The three W’s that will drive the growth of the Pacific Build-to-Rent sector

A growing Pacific rental pool incorporating more than three million households will be a key driver of the region’s nascent Build-to-Rent (BTR) sector if developers can provide the right product and amenity.

This is one of the conclusions from CBRE’s latest research report, Build-to-Rent: Who, What Where?, which examines the shortcomings of the region’s current rental market, highlights who the early adopters of Pacific BTR product might be and where projects may be built.

CBRE’s Head of BTR Research, Benjamin Martin-Henry, said most of the BTR analysis to date had focused on how to make projects financially viable for developers by changing tax regimes, planning and policies.

The Who, What Where? report examines the tenancy side of the equation, looking at what benefits the public can expect, what type of product will work best and what developers should be focusing on.

“Over the past decade, the number of renter households in Australia and New Zealand has increased by 500,000 and 120,000 respectively, increasing the proportion of renters from 27% to 31% in Australia and from 30% to 34% in NZ,” Mr Martin-Henry said.

“A strong influx of new migrants, who are more likely to choose rental accommodation than ownership straight off the bat, has been a key driver as has runaway house price growth, which has left few alternative options for locked-out households other than long-term renting. Even now, with several major markets experiencing price corrections, getting onto the property ladder will still prove unattainable for many, which is driving interest in more attractive, long-term rental options.”

CBRE’s report highlights that the Australian and New Zealand residential rental markets are now essentially run as cottage industries. In New Zealand, 53% of landlords own just one rental property, and a further 22% own two properties.

In Australia, the figures are even more dramatic, with 71% of landlords owning just one rental property and 19% own two. 

At the same time, overall home ownership rates have been decreasing, particularly in the 15-24 and 25-34 year age brackets, with declines of 30% and 26% respectively in Australia between 1995 and 2014. 

“These results, whilst not being particularly surprising, highlight the problem for younger generations coming of age in a time of the new norms of lower economic growth, lower wage growth, high underemployment, the gig economy, a booming residential market and higher living costs,” Mr Martin-Henry said.

In this environment, BTR developments are expected to gain more momentum, but location will be key – particularly in markets such as Sydney and Melbourne, according to CBRE’s Head of Advisory, Kelwyn Teo.

“Unsurprisingly, the highest proportion of renters in Sydney and Melbourne are in some of the most desirable and, therefore, more expensive locations,” Mr Teo said.

“Given the current high cost of land in these areas it will be difficult – but not impossible – to make BTR developments stack up through a combination of key metrics including occupancy, stabilised rental growth and operational efficiencies. As land cost will still be a key factor particularly in Sydney, we anticipate most developments will initially be in more fringe locations and, crucially, they are expected to be in and around population growth corridors and / or employment hubs supported by a good public transport system such as Parramatta, Macquarie Park and Liverpool.”

Rental dissatisfaction will be another driver of the BTR market.

In New Zealand, for instance, the most recent NZ Housing Satisfaction survey showed that 18% of renter households were either very dissatisfied or dissatisfied with their dwelling, compared to just 5% of owner-occupier households, while 50% of renters reported major problems with their dwelling.

Mr Teo said these issues, which typically related to older properties, coupled with unpredictable rent increases and owners selling up, had the potential to be alleviated by BTR developments.

“The operational structure of professional BTR landlords means they are more likely to apply a longer-term investor mindset than small-scale investors and provide longer tenure terms, which currently average less than two years in major markets such as NSW,” Mr Teo said.

CBRE’s report highlights that the US is the most advanced BTR market globally, with over 21 million residences. However, using the United Kingdom as a guide – being a relative BTR newcomer with 30,000 existing units – the split of BTR renters involves 22% younger independents (aged 18-24), 26% flexible professionals (aged 25-44 without children), 29% budgeting families (aged 25-44 with children at home) and 23% reconciled with renting (aged 45+).

Mr Teo said a key driver of BTR take-up in Pacific would be professional management akin to a hotel or student accommodation, where the tenant was the customer and the focus of the operator was to increase retention.

This could include provisions such as having a storage facility on site with spare parts for appliances to reduce the time a tenant must wait for a replacement or having staff onsite to attend to breakdowns.

Mr Martin-Henry noted that another driver of growth in the Pacific would be the competitive rental markets in areas such as Sydney, which often required renters to attend multiple inspections for what was often sub-standard accommodation. 

“In the US and the UK, large-scale BTR providers allow renters to drop into a leasing suite, talk to an agent or do an online virtual tour of various apartment styles,” Mr Martin-Henry said.

“Amenity provision is another point of difference to the traditional mum-and-dad model, where no auxiliary services are offered. Gyms, for example, are common-place in many BTR facilities overseas, as are BBQ areas, lounges and even cinema rooms, and they aren’t token gestures as the idea is that residents use them and mingle.”

Mr Martin-Henry noted that studies had shown that residents with friends in the same building were more likely to stay on a long-term basis, which was why supplying facilities that built a community spirit were so important to an operator’s business model.

Developers also needed to be cognisant that different products appealed to entirely separate demographic and socio-economic niches. 

Click here to download the full report.