Featuring Tamba Carleton, Natasha Sarkar & Craig Godber
Thursday 25 November 2021
TC
Hello and welcome to Talking Property with CBRE. A podcast in which our team of experts share insights into the way we live, work and invest in property. My name is Tamba Carleton and I am an Associate Director in the New Zealand Research team, focused on residential, apartment and build-to-rent markets.
In this episode we will be sharing insights on the regional build-to-rent markets of New Zealand and Australia and how they are likely to evolve in the future. I'm pleased to welcome today, Natasha Sarkar, Director of our Structured Transactions and Advisory team in New Zealand and Craig Godber, Head of Residential Research at CBRE Australia and the co-author of this report series with me.
Thank you both for joining me today.
CG
Thanks Tamba, it’s great to be here.
NS
Cheers Tamba.
TC
I thought we'd start off with you, Craig, If maybe you could please give an overview of the report series and why it looks specifically at regional build-to-rent.
CG
Yes, as a start, we need to remember that when we say regional, we mean the areas outside the major capitals be that Sydney, Melbourne, Brisbane, Auckland or Wellington. So we can still be talking about highly urbanised areas.
TC
Yes, regional doesn't mean rural.
CG
Yes, that's right. So build-to-rent as an asset class is certainly gaining momentum in both Australia and New Zealand. In Australia, we have over 20,000 units identified in the development pipeline at this stage, and that number is growing week by week. Developments so far, however, has been largely concentrated in the major capitals. In more material markets such as the UK and the USA build-to-rent is certainly much more widespread away from the largest cities in the UK, for example, of around 180,000 units that exist in the pipeline, almost 100,000 located outside London in that second-tier city or small regional markets.
TC
So it's certainly a lot bigger than the Pacific?
CG
Oh, definitely so this suggests there will be opportunities for build-to-rent product into various markets across Australia and New Zealand as the market grows. Although we do think that a lot of the development could come, will certainly look different in the regions compared to the models that are being developed in the larger cities. This will add a new level of diversity to the rental product on offer and in the end, hopefully shape local rental markets for the better. So we have decided to investigate the potential for build-to-rent development in the regions across a series of reports this year. The final report in the series ‘It's going to Happen’ is now available.
TC
So let's have a look at the driving forces. The first two reports looked at various data points that indicate regional build-to-rent potential, report one was very people focused data and report two was broader economic and financial data. Report one also looked at the international context and the existence of regional build-to-rent in more established markets. Natasha, you've had several years’ experience in the UK working on build-to-rent. How did the regional market evolve over there?
NS
As Craig mentioned, 55% of UKs build-to-rent stock is actually outside of London. The UK is very populous in many cities outside of London, so very similar to what we've seen in Australia now, other main cities took off with the higher density build-to-rent product. So we saw that apartment typology in Manchester, Birmingham, Leeds and even in smaller places like Brighton, but these were the more dense product of vertical nature.
TC
So it's still very much a city vibe.
NS
Yes, but not necessarily those big city prices. The high land costs in London, very similar to Sydney, meant that build-to-rent was viable in Manchester and Birmingham and arguably reached scale at pace with London. Those same demographic drivers for build-to-rent are evident in the regions, so we have, you know, housing and unaffordability relative to incomes. The millennial effect, which desires access over ownership and the same societal changes are flowing through so that demand base is there. In some regional locations, you may have better affordability, but those centres may serve as some more transient demographic for instance. People that will look to live or work there for, say, five years after you need but aren't necessarily looking to buy a home in that location.
TC
Craig, the data in the first two reports identify different supporting factors of build-to-rent development. What are some of those factors and how do they differ between regions?
CG
Well, as you mentioned in report one, we look at the people. The key trend highlighted being a move to regional locations away from the larger metropolitan areas. We think this is a trend that will continue in a post COVID world and in report two we looked at the employment trends, affordability, lifestyle, those sorts of factors. One of the reasons that we see build-to-rent as being desirable is because of the flexibility that a renting lifestyle offers. Regional markets have a definite advantage supporting this for affordability and lifestyle.
TC
Yeah, I've lived in Auckland all my life, but I've heard that living in some of the regions is a bit more relaxed.
CG
Yeah, I think the people in the Sunny Coast would certainly agree with that. Anyway, that was reports one and two in report three. We've combined the key data points to benchmark and ranks different regions in terms of their likely potential to support build-to-rent development in Australia, it was no surprise that the satellite cities in close proximity of Eastern Seaboard capitals were prominent, although the smaller capitals, the ACT, Perth and Adelaide were also highlighted. Some of these areas are already seeing larger scale development such as the Gold Coast and some of these other areas, those smaller capitals are certainly on the radar of developers now.
TC
Yeah, and then in New Zealand, the two regions bordering Auckland, Waikato in Northland, they came out strongest in the rankings. So from my perspective, it seems pretty well inevitable that regional build-to-rent will start to gain momentum soon and that's because, as Tash said was the case in the UK, the key driving forces of city development also exist in the regions but the expertise and skills of city development doesn't necessarily transfer to different markets. Regional build-to-rent is going to have a very different look and feel the city development just like it does overseas. There are a small number of regional build-to-rent examples and its local developers, who are using their local market knowledge to be the first movers in their markets. You compare that to Australia has been very much a big city institutional market so far.
CG
Yes, that's correct but I think Australia will certainly see more regional development in the future.
TC
It's just like how I think New Zealand is going to see more city institutional development in the future. So it will be interesting to see how Australia and New Zealand potentially become more similar over time.
Now, looking at the ingredients for success, I indicated that regional build-to-rent will have a different look and feel for city development but what does that mean exactly? What is it about regional BTR that’s different to city BTR? Tash, we have some data from the UK looking at the different amenities included in regional and London build-to-rent. Could you share some of the key differences and the reasons behind them?
NS
Yes, we've got some great analysis from our UK counterparts looking at the amenity offer within build-to-rent and this looks at it both over time and the nuances between London and regional. First over time, there are some stark differences in the proportion of amenity space when we compare 2015 stock to those being developed now, for example, 11% had some sort of reception or concierge facility, whereas now 80% do. Very similar stats for residential lounges as well.
TC
Some big changes there.
NS
For sure and the second theme is a difference in the actual offer between London and the regions. For example, 78% of build-to-rent schemes have some sort of roof for outdoor terrace in London versus 36% in the regions. So the reasons for these differences are, of course, different lifestyles and occupier types. So city professional needs versus regional, which might have more of a focus on families, for instance. And, of course, the actual amenities on offer in the immediate vicinity. So in central London you would have more gyms, for instance, within close proximity versus in the regions that there would be less gyms nearby. So the requirement there for gyms within build-to-rent facilities is, of course, less in regional.
TC
Yeah, I mean, if you're a London build-to-rent developer, why would you put in a generic gym for your residents when there's multiple specialty gyms within a short walk of your building?
Craig, much of the Australian built around pipeline is city high rises. Do you think these type of buildings work well in regional locations?
CG
In short, probably not in most regions. Even if we just get back to the basics of, for example, local planning laws, public acceptance high rise is unlikely to be the solution in most regions. Many regions also offer those lifestyle advantages over and above the big cities so the extra facilities and services that are in those big city models of build-to-rent won't necessarily need to be in the regional developments. Other factors exist as well, such as lower site costs, the availability of large land parcels. So that suggests that many of the developments in regional locations will likely lean towards lower rise.
TC
Do you think infrastructure makes a difference in accessing these lower site costs and larger parcels?
NS
Yes, definitely so and increasingly so in a post COVID world. Working from home for at least part of a week is likely to be the norm for many people now. This means our community between, for example, the Gold Coast of the Sunshine Coast and Brisbane will become even more attractive than it already is, if that only needs to be done for, say, three days a week. So that change will support even greater opportunity for regional markets across a range of residential product, including build-to-rent. The key, of course, will be continued development by government of high-quality road and rail infrastructure to support that movement between the regions and the employment nodes.
TC
Yeah, that makes sense. I mean, I live moderately far from the office and pre-pandemic. Going into the office every day, five days a week was a bit of a drag as a commute. But now I'm going in up to two days a week and working remotely the rest of the time. It makes the commute quite a novelty.
Okay, so now let's take a look at our predictions for the future. First of all, predicting the future is hard. Could anyone have really predicted how COVID would affect the world in our daily lives? No. But there are some irrefutable trends that are influencing future housing. Natasha, how has COVID influenced our living situation and has this, in turn, meant changes for build-to-rent design.
NS
Build-to-rent was well placed to adapt to the pressures of COVID because the long-term flexibility of the asset class is the key value driver. In fact, tenant satisfaction went up in build-to-rent/multifamily during COVID. We've got stats like more than 90% of build-to-rent tenants would recommend their landlord. But we are seeing further changes flow through to the design now 18 months in. These are particularly around the need for work from home space, wellness priorities, ventilation and circulation, deliveries and outdoor amenity. These trends are eventuating into physical changes of course. One differential, I guess, is management, which is now being treated as amenity in itself and the value of this is being seen. We're seeing active management result in tenant satisfaction that I mentioned lower voids and so on.
Physically we're seeing the flexibility come through. So those multipurpose rooms and grid system design and the need for adaptability that's needed for build-to-rent to morph in time is being fleshed through COVID benefits as well. We're also seeing clients spending a lot more money on acoustics. This is one of the biggest complaints by tenants, which of course is very important with people working from home now, but more so with multiple people working from home and we're seeing the benefits of these units being designed better for residents and modern renters coming through with double bedrooms, fitted wardrobes and ensuites.
TC
It's amazing that tenant satisfaction went up despite the difficulty of having face to face contact with building staff during the pandemic, tech must be a real focus for build-to-rent now.
NS
Yes, so high speed Internet is crucial. I recall analysing this years ago and thinking it was a bit of overkill, figuring out the exact speed and so on of Internet but this is very valid now, and I think it will continue to be valid you know, as more people gain from home. For instance, there is a desire that people are seeking for high-speed Internet apps are becoming more important and that's for both residents and managers. Their ability to communicate through these enhanced, well being managed deliveries and book communal space and we're seeing these techs and applications being used more and more by management as well. They're using this to analyse the data, analyse how much space is being used and respond better to peak demand.
TC
Which ultimately results in more efficient building use and increased returns for investors.
NS
Absolutely.
TC
Craig. There's been a real shift to the shared economy, where emphasis is on access rather than ownership examples such as Netflix, Uber, Spotify, where you don't own the item but it’s accessible as a service on demand. Do you see housing going the same way?
CG
I think so. Ownership is certainly becoming more and more out of reach for some people, and there'll be a certain demographic moving forward either by choice or by necessity, will never own. But many of these people are already starting to realise that they don't need to accept what you could say would be the ‘old model’ of renting just effectively being a place to live. So lifestyle is becoming more important and that amenities and services that come as part of a true build-to-rent product, I think, is where that sector can gain its place in the market.
NS
I agree, Craig. I think that's why it's not just going to be a millennial product. We're also seeing more older people starting to rent. Now there's been a 46% increase in 35- to 44-year-olds, for instance. This used to sit at about 17% of the cohort, and now we're seeing this at 27% and these different age groups obviously have different housing needs. For example, more space. This shift has led to the revival of demand for single family housing, a product that is suitable for people who have, for instance, married later have Children or caring for older parents.
TC
In other words, a type of housing product that's perfect for regional build-to-rent. Well, that's all we have time for. Thanks so much. Craig and Tash for joining me.
CG
Thanks to you, it's been a pleasure.
NS
Cheers Tamba.
TC
To read the full report, click on the link in the show notes.
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Until next time.
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