Build-to-rent sector cuts a strong figure amid changing market

Currently, the institutional-grade BTR stock in the country stands at 3,800, with a further 8,400 units under construction. 

The future pipeline currently stands at 22,500 units, including those at application stage. This brings the overall size of the sector to 34,700 units completed or in development, with a total of 15,400 BTR units slated for completion by the end of 2024. 

Savills said that BTR has made a name for itself as a well-performing asset in the last two years due to fast recovery of rents post-lockdown, minimal arrears and elevated renewals, low vacancy and solid income growth.

The report noted that the BTR sector’s proven investment credentials have, in turn, buoyed investor confidence in the asset. 

Savills head of operational capital markets Conal Newland said that the BTR model is particularly appealing to property investors in the current inflationary environment. 

“[The] granularity of the revenue streams across multiple tenants allows landlords to recoup inflation cost pressure through increasing rents on a regular basis, rather than fixed mechanical increases as would be seen in a long-term commercial office lease,” he explained. 

He added that potential ripple effect of inflation bolstering rental prices could be “significant”, with renters making up one-third of the housing market.

The report further forecasts that the residential sector will be spared from a consumer spending squeeze, with tenants prioritising rent over spending on non-essentials.

Mr Newland also explained why he predicts the sector will continue to perform well amid a rising rate environment. 

“We consider that the influence of increasing interest rates through 2022 will have a limited impact on yields and discount rates moving into 2023, as the level of capital allocation to BTR for Australia places downward pressure due to the strong thematic, and outweighs any negativity surrounding rising construction and debt costs,” he stated. 

Citing historical data, the report noted that the residential sector has previously proven its resilience throughout periods of high interest rates and inflation. It also drew data from competitive global markets, which showed that best-in-class assets are achieving premiums with widespread yield compression.

Looking forward, Paul Savitz, the Savills director of operational capital markets, stated that the Australian residential property market has “perfect conditions” for the BTR sector to continue its growth streak, citing the positive demographic and economic changes that will underpin the asset’s expansion. 

“Our household size is reducing with a rise in one-person households and fuelling demand for more homes whilst rental vacancy remains low with limited new supply — creating a strong case for rising rents. 

“As we emerge into the post-COVID climate, immigration is also set to pick up with the government increasing the skilled migrant cap to 195,000, alongside an increasing rate of international students returning onshore,” said Mr Savitz.

He also highlighted that the Australian economy remains solid due to significant growth in employment while the unemployment rate is at multi-decade low — factors that could offset any negative impact from rising interest rates and inflationary pressures. 

“As build-to-rent matures as an asset class globally, we have seen the type of capital targeting the sector change. The balance of BTR investors has shifted toward lower cost-of-capital investors. 

“The performance evidence from global markets has given these investors the confidence to enter the Australian market at an earlier stage and will continue to do so as more opportunities to deploy capital arise over the coming months”, said Mr Savitz.

Due to these factors, Savills forecasts that investments committed to the Australian BTR sector will increase to $4.5 billion before the end of 2022.

Build-to-rent sector eyed as an affordability buffer

The global real estate firm also noted that the BTR sector is attracting the attention of policymakers who are on the lookout for potential affordability buffers amid the country’s worsening housing crisis. 

“Our emerging BTR sector is at a pivotal point in its growth trajectory and has also caught the attention of policy-makers, who recognise the role it can play in managing complex issues including affordability, housing deficit, rising rents and new construction,” Mr Newland stated. 

According to the report, the relative speed in which BTR dwellings can be delivered to the market — as presales of individuals are not required to commence construction — can aid in alleviating rising unaffordability in the housing market. 

Savills also highlighted that BTR could serve as a “pathway” to allow more social housing impact to enter the housing system to provide a home for those who are vulnerable in the community.