Aussie BTR set to pivot towards the mid-market
By Jonathan Holden, Chief Operating Officer
Roy Thompson (Managing Director), Peter Watson (CFO) and I recently attended The Urban Developer’s BTR Summit in Melbourne to find out what our neighbours are up to and what we can learn from them.
You might assume, as I did, that build-to-rent in Australia is on a real tear with capital flowing freely into the market and developers, investors and operators all finding this new asset class the latest gem from the ‘lucky country’.
Interestingly, the picture is somewhat more mixed. Firstly the market is not as advanced as I had thought, with surprisingly few operational assets delivered to date (only 33 fully completed BTR developments nationwide) and only one or two secondary market transactions. Secondly, the market over there has a lot of the same characteristics as NZ with Melbourne (in particular) having experienced high population growth and high construction costs along with sluggish market values making feasibilities very marginal!
What is different is the scale of the BTR developments – typically large, with over 300 apartments in a development commonplace. To understand why there is such scale in Melbourne BTR you have to understand the origins of this market.
The asset class began to emerge in 2016 when the Victorian Government started clamping down on investors buying apartments with an absentee owner tax and vacant residential land tax. With the build-to-rent market at this time in its infancy, many of these entrepreneurial developers pivoted to BTR and brought with them their appetite for, and expertise in, building large towers.
Instead of selling a whole swag of individual apartments one by one to investors (often to rent) they pretty much built the same buildings but looked to sell them ‘in one line’ or set up BTR platforms to attract the capital to buy into these developments. The net effect was less apartments being built and a shift from new apartments being owned by individual investor landlords to larger institutional landlords.
This is all good for a while but this high amenity, high rent end of the market is quite limited with only 5% of Melbournians spending more than $750 on rent per week. The remainder of 2024 will see another 15 BTR developments completed in Melbourne (increasing the completed stock by more than 50%) and with most of these still focused on the top end it’s a lot for the premium market to digest in such a short period of time.
The other interesting aspect was the financial returns from the Aussie developments, with the average development margin sitting at around 7%. This is considerably less than what any developer (NZ or Aussie) would generally accept as a fair return for taking on and funding a development proposition. For reference, our last completed BTR development had a development margin above 25%. At the same time the net rental yields being achieved seem to be around the same levels as we achieve, which is somewhat less than the numbers being touted in Australia two or three years ago. Ultimately the biggest driver of returns over the long term will be the level of asset appreciation which will take some years to play out.
“By far the majority of speakers and delegates shared the view that the next evolution of BTR in Australia will be away from high-rise, premium apartments towards the mid-market and more affordable offers. ”
This is the space that New Ground has always focused on with some of our first ‘mid-market’ assets having been completed six years ago. Interesting to think that I arrived at this conference believing that Australia was well ahead of NZ and left with the view that New Ground’s BTR model is exactly where they are now heading!