Hosted by Kate Heaney, guests include Tamba Carleton and Natasha Sarkar
Thursday 18 June 2020
KH:
Hello and welcome to Talking Property with CBRE. A podcast in which our team of experts share their real estate insights. My name is Kate Heaney, Head of Client Care for Australia and New Zealand and I'm your host for today's episode.
Over the next little bit, we'll be talking about why the global pandemic will be a catalyst for more build-to-rent development in the future. I'm joined by Natasha Sarkar, Director in the Structured Transactions and Advisory team, and Tamba Carleton, Research Manager in New Zealand. Thanks for joining me.
NS:
Thanks, Kate.
KH:
First, let's get straight down to the questions. Let's talk about rental receipts. So why have multifamily tenants been paying their rent?
TC:
Yes, then interesting to see the impact of the pandemic on rental receipts. So, residential tenants they've just had a greater range of income supporting government welfare schemes to keep them in their homes. Office rental receipts are 70% of what they were before the pandemic. Industrial 56%, retail 49% and public realm understandably, most people being locked down at home haven't been using car parks etcetera, so rental receipts are only 24%. But in New Zealand, leading build-to-rent provider a New Ground Living have seen 100% of rent collected to date. So, you compare that to multifamily in the US, rental payment rate has been 95% of the previous month and they're a lot worse impacted than New Zealand, but overall rental income for residential assets have been better.
KH:
So, Natasha chatting to you you've got a lot of international experience and build-to-rent. So how did build-to-rent/multifamily perform during the GFC?
NS:
Firstly, Kate, I want to make it clear to everyone multifamily/build-to-rent are the same products and are used interchangeably. Multifamily is the US term and for whatever reason, build-to-rent is what the UK, Australia and New Zealand have adopted. In the U. S. multifamily was in fact the first sector to recover from the 2008 recession and it then went on to achieve superior returns through both the recovery and expansion phases. The subprime crisis itself result in people defaulting on their mortgages, so they moved from ownership to renting because, of course, they had to still house themselves somewhere. Rental demand therefore went up and thus multifamily recovered first. In a post lockdown world, we really do think build-to-rent is worth watching closely to see how it performs coming out of this market downturn.
KH:
So it's obviously an emerging asset class in Australia and New Zealand, but back to that international experience of yours. How does this compare to the UK?
NS:
As a starting point Kate, I think we'll look to the US so multifamily is a well-established sector in the US. We're talking 40 years old, now with 26% of institutional stock being classed as multifamily. The average total returns this asset classes getting is on par with the likes of hotels, industrial and retail.
In the UK Relative to this US backdrop build-to-rent is still a new sector. The UK have been exploring the concept for coming on a decade now, notably from the conversion of the Athletes Village in London from the 2012 Olympics. It's really gained momentum only in the last 5-7 years in which time was seen a considerable shift in the scale of these schemes both under development and in the planning pipeline.
Off the back of Brexit from 2016 and 2017 onwards, with saw build to sell conversions into rented product. This sort of conversion isn't quite to the scale of build-to-rent or what we mean in the definition of build-to-rent. They weren't purpose built for rent, they weren't designed as such and they didn't offer the level of amenities and services necessarily. We also saw build-to-rent, gaining a lot of momentum and a stronghold in the regions to the likes of Manchester and Birmingham. Which offer a strong, transient market that are more inclined to rent then buy. 2018 onwards, BTR became very prominent across the UK and much larger schemes. We saw a shift from the sort of 100-150 unit towers up towards 500-1000 unit schemes be it in a single phase or multi phases and that's when we really started to see the amenity, the service offer, the purpose built and the design that defines a build-to-rent relative to the private rented sector.
Moving forward, the pipeline in the UK has over 150,000 build-to-rent homes. Ironically, this has been driven off the lack of planning policy in the UK, which is another podcast in itself.
KH:
Thanks, Natasha. We need to face the fact that we're in a COVID environment, don't we? But talk to me about, we’re in COVID but how adaptable is the build-to-rent product?
NS:
Built-to-rent I think is very well set up for this new normal we keep hearing about. Build-to-rent developments offer desirable work from home opportunities, many of these schemes have co-working space, libraries, lounges, all these sort of communal facilities foster the flexibility of working from home so you’re not necessarily stuck working from your dining room table. Faster Broadband schemes, that’s very important now as we all work from home.
These build-to-rent schemes have long factored this in and we're starting to see that many people researching their new homes are looking at the quality of internet provisions and build-to-rent is well set up for this.
Again, leading well into this also is the digitalisation. This is becoming more and more prominent. We've seen from, you know, the apps during this time, the contact tracing. Build-to-rent schemes often already have a large digital focus. We've seen resident apps for instance, these offer the ability to communicate with the concierge team, the
maintenance team, to communicate internally with other residents, share news and updates. So, this digitalisation is pretty well enshrined with build-to-rent schemes and this is actually meant that in the lockdown phase, amenities and resident engagement moved pretty seamlessly into the virtual world. There were online fitness classes, online well-being and other perks that benefited from this digitalisation. That in turn, improved the quality of life and living in these schemes.
KH:
What a great product to meet the challenges that we're all facing within the pandemic. I'm sitting here in Australia, you are sitting in New Zealand, how much build-to-rent is there in New Zealand?
NS:
There are promising signs coming in and promising in the sense that these schemes that we're starting and the interest that we're seeing is of scale and factoring in more and more amenities and services, which is the shift we want to start seeing. Modal House, for instance, that was due to open but couldn't due to lock down and prospective tenants have actually been able to get a glimpse of the beautiful dark grey brick facade from the street.
TC:
It does look so good, that’s a classic Ockham move to put a beautiful brick facade on the developments. There's several hundred build-to-rent units that are existing in New Zealand, most of which are in Auckland suburbs. There's plenty in South Auckland, for example, Hobsonville and Whenuapai but importantly, there's hundreds in the pipeline. As well as Modal House there is 26 Aroha, which is taking tenant applications from now. There's an Eden Terrace development Henderson, Takapuna and several in Wellington and Queenstown as well. Most of these are around about 30 to 50 units each but behind these are some really significant developments in the planning and design face, which is very exciting.
KH:
So Tamba you’re mentioning, obviously quite a lot of product, which is incredibly encouraging for this emerging asset class. But let's think about the rental market, how will it actually perform in the short to medium term?
TC:
I think that because of this pandemic, people will be staying in their rental properties for longer particularly, what would have been first time buyers. So, if you're a first-time buyer, your Kiwi Saver Balance is probably going to be a big part of your mortgage deposit. But with the pandemic, Kiwi Saver Balances took a bit of a nosedive. They've since recovered a lot of those losses, so hopefully people didn't lock in those losses. But at the same time, it's really caused a lot of uncertainty, especially with younger people being disproportionately affected by job losses. Countering this is the scrapping of the LVR rules. But just because the Reserve Bank isn't requiring you to have a high deposit when buying a home, it doesn't mean that the retail bank is comfortable with that. They're not going to give you a 98% loan value loan unless they're certain that you can meet the repayments, that you’re not a risky customer and that you can comfortably service your mortgage. So overall, I think that people will be renting for longer.
NS:
Tamba, to add to that I think, on the soft side as well lockdown has really caused people to rethink their priorities and how satisfied they are with their living spaces. For me I think in the medium term people will be looking for a property that isn't just a crash pad, but more of a home, I think we're also going to see a greater supply and rental properties in the short term from previous Airbnb stock that is now vacant and I think as the year progresses, unfortunately, as we see more job losses, people may be forced to downsize to flat share, perhaps move in with relatives. So again, perhaps more vacant rental stock coming online, affecting that demand and supply.
KH:
So, I'm hearing quite a lot of positivity around the future and the potential of such a strong asset class, both internationally and for them now locally. But there must be some challenges, what are those challenges for the build-to-rent industry, Tamba?
TC:
I think that the first one, the one that developers most commonly site to me is their reason for not being interested in build-to-rent is low yield. The reason for that is its true, build-to-rent does have a low yield, lower than industrial and office assets. But that's when you look at yield through one lens, one that is not risk adjusted, and with this pandemic it's really made an impact on how important it is to look at a yield through a risk adjusted lens. So, build-to-rent is looking a lot better, comparable even.
Another challenge for build-to-rent developers is construction costs, and that's because construction costs are really high, they’re high for everyone. But new launches with the apartment pipeline are half of what they used to be. We've got a lot of apartments completing this year and those builders have built up capacity, which won't be redeployed into new apartment projects as much. A lot of it will be redeployed into state housing, that pipeline has really increased and some into those shovel ready infrastructure projects, but there is capacity there for build-to-rent. There are other issues around financing evaluation aren’t there Natasha?
NS:
Yes, financing is, of course, an issue. The banks are very much used to being repaid on completion of construction as those presales settle. With build-to-rent it's not a land play, it's a longer game, it's about generating income, and the value that sits there. Of note, I think, is the $1 billion debt fund that we saw Qualitas launch in Australia and just February of this year, that $1 billion debt fund is targeted purely to build-to-rent. Another challenge, I think, operators specifically, is the need to be service centric. There needs to be a shift from thinking of residents as tenants and more as customers and what their needs and desires are and providing that sort of amenity and service to them.
KH:
I’ve learnt an amazing amount through this whole podcast, and I just want to turn to you both. A lot of history, a lot of information there. But what are your bold predictions for the year ahead?
TC:
I think there will be a some more developers who pivot from build-to-sell to build-to-rent and CBRE is here to help those developers with demand studies design, evaluation services.
NS:
My view is, of course, that build-to-rent is, in fact, one of the strongest and most reliable asset classes, it always has been and I think, therefore investors are going to start to see build-to-rent as the safe haven. I think as Tamba said, we're going to see residential sales and presells come under pressure. That, coupled with job and income uncertainty, leads to a less willingness to take on mortgage debt. As a result, I think we'll see further interest in build-to-rent as an investment class. I think the social shift to an increased focus on living and where people are living again leads to build-to-rent development and growth in the sector.
KH:
Well, thank you both so very much for that incredible amount of information and insight into build-to-rent. So, thanks for listening everybody to Talking Property with CBRE. If you like the show and want to check out more, please visit cbre.com.au/talkingproperty.
Until next time.
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