Build to Rent: A Game Changer for Australian Real Estate?

Does this have the power to change property investing forever? I'm talking about build to rent. Massive corporations building entire complexes and actually competing with everyday landlords like you and I. Is this something we need to be cautious of? In this episode, we're going to talk about the potential of BTR creating greater rental supply and the rent vesting paradise this could create, as well as how it might change the Australian outlook to renting.

I'm Arjun Paliwal. Let's get into it. If you're new to what BTR is, it stands for build to rent, which is essentially when you take large institutional money, I'm talking super funds, major investment players, and instead of putting it into say companies, their shares, they're putting it into real estate. Now, yes, there's real estate in terms of commercial or what we call REITs, real estate investment trusts. But now we're talking BTRs, which is more about taking the things that everyday people are living in, unit blocks, and instead of building and constructing them to be able to sell them off individually, which is predominantly how unit blocks occur today or operate today, we're actually now looking to build, create new supply, but then actually own it all for the purpose of renting to everyone.

So this would bring on huge levels of rental supply because instead of say a unit block of a couple hundred or even say something monstrous with a few thousand being individually sold, some to homeowners, some to renters, this creates this new supply to all to go towards renters. Now, I want to break this down further as to what it could mean. The best place to start is look abroad because whilst it may be relatively new to Australia, it's happening overseas to a much deeper level. In the US, build to rent referred to as multifamily properties. And it's also a big reason why as to the US market having sales of unit blocks as a whole, even at large scale, because it's been around for so long that unit block can continue to transact as a whole block rather than individual properties.

Now, big reason why individually it makes more sense for developers over here to do so is the fact that our taxes are geared towards penalizing you being a holder of lots of property instead of flipping it, selling it and being able to move on. And so to add to all the costs that come from holding so much or having all the taxes that come with it, developers tend to want to get rid of it rather than hold it on for so long. Now, in the USA, build to rent or multifamily actually accounts for almost 10% of all housing. Whereas if you go to another location like the UK, it's just over 8%. But in Australia, it's 0.

1%. And even with all the BTR that's currently in pipeline, let's just imagine in Australia that's all built out, that would only equal 0. 6% of total stock. So we've clearly got a lot of opportunity to grow when we're looking at our UK and US counterparts. One of the things when it comes to renting in Australia is that many of the rental blocks aren't always built to have a lot of facilities, a lot of lifestyle, because at the same time, if there's more capitalization to all the amenities, the developer may, not always, but may struggle to actually bring back value into the per unit sale.

Some developers look at it as it doesn't suit the area, I might not have the demographic. And if I'm building, I just want to build it for volume, sell each at volume and move on. In that scenario, they may be scared of actually inputting all the lifestyle amenities, whether it be shops or restaurants or swimming pools, gyms, libraries, the list goes on. Because if they do, and they start now needing to price their units at such a high level to make up for that, they may feel like they may not get that price. And as a result, they don't see the value of building it.

Whereas someone operating, say, on a build to rent, they may want all of this because they want the community to be active and also interested in living there for the long term. Having all of these facilities will allow them to actually give more of a reason to stay and live there for the long term. Because for the build to rent, it's value retention, but also it's long term rental growth and rental yields, which is also important to them. Now, it's not to say that build to rent by having all those extra facilities and turning into a bit of a paradise means that it's suddenly affordable. Because remember, like developers, the build to rent market can also increase the rents of all of these units, making it less affordable.

For example, in the UK, a lot are priced higher than typical markets, even in the build to rent, just because of the facilities or the things that they're trying to create, the environment and trying to maximize the rental yield. So whilst yes, it increases rental supply, it doesn't always mean it's affordable rental supply. It's just about them trying to balance out towards the market. But imagine if been building at that scale, trying to create communities, it will bring life to many areas that may not have had it before. The other thing build to rent has the opportunity to do here is it may change the outlook for Aussies when it comes to investing, and it may even change the way Aussies invest.

So the third point I want to raise is the outlook. When it comes to investing and renting, there's a few different things to consider. From the renting side, build to rent brings more tenure. It's quite uncommon these days to have leases that go for one, two, three, and four years. It's typically six to 12 months with a couple that go into the two year mark.

But what could be found as quite common in the future is build to rent leases going for much longer and having built in agreed to increases over time, meaning that that whole fear of am I going to get kicked out? Do I have to move somewhere? Maybe better in this scenario than it is currently today, where individual owners can control individual lots also differently, even in the same block, whether it be different rates of increases, whether it be different rent lengths of tenancy, and whether it be different times of availability too. Whereas if you're having a block and it looks at the whole block as a rental property with every door or every unit for renting with certain agreements, long term tenure may be in their interest. And so as a result, it's going to be far more common to have that.

You may also have more rules that apply to the whole block versus, you know, rules of individual owners wanting pets or not wanting pets. It might start to become more of a freedom of the whole block as a whole. There's little things that come into it that may be changing the view of renting when you think of the lifestyle that may come through, the facilities that may come through, the fact that renting is readily available to such scale and with longer leases, more favorable terms, and also more consistency. So all of these things may bring in different market for renters, maybe just treat the view of it differently as well. Another thing as well is that it may open up more locations in areas where you think that it might not have all of the supply that you'd like it to see.

But say if multiple older blocks come together in closer to town or closer to jobs and amenities, and then suddenly turn to become larger projects by build to rent levels, then all of a sudden you now also have them placed in the right areas too, but at large scale, not having such a huge owner-occupier base offering more supply to renters looking to be in key areas. So these are some of the things that may change for renters. But from the investors, it might change this. If we look at investors right now, there might be less and less purchasing of individual units because of how many more units come in at the scale. And so that may put more demand for houses because if institutional players keep buying units or majority of the construction becomes units and you can't buy as many as you used to because of the proportion changing more towards these larger blocks rather than individual sales, you may start to move your capital towards houses, putting more demand on the house market as well for investors.

Now, another thing you'll do for investors is for those with a large pocket, at some stage, those funds may look to cash out just like they do in UK, just like they do in the US. And those major hundreds of units in one building may sell to groups of individual investors or a large wealthier individual investor. This might create the opportunity for what we call multifamily housing like in the US of blocks to be sold as a whole. Now, that's something very interesting because it hasn't really happened in Australia to such large quantity levels. So could you imagine one person having a block of 40 or a block of 50 and having that in a portfolio instead of everyone looking at units individually?

That'll change the game of where units are invested in as well with the belief in units too. Because in the US, units aren't seen with the same negative sentiment as we do here in terms of property investing. So these are just some different ways property investing could have a different lens, renting could have a different outlook, and the supply variances we have in build to rent today versus some markets like in the UK or USA and the different pros and cons that might come into it and where money moves as a result. So it's an interesting space. I do think it has many upsides because it has supply, it has scale, and it also starts making multifamily a thing in Australia.

We have an opportunity to change the levels of large rental supply very quickly because of these projects and because of these players. Remember, we're only at 0. 1 to 0. 6% with the changes in pipeline and there's still many more percentage points of housing stock that could come from this.