KH:
Hello and welcome to Talking Property, our CBRE podcast series where our team of experts, our clients, and industry specialists share insights into the way we live, work, and invest through a real estate lens. I'm Kathryn House, CBRE's Australian Communications Director and I'm your host for this latest Talking Property episode. Today we'll be talking about the build to rent sector, which is known as multi-family in the US. It's an emerging asset class here and one that's attracting significant interest from both local and offshore investors and a lot of industry attention given the current housing crisis and the significant shortfall of rental housing across Australia. BTR involves blocks of apartments that are specifically built to be leased rather than sold to individual owners. 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.
It's still early days for the sector in Australia with about 30,000 apartments operating or in the pipeline across the country, but there's huge potential with forecasts the sector could grow to as many as 150,000 apartments within 10 years - if we get the playing field right. This would help alleviate current housing supply pressures, provide quality long-term accommodation for renters, and bring a range of social benefits, both from a sustainability perspective and via the sense of community that BTR facilities foster. It will also help cater to higher population growth forecasts, factoring in Australia's revised net overseas migration targets given most of these migrants arrive in our three biggest cities and 70% are renters. So, to talk about the opportunities, some of the current challenges and the future market outlook, I'm delighted to be joined by Mirvac Fund Manager and BTR Sector Lead, Angela Buckley, and by the Pacific Head of CBRE's Living Sectors Capital markets business, Andrew Purdon. Thanks for joining me today.
AB:
Hi Kathryn.
AP:
Morning Kathryn. Great to talk to you.
KH:
Perhaps to set the scene, Mirvac has been one of the pioneers of BTR in Australia through its LIV brand, having already developed two assets, one in Sydney and one in Melbourne. In fact, Ange, you are joining us today from the podcast studio in your Melbourne complex, LIV Munro at Queen Victoria Market. Mirvac also has another three developments under construction. Ange, could you talk us through why Mirvac decided to target this market sector and what your longer-term vision is?
AB:
Well, Kathryn, I think like most, hopefully sound business decisions, this has really been driven about by solving a customer problem. And I think that especially when we think about the rental market in Australia, the size of it, just the fact that in our inner cities, one in two people rent and anybody who has rented will typically have a story of not necessarily a great customer experience. And I think really when we combine that as an opportunity, purely from a customer perspective, with some of Mirvac's capability, so we've been a residential apartment developer for more than 50 years. That capability has also expanded out to be able to develop master plan communities, medium density residential developments, and being one of Australia's largest diversified REITs and owning and managing property across the office, retail and industrial sectors. Combined with the fact that we have in-house design and construction capability as well. I think all of those factors really combine to say this is something that we could really lend our hand to in thinking about how to solve this customer problem. And really, the evolution of it has been driven from there.
KH:
Fantastic. So Andrew, you have a long background in the living sectors. Having worked in this area for 10 years in the UK before relocating Down Under last year. The UK is well ahead of us in the development of BTR projects with approximately 125,000 apartments completed or under construction. However, the sector is still a tiny fraction of the overall housing market there, around 0.6% by value. Are you seeing many similarities in the way the sector is evolving in Australia? And what can we learn from both the UK and the US where BTR is even more advanced, accounting for about 14% of their housing stock by value?
AP:
Well, it's interesting for me, Kathryn, as a relatively new arrival into Australia. I arrived here in May last year, but when I looked at the Australian market through the lens of somebody that's been operating in the rental sector in the UK, it has huge similarities. If you think about the customers first, as Ange alluded to, in both countries - the UK and Australia - we've had a noted period of increase in the percentage of renters in our population. So, in both countries, about a third of people rent and of course in Australia, given that the market for build to rent, so purpose design buildings, is so new, we have virtually no purpose design, purpose built and operated, professionally managed rental accommodation for those people. So, you know, from the customer standpoint, which is where we all start with our thinking around this, there's a huge need for the product.
The similarities are quite obvious with the UK. Both countries have a very expensive home ownership model, both countries, you know, it's hard for people to buy their own homes, which is what's really fueled the increase in renters in both countries. And the inner cities in particular are just growing exponentially. So, you think about the population growth in Australia, which is forecast over the next five years, you know, the government's target is about one and a half million more people coming to Australia as new arrivals. And those people we know tend to start their lives in Australia in the inner cities and as renters. Which is actually really similar, that urbanisation and population growth in the inner cities is really similar to some of the UK cities. So, you know, it is a bit like history repeating itself when I look at the Australian market and how it will grow over the next five or 10 years.
To answer another part of your question on the US, the US is such a huge country by population and the market has evolved over a 25-year period. So, it's quite difficult to draw the same parallels as Australia and the US. But one of the things I'm sure we'll talk about today in the US, what we've seen is the evolution of different styles of rental accommodation to service different cohorts of renters. So over time, I'm sure Angela will have views on this, I'm sure we'll see diversification of typologies of rental housing in Australia, but right now that the main market activity is in the inner cities.
KH:
Yes. And I think we were talking about it earlier, but you've, you've had your own experience with having to try and rent in Australia. So you're coming at it with some good knowledge there.
AP:
I am. I'm a recent immigrant and a renter, so I suppose I tick a couple of boxes there.
KH:
Absolutely. So there has clearly been a huge amount of investor interest in Australia's BTR sector. This was evidenced last month when Mirvac established its new $1.8 billion build to rent venture with some well capitalised cornerstone investors, including the Clean Energy Finance Corporation. A question for both of you as Andrew, I know you jointly advised Mirvac on the capital raise for that. What's underpinning this investor interest and which investor types are the most active in this space?
AP:
Yes, so I mean the thing that's really underpinning the investor interest, and it is not just overseas investors, but domestic too, is an acknowledgement of the fundamentals that drive the sector. So, it's about population growth, it's about an unsatisfied need from the customers, but also it's about driving solid rental returns and capital growth through real estate investment. And that the residential market at the moment looks quite different to a number of the other commercial markets, which is where the majority of investment activity has been in Australia over the last 20, 25 years. So, think about offices and retail and logistics as the three core sectors for most investors in Australia, the fundamentals behind some of those sectors are a bit different. They're a bit more challenged than residential. So that's why the capital markets and the long-term investors are really looking at rental housing now as a diversification play and an area to get those really solid investment returns that they need for their shareholders or their members.
KH:
Absolutely. And Angela, what did you find during that capital raise process?
AB:
I'd echo a lot of what Andrew has said. I think the other two points that I would just add is that there's also I think a really strong alignment with residential investment in achieving ESG outcomes as well. And I think we definitely saw that with the recommitment to the platform from the Clean Energy Finance Corporation and that the recognition that we are so early in the journey in build to rent in Australia. And because the product needs to be developed out and it is fundamentally people's homes as well, there's a really strong opportunity to deliver fantastic environmental outcomes as we propel towards decarbonising the economy. Most of which is very hard to achieve in a typical residential setting, but also the importance of the S and the G in ESG as well. And that these communities that we're creating are actually really leaning into the social sustainability theme and able to address some of the social issues that we face, particularly around loneliness and a lot of those core needs that we have as humans that often aren't addressed in the housing market as well. And that if all of that can be delivered by responsible institutional investors who are looking to make, you know, a positive impact over the longer term, then there's a really strong alignment with the growth of the sector to ESG as well.
KH:
Absolutely. I mean it's interesting that you talk about that sort of the E and the S. There's maybe a little bit of a misconception in some spheres that BTR is purely this sort of top end exclusive product, but I was looking at your LIV website and some of the resident interviews on there and there's everyone from students through to DJs, marketing managers, interstate workers who are using the apartments as a crash pad. And there's this common thread when you look at the interviews with people talking about the sense of community that they feel, including there was one person who set up a fruit and vegetable co-op to help other residents with the price of living going up. So perhaps you could talk us through a little bit more about some of these societal benefits you're seeing and I guess some of the other reasons why people are gravitating towards BTR living.
AB:
Well, I think it's no secret that it's really tough to be a renter in the sense that the whole system today is really geared around a pretty inefficient way to procure a home. Whether that's the initial contact that you have when you're trying to actually find a home, the fact that it's relatively fragmented. You are dealing with often one real estate agent for one single apartment and lining up for open for inspections for, you know, 40 minutes and hoping you are the one that is chosen. So right from that first touch point, pretty much all the way through the journey, our system's really been set up largely to support the landlord much more than the tenant, even though I don't usually use that word. And that goes to the fact that it's not seen as a really desirable living option for people today. You are almost thought of as a second-class citizen if goodness you're a renter - sorry to say that Andrew as a new immigrant.
But realistically, you know, we are talking about everyday Australians, and you listed a few that do live with us, and it is about addressing a very broad audience. If one in two people in the inner-city part of our cities are renting, then we all know renters. And this means that there's this hugely unaddressed audience. And when you combine that with, as Andrew said, professional management that really focuses on the tenant as the customer, everything that we do is all about wanting people to live with us for as long as it suits them. If that is a long time, if they want that to be five, seven years, then we will happily accommodate that. Or if they are being relocated for work for six months and need somewhere to live, then we'll also accommodate that. But it's putting that choice back in the renter's hands. And there's this really strong focus from us about really wanting this to be a genuinely new category of housing.
So, bringing together some of the benefits that do exist in the rental market, like flexibility perhaps of a shorter-term lease, but also the sense of security that you often only get from in Australia owning your own home. So that can be not just security of tenure, that could be the fact that we encourage people to really make the home their own. So, we are happy for people to bring their pets and their children. We're happy for people to paint their walls, to hang pictures, to really get that strong sense of belonging and also individualism as well. And to know your neighbours. And when you have that ability to have a sense of security, whether that be from the tenure of the lease or the fact that you know that your landlord is a professional manager who doesn't want to sell that unit in six months, or whose daughter might be relocating for university and want to move in there, then you get to deal with, you know, a very different approach in that everybody's on an equal playing field. Everybody is a renter. There is no hierarchy between the owners and the renters in the building because everybody's equal. And therefore you are genuinely changing the game around what an inner urban living experience can be. And we design the buildings for living. They're not designed to maximise private space, which is typically them driving capital value. This is about designing for a living experience that is sustainable in the long term.
KH:
Fabulous. And I know Andrew, you often talk about the societal benefits as well. I mean, what did you see in your time in the UK about how that sort of played out?
AP:
Well, I think probably the starting point for this is that we, we all in the industry, we fully acknowledge and understand the benefits of build to rent. But actually communicating it to customers who haven't experienced it before is a slightly different challenge. So Ange, I'd love to hear your views on when you've engaged with customers and you've been leasing up a big building like LIV Munro. To what extent are the customers pre-wired and a bit cynical about what your promises are as the operator of the building?
AB:
There's definitely a healthy level of skepticism and I think that's been driven by the fact that renters typically aren't treated as customers. So, and therefore, you know, there's this tension that exists between the traditional landlord and tenant relationship. But once we're able to, I think really demonstrate some of those benefits and people are able to see it with their own eyes and when you walk into the building, people will say hello to you or say hello to each other. I love the story in the last couple of weeks that we host Friday night social drinks each fortnight as one of our many resident engagement opportunities. And that's been relocated down to the lobby of the building up from our level 39 amenity because people wanted to bring their pets. So, I think last Friday, I think there were at least five cats and I think 10 dogs all enjoying Friday drinks. And it sounds atypical because I also live in an apartment building and I can't imagine that probably happening because it's not geared to, either. And so, I think that first leasing experience is obviously really important, but it's also the ongoing kind of enduring experience that we are committed to delivering as well that I think will make the difference long term.
AP:
And I think one of the very few positive things that came out of Covid is that people really value community in a different way. Now if you, if you think back to when we're all locked down in our houses and how we all got to know our neighbours and we have the street WhatsApps and that sort of thing, people realise that, you know, in our busy lives that we all lead, having that richness of relationship with neighbours and community is hugely beneficial and valuable and we probably undervalued it pre-Covid. So, to answer your question around, you know, what have we seen in the UK and what's happening in Australia? I think BTR customers and residents, they are big advocates and fans of the place that they live and Ange you've seen that within your buildings, you know, they're very proud of where they live and they love hanging out with their neighbours and getting to know and engage with the community.
And that's the social benefit in many ways, it's connecting people up. And it's not only accessible as well to people who are earning the highest salaries in the cities. Our analysis shows that quite consistently across the east coast cities of Australia, the entry level for somebody to live in a build to rent building is probably somebody, particularly if they're sharing, something between $50,000 and $60,000 per annum as income. You look at that relative to median salaries, it's well below median salary and a huge broad range of job types can access that sort of rent. So, it is a different lifestyle offering. We believe that it's much, much better than the private rental sector, a richer better life to live in an urban environment for sure. And it's very accessible for lots and lots of people. So it's great.
AB:
I'd add to that Andrew, I think that the other part is it does go back to that design point that the mix that we would typically create across be it studios, one bedroom, two bedroom or three bedroom apartments, often people have a traditional mindset of what you do with those one or two bedrooms that you rent as well. And we are very much thinking about how to maximise the utility of all of the spaces that we have, which includes a private space but also within someone's apartment, but also how that can be complemented by additional space that might be shared. So here at LIV Munro, I've just come from the coworking space, there's 18 sit to stand desks, there were a crowd of people in there this morning that have all booked a spot for the day as well. There are a variety of meeting rooms that are also being used as well and the multimedia rooms that people are using for a variety of different reasons.
They might be having their friends over to watch a movie together or even play karaoke or play a musical instrument and not bother their neighbours as well. And again, it's just redefining what that living experience actually looks like and the different ways to use spaces. That can also happen when people's circumstances are changing. We had a lady who was living with her adult daughter who has moved overseas for 12 months and she's moved from a two bedroom to a one bedroom on the same floor and that, you know, she said it's really difficult to be able to do that elsewhere. So it's about creating, again, more choice for people and more certainty at the same time.
KH:
Yes, that's fantastic. And not having to engage a mover. You could just carry her things to the next apartment. So, we've talked about the opportunities, but I guess we really should talk about some of the potential challenges for the sector as well. One would be the Green's opposition to the Albanese government's $10 billion housing fund unless the government coordinates with the states to impose a two-year national rent freeze. At the same time the Andrews government in Victoria is mulling a package of housing measures, which may include rental controls. So, a question for both of you. What impact could these types of rent controls have on the sector's growth?
AP:
Well I think the starting point on this one, Kathryn, is that proposed rental reforms, and we don't know really what the Andrews government is thinking about at this stage in detail, but it's much broader than BTR. So, we'll sort of talk about it from the sense of consumer outcomes and customer outcomes, renters, and then why don’t we talk about the impact that it could have on build to rent specifically as a very small part of the overall housing market in Australia. So Ange, I mean we talk about this quite a lot, don’t we, the risks and the headwinds that we all face at the moment in the sector. It's unrealistic to say that the BTR market, the institutional investment market is anti-reform, but let's just talk about what reforms would be positive for customers potentially and we can talk about others that would really impair investment into the sector.
AB:
Yes, I agree. I think rental reforms broadly can actually be really positive in creating that certainty that we talked about for the customer, but also for investors as well. And some of the reforms we know are on the table delivering on outcomes that actually already exist in the build to rent market. So it's bringing up the standard of renting more generally when we're talking about things like security of tenure, which of course build to rent already provides. When we're talking about no fault evictions, which again, build to rent already provides. In New South Wales, the introduction of a portable bond scheme, which we actually don't charge our customers a bond. So those sorts of reforms are actually really positive and I think it's very clear to say that investing into a sector, whether you are a superannuation fund or an international investor or even a mum and dad investor, what you're really looking for is clarity and certainty and the ability to operate in the free market as well.
And I think there are already some signs that some of the proposed reforms that we're seeing are taking away some of that certainty and therefore, even mum and dad investors are starting to show signs of exiting the market. Today when you look at the proportion of listings that are on the market in Australia, investors represent the largest proportion that they have in more than a decade, which I think is one of the signs that the risk of that certainty will actually stifle investment. And it seems logical that a rental cap can be a good thing for a customer, but in every market internationally that we've looked at where either rent stabilisation or rent controls are in place, there's a direct link to inferior customer outcomes because you're capping the equity upside investment, you are also less inclined to invest in the repairs and maintenance or the capital investment of a building and it's very clear as well that supply actually becomes crimped from such measures being in place. And with the market where it is today and if you look over a 5, 10, 15 or 20 year period, the best way to have less volatility in the market and growth that is more akin to inflation is to actually encourage supply. And we really are at the point where we need to incentivise supply in the short and medium term for our cities.
KH:
So, Andrew, what is going to stimulate supply in the BTR sector?
AP:
Well, as we've talked about already, Kathryn, the fundamentals and the tailwinds behind the sector are really positive and Australia in many ways is a standout market in the world, not just in APAC but around the world in terms of the attractiveness to invest in the sector. But we need to make sure that all the policies are incentivising investment rather than impairing investment. So we definitely need certainty of thinking from politicians at a state and federal level. Obviously, there was huge excitement at the last federal budget, the announcement of changes to MIT tax, which has really caught the attention of the global investment community and attracted new investment or prospective investment into Australia. So we need consistency of thoughts and policy at a state level too. A lot of our clients talk about the challenges of getting planning permits for delivering. So the states seem to be alive to that. They try to accelerate planning processes and give investors more certainty through planning outcomes. And that's the same, that we need to see that that mentality of incentivisation and providing certainty needs to percolate through all forms of government policy to help the market grow and to help investors invest.
AB:
I think Andrew there's also a real opportunity to partner with government as well. We've got an example in Queensland where we're delivering a project which incorporates affordable housing. So, 25% of the 396 apartments will be dedicated to key worker affordable apartments and that's over a minimum 15-year period of time. So, there's also partnership opportunities, which I think could also help to stimulate supply when, to your point, if we get the policy settings right.
KH:
Absolutely. So, one last area I'd like to explore with you both is that the other types of rental models that investors are exploring in Australia. So we've talked a lot about BTR, but you know, there are things like family housing, single person households, affordable and social housing. Ange, are these areas that Mirvac's looking at? And I guess a question for both of you, what's going to be instrumental in driving the growth of these types of housing models in Australia?
AB:
Look, I think I would say Mirvac generally has really strong conviction around the living sector and whether that be across residential build-to-sell in apartment format or residential subdivisions or even medium density build-to-sell style developments, that we believe that there's a really big role to play in the market in that going forward. But it's taken us six years to really establish the platform that we have with LIV and creating an institutional rental model. And I think what we've really got conviction about is that potential expansion of that going forward would seem like the next natural adjacency for us as well. There's a very broad range of customers to address in this market and being able to operate across the continuum I think is, you know, a natural opportunity that we're continuing to explore.
KH:
Andrew?
AP:
Yes, so we're starting to see some different styles of rental housing business plans emerge in Australia. Back to what I said before, the US has the most segmentation within the market. Everything from high-end CBD-style rental housing to inner ring to what they call worker housing, which is more affordable products. And then single family housing, which as described is master plan, community style housing for families, people with children, you know, near schools or things. So, what we know is that the investor’s quite open-minded around the type of accommodation that they're investing in, that they're consistently looking for those stable income streams, which all those types of housing can provide. So I think as Ange says, really, I think build to rent will continue to drive the market in Australia, but over the next three to five years, I think we'll start to see clear segmentation and multiple outlets for businesses like Mirvac and others who can deliver on planning and design and construction and management and service a different cohort of customers. Co-living is an example of something that I'm very passionate about. That's effectively purpose-built rental housing for singles. And if you look at the demographic trends in the Australian cities, the single person household is the largest growth household in the market and those people aren't generally accommodated with purpose designed housing. So, there's a clear customer need there and I'm sure we will see those sorts of buildings developed in the very near term in Australia. It's hugely exciting.
KH:
It's a very exciting time for the housing market, I think, despite all the current challenges. So, thank you so much for your time, Angela and Andrew. I think there's so much more we could have explored today and I think we might have to do a part two on this down the track. So clearly the build to rent sector is one to watch and it's going to be exciting to see how this evolves in Australia over the next decade. Thanks for tuning into this latest episode of Talking Property with CBRE. If you like the show and want to check out more, visit
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