solve the problem of earnings to house price ratio over the long term.  

“In the rental market, availability is at a 16-year low in Australia as a whole and availability is tightening each month. Rents are growing rapidly (in some locations more than 10% per annum) and there are fears in the industry that the lack of stock will be a major barrier to delivering against the Federal Government’s recently increased immigration targets.” 

Where will new arrivals live?  

People migrating to Australia typically choose to rent as their first step into the housing market. The majority of immigrants flock to the major cities for the availability of jobs and often prefer to live in very urban locations for ease of transport to the major employment hubs and to enjoy the abundant amenities of our city centres. These urban locations primarily offer apartment living rather than houses. This is the segment of the housing market which the majority of investors in Australian BTR are focusing on. 

What about supply of apartments?  

The issues regarding residential vacancies are compounded by the low volumes of medium and high-density apartment projects which are due for completion during 2022 and 2023 - an output which is significantly below the five-year average and the lowest annual volumes delivered since 2015.  

The combination of these factors are the major contributors to the property industry’s interest in a relatively new asset class in Australia: build-to-rent. With high demand for accommodation and a low supply environment, investors recognise that the medium-term outlook for outperformance is very positive.  

What is build-to-rent? 

Most are accustomed to the conventional build-to-sell residential model. This is where the developer builds a property such as a large-scale residential development with the intention to sell those individual apartments to buyers.  

“Build-to-rent takes the different approach of building properties specifically for leasing instead of selling to individual owners,” explains Purdon.  “These developments are owned by a single investor and often provide more services and amenities for their tenants, who are treated as ‘residents’ or ‘customers’. This is an important distinction when compared to the experience of renters elsewhere.” 

What’s so special about build-to-rent?  

“Build-to-rent is already an established asset class in the US, Europe and Japan with many international and Australian investors very active in the sector globally,” adds Purdon. “CBRE estimates there are approximately 22 million build to rent properties in the US alone, where the asset class is known as ‘multifamily’.” 

In the last couple of years, attention has turned to opportunities in Australia, which has also led to growing interest from domestic and offshore lenders explains Will Edwards, Associate Director of Debt & Structured Finance at CBRE. 

“There’s been an education phase for lenders during the past couple of years.  They now have an understanding and greater confidence in the asset class.  

“The resilience of the cash flow is a major attraction of build-to-rent and lenders increasingly understand how it is different to other forms of real estate. Most completed build-to-rent assets in Australia which have been through their initial lease up period are consistently performing at 97-100% let. In some instances, there are waiting lists for new customers to gain access to an apartment.”  

“We recently completed a survey of lender sentiment and most of the respondents indicated a desire to increase their exposure to build-to-rent assets. 

"It was also third in line of the asset classes that local and offshore financiers were looking to build their exposure to in Australia.” 

“It is just a matter of time before build-to-rent proves itself as a core asset class in Australia.”  

Why investor sentiment is positive in Australia 

• All people need a home to live in and build-to-rent represents an important component in addressing Australia’s current housing crisis 
• Build-to-rent provides housing for people who want to live in cosmopolitan areas where there’s low rental stock and high price points to purchasing property  
• Many build-to-rent investors will only back projects with good access to public transport. This is positive for our cities as it enables population growth whilst not adding too much additional strain to the road networks 
• Build-to-rent is a true value-add asset that is designed for the renter as opposed to being designed for a small investor who then rents to the end user 
• Build-to-rent offers shared amenities and is often focused on building a community within the property which creates real world relationships for residents and improves social mobility 
• Build-to-rent investors are generally large-scale pension and insurance funds. The fund managers are exceptionally focused on ESG and ensure their property assets are designed and built to high standards with energy saving technology embedded to minimise the carbon footprint during construction and operations 

What are lenders looking for? 

While both bank and non-bank lenders share a positive sentiment towards the build-to-rent asset class, the loan-to-value (LTV) which you’re able to be funded from a non-bank is significantly greater.  

“A bank, in terms of their loan amount, would offer up to approximately 55% of the as-of-complete value,” says Edwards.  

“A non-bank lender would be more comfortable to extend up to 75% LTV as of-complete-value. We’ve funded both those scenarios at CBRE. The primary difference is the cost of the facility.” 

Your successful build-to-rent journey starts here 

The success of any build-to-rent project relies on an exceptional team of specialists with proven experience in everything from large, complex portfolios to small private capital assignments. CBRE’s Debt & Structured Finance team excel by providing clear advice to create value for your project and maximise the returns.  

Our competitive edge in debt and structured finance in build-to-rent projects is upheld by three core pillars: 

• Leveraging our network. CBRE’s Debt & Structured Finance team can access a deep pool of debt capital from global sources. Our competitive process and specialist real estate experience has been built through longstanding partnerships with bank and non-bank lenders to ensure our competitive market process obtains the debt capital that best aligns with the client’s  investment objective 
• We will seek to understand the feasibility and the parameters of the debt assumptions driving the project’s success. This will allow us to provide clients with a recommendation regarding the appropriate qualified capital sources for the respective project investment objectives, delivering the lowest cost of capital available 
• In addition to preparing detailed documentation for prospective lenders to review, CBRE’s Debt & Structured Finance team will promote our client’s platform and capability in the build-to-rent space at every contact point throughout the transaction process with lenders. This will provide the client with the best opportunity to achieve the project goals and long-term objectives of the company 

Our build-to-rent capability is proven in our real-world results. CBRE’s Debt & Structured Finance team recently assisted Greystar with arranging a senior debt facility to fund construction of Australia’s largest build-to-rent development comprising of 700 units and 4,300sqm of amenities. The competitive tender process headed by CBRE’s team achieved debt funding at a market leading rate with a single major domestic bank.  

To start your build-to-rent journey, get in contact with our experts.