Featuring Rosie Young & Steph Harper
Thursday 26 August 2021
Hi and welcome to the Talking Property Podcast from CBRE. A podcast in which our team of experts are clients and industry specialists share insights into the way we live, work and invest through the lens of commercial real estate.
My name is Rosie Young and I'm your host for today's episode. For our listeners, I work in the Residential Living Sectors Team specialising in purpose, built student accommodation and co-living.
In today's episode will be providing an overview of the emerging residential investment asset classes. We’ll be focusing primarily on multifamily or build-to-rent, co-living, purpose built student accommodation and affordable housing, all of which fall under the umbrella term of residential living sectors. We'll be examining exactly what we mean by residential living sectors and touching on some of the terminology commonalities that exist between these sub sectors. Current stage in the lifecycle, and we'll also have a quick look at the investment market.
To help me do all of this, I'm joined by my colleague Steph Harper, director in the Residential Living Sectors team. Steph specialises in multifamily, build-to-rent, affordable housing and co-living.
Hi Steph, thanks for joining me.
Hi, Rosie. Thanks for having me looking forward to discussing our sectors today.
Yeah, me too. So, Steph, let's start off. I thought it would be a good idea if we went back to basics. What are you referring to when we say residential living sectors and why have we classed these assets together?
We're really referring to anything where people can reside or live and we're not talking about Mum and Dad investment stock. We’re referring to passive commercial investments and institutional grade assets.
Residential living covers anything from the basic apartment building to a large 700-unit multifamily assets, as well as alternate residential forms, including single family rentals, new generational boarding houses and manufactured housing estates. The market, however, is really focused on four main pillars, and they're affordable housing, multifamily, co-living and purpose built student accommodation and the difference really between them is a targeted cohort as well as some physical characteristics. If we go through them in a little bit more detail, affordable housing is accommodation that is provided to eligible low-income earners and its stock that is either owned or managed by a registered housing agency or community housing provider, depending on which state you are located in. These properties derive income from social or affordable rents and it's dependent on how the property is incumbered. Affordable housing also includes intermediate housing models, which is fundamentally anything that does not represent market rents or market prices and also includes shared ownership models or discount to market models. Each of these models have their own unique valuation methodology.
Affordable housing is really only at an embryonic stage here in Australia, and we've seen how the market evolved in international markets, and it's likely that we're going to follow suit, particularly private investment, into the sector. So multifamily which is often being referred to here as build-to-rent has no cohort restrictions, however, is likely to be targeted towards the 20 to 40 year olds through the professional management and the single ownership multifamily should deliver a high level of service and experience to our residents and customers. Its purpose built rental accommodation. It's well designed, good quality, high level of amenity and the professional management of the building, which is usually at scale for efficiency. These assets will be above and beyond anything that we actually have seen within our established private rental market.
So, Steph, can I ask when you talk about build-to-rent and multifamily in those terms used interchangeably? What's the difference, is there a difference?
Yeah it is used interchangeably. I mean, the terminology is often market led, and the property industry is very much referring to it as build-to-rent. So when I'm mentioning multifamily, it does in fact, refer to build-to-rent as well.
So we go on to co living. Co-living is essentially an alternate form similar to multifamily. It is large scale purpose built, single ownership, professionally managed development for rent over co-living offers smaller private residences with extensive communal facilities. Residents are generally offered shorter term leases of say, 3 to 9 months in comparison to the terms that are currently offered by the private rental market. From a resident's perspective, these properties will be hassle free. They're often convenient, they offer rooms that are fully furnished, service and managed and the room rates are inclusive of utilities, Wi-Fi, television, cable and communal areas. The development is designed to enhance social engagement and well-being and generally it's targeted towards singles. I believe the characteristics Rosie, are quite similar to PBSA?
Yeah, that's right Steph. PBSA to start with stands for Purpose Built Student accommodation. We like acronyms in the residential living sectors. So, yeah, there are lots of similarities in terms of how the buildings are structured so similarly to co-living, we are talking about assets that will be fully furnished. There will be a large amount of amenity space of high quality and varied different spaces to help facilitate that sense of community. So, in a student accommodation property that could include areas like cinema rooms, gymnasiums, rooftop terraces and of course, lots of varied study spaces. The other thing you'll find is that there's a strong emphasis on well-being and pastoral care programmes within the building and also a strong focus on security, which is obviously important when parents or guardians are potentially sending their children away from home for the first time. So you'll find that there are reception desks in every property and 24-hour security.
In terms of quantum, you're probably talking for a PBSA property will start at a minimum of 100 to 150 beds and go upwards to anywhere of 800 plus, although really, the sweet spot probably sits around the 500 to 600 bed mark. You'll notice stuff that I'm talking in beds, not rooms. So that is one of the differences and that's partly because you can get shared rooms in PBSA. So that brings me on to the types of rooms. Basically, in a lot of PBSA properties, you get a mix of room types, and that's so that the operator can target different price points. So, broadly speaking, you'll find the three types of rooms that studios which are fully ensuite with a kitchenette and queen bed, twin studios or ‘twodios’, as we like to call them in the student space and they are very similar to studios, but we'll have double occupancy. Then you get cluster apartments, which can be both ensuite and non ensuite and they range from 3 to 6 beds per apartment and each apartment will have shared kitchen diner facilities.
Locationally PBSA properties are ideally should be close to a university campus or other educational institution. Alternatively, proximity to a transport hub, train station, bus interchange is ideal or alternatively situated in a CBD where obviously you've got good transport connectivity and also a wide range of amenities in the immediate vicinity.
Operationally, they're very similar to co-living structures in that they're generally owned under a single ownership. We don't really have strata in the PBSA world. The rents are on an all-inclusive basis and lease length generally ranged from between six months to a year.
So Steph now that we've defined and provided an overview of each of these sectors. I guess my next question is, why are we seeing such a high level of interest in these assets now and why are they only just emerging? What are the key demand drivers?
Well, market conditions for residential investment hasn't always been attractive and as commercial yields are compressed, closing in on Australia's established residential yields, the residential living sector assets have become more attractive in recent years. These sectors are really a global phenomenon, so it's not just Australia that it is in fact emerging and with the weight of capital. Global institutional investors are seeking long term stable income, and these sectors are able to deliver exactly that.
Institutional investors are also looking for, essentially to diversify portfolios, particularly those that might be exposed to retail markets. Most of the investment that we've had here in Australia to date is from foreign investors, which have generally been well versed in the multifamily market across the globe and have confidence in Australia's economy. I guess the key drivers for rental accommodation and not too dissimilar to other international markets. We've got challenges with housing affordability, we’ve got mortgage stress and rental stress and emergence of long term renters and that's either by necessity or by choice. We've got a lack of supply. Even with an adjustment for population forecasts due to Covid, we're still going to see a shortfall coming through a stock being delivered and we've also obviously, we got the challenges that we have with the author plan market. The degree and impact obviously varies between each state and capital city and generally the private rental market in general, it provides a really poor experience for renters and the poor quality accommodation. So it's really a compelling investment story with the key drivers. It actually provides a really good opportunity for alternate residential offerings into our market. What is interesting, though Rosie, is that the PBSA market has been around for a number of years. It's much more mature. What was the catalyst for the regions of the sector?
Yeah, it's an interesting question. I mean, in Australia it was really just driven by demand and that demand growth came from a number of different factors.
Firstly, Australian cities were more competitive from a cost-of-living perspective. I'm not sure you could say that as at today, but certainly when the sector was emerging 10 years ago, it was definitely a factor. Australia is an English-speaking nation which is highly appealing to students. It has a large number of highly ranked universities globally, and it's also deemed to have a very high quality of living. I mean Melbourne and Sydney are consistently ranked in the top 10 most liveable cities in the world. Finally, Australia's viewed as a relatively stable and secure country from a geopolitical perspective. So added to that, you also then had the wealth accumulation effect that came from key countries such as India and China, which created these new source markets for PBSA and just to give you some context Steph over the last 10 years, Australia has experienced a 45% increase in student enrolments in higher education institutions and with overseas students that growth has been even more pronounced, with a 70% increase in 10 years. Prior to Covid-19, which has obviously changed the landscape somewhat. Australia had the highest number of overseas students in the world on a per capita basis. But I think also it was that the PBSA model, had already been proven successful in other countries such as the US and the UK. They had similar demographics in terms of the growth of student numbers, both domestic and overseas. Many of those operators in those markets just saw the growth potential offered by Australia and just decided to build up their portfolios in key capital cities, predominantly on an owner operator model.
But in the last couple of years, I would say we've shifted from that development and growth phase and we're now in a more mature and sustainable operational real estate model and that was driven largely by the transactional activity that we saw in late 2019 and early 2020 with the sale of the Urbanest and a tier portfolios that was both the real estate and the operational platform and they went for a combined total of $2.7 billion. These sales really did represent a sea change for the sector. It demonstrated that there is a level of appetite from overseas investors that we hadn't seen before. Both of those portfolios were purchased by Scape and they were backed by Axa, Allianz and APG. So it's lots of good news coming through to the sector but what I would say is that there's still a limited number of single asset transactions and in general the transactional evidence is more limited than perhaps some other commercial real estate sectors.
So when I'm looking at student accommodation, I do also have to have regard to those other asset classes and bed classes such as hotels or build-to-rent, to see where that sentiment is sitting. I also obviously monitor what's happening globally with PBSA, so that brings me nicely onto the investment market in your sectors, Steph. I mean, there's lots of talk in the media about BTR and you can't open a paper or go online without seeing an article about the rise of the sector. But has there actually been much transactional evidence and is there a large yield spread across these various residential living sectors?
We are seeing lots of interest, build-to-rent is certainly a trend or a buzzword at the moment, but similar to PBSA we do have limited data and limited sales evidence available. What we are seeing, though, is the emergence smaller, more modern and passive residential investments and that's always been a little bit of a challenge as sort of market acceptance of large-scale build-to-rent that we didn't even have any sort of residential investment assets, which it's good that we're starting to see those come through because it ultimately proves there is demand.
We also do have a number of development deals of fun three transactions that have taken place and by analysing those transactions together with having regards to alternate asset classes like you mentioned Rosie, we also do review international yields where we’re then able to arrive at a yield conclusion for multifamily and co-living assets. We believe there is really strong appetite for residential investments and the yield spread between the classes is going to be quite tight. I think Covid has really exasperated the interest in the sector primarily due to the sector's resilience, but also putting a bit of a pressure on those key drivers around affordability, supply constraints and the increase in renters in general. Rosie, has your sector being impacted by Covid and what is the current outlook?
Yeah, look, I mean, there's no denying that 2020 and 2021 have been very challenging years for the sector. When I say challenging, I’m meaning in terms of occupancy levels that we've seen and that's just predominantly been driven by the continued international border closures. PBSA is certainly one of the hardest impacted sectors, but there's hope that as vaccination rates improve, we will start to see a gradual opening up of borders and hopefully some of these pilot schemes that have been mooted will help facilitate the return of overseas students. I guess what I'm saying is that the demand is certainly still there. We are seeing a slight headwind in that there is some time pressure entering into the equation as the competing markets of the US, UK and Canada. They're all further forward in terms of their vaccination rates and also reopening of the country and getting back to normal and if we're not careful, we could see Australia losing out to some of those competing markets. But long term, I don't see any real structural change entering the sector.
Demographic trends remain strong, international demand levels are high and even with the current lockdown situation here, I still think there's a general view that Australia has handled the pandemic well and is still viewed as somewhat of a safe haven. As you've mentioned, affordability and traditional residential sectors is becoming more and more of an issue and this, in turn, should help with the recovery path for PBSA. 17 MINUTES But you know what the latest lockdowns do demonstrate is that there's still a high degree of uncertainty around those macroeconomic factors but PBSA historically has been seen as a defensive asset class in times of uncertainty and what you'll find is when households are under financial stress, One of the last things that they will cut back on is education and housing.
So, Steph, I mean, how's Covid impacted your sectors? I mean I appreciate you're still really and more of a development and ramp up phase. So has it had an impact and how's your outlook looking?
Yes, I think the first thing that comes to mind particularly when we're talking to clients is rents and vacancy rates and what is happening in those sort of areas in particular capital cities. There's been a bit of concern around the spike in vacancy rates and the significant drop in rents due to the pandemic. There's no denying this is a case in particular locations, but the private rental market should perform differently in relation to institutional grade assets. We believe that Covid has probably provided a little bit of an opportunity to put the private rental market under a microscope. It did demonstrate and confirm what we've been saying about existing private rental market. So it did show that there's obviously a lot more volatility in the rents, and it's often a bit of a race to the bottom mentality. Due to the multiple ownership structures of a single building for a build-to-sell product. Renters are often driven to well-managed, well-designed buildings and Covid did provide evidence of that, notably apartments that had better natural light, private outdoor areas and the lights were obviously least up a lot quicker. It was also evident that particular property managers performed better than others and I think this really came down to having a slightly better reputation. The residential living sectors though is still very much in the emergence phase and Covid’s put a bit of a positive spotlight on the sectors if anything. We obviously still have some challenges with our federal tax, notably MIT, GST however we have started to see some state governments announce land tax discounts and that actually shows support in the sector.
I think overall, though, build-to-rent, multifamily and co-living and all these residential investment sectors, there's a lot more collaboration that's required in comparison to build-to-sell and the off the plan market and I think there's a significant level of education is going to be required and it's not going to happen overnight. Unfortunately, you can't just listen to a podcast and know everything inside out. From a local context we've got developers who are really trying to understand the asset and model itself. We've got institutional investors, usually foreign investors, which are learning markets from a local context and that can be quite challenging. When you've got a number of different groups coming together, everyone's trying to educate each other. In addition to that, we're still learning about design, and we're still learning about the management elements. While we will take various trends from international market, what we do know is that no two markets are alike and our market will evolve differently. But overall there is a positive outlook for the sector, and I think that it's really exciting to see how it will ultimately unfold.
Oh, that's great. Thanks for sharing your thoughts. It's great to end on a nice, positive note. So that draws us to a close for this edition. Thanks for your time today, Steph and for sharing your thoughts.
Thanks everyone for tuning into this episode of Talking Property with CBRE, we'll be taking a more in depth look at some of these sectors in future episodes. In the meantime, if you want to learn more about what we've covered off today, you can reach out to Steph or myself via the link in our show notes.
Finally, if you like the show and want to check out more, please visit cbre.com.au/talking-property where you will find episodes on placemaking real estate market outlooks, disruption in the industry and more. You can also subscribe and rate the show through Spotify and Apple podcasts.
Thanks and until next time.