Australia Real Estate Alert

It is common understanding that the Australian Government has historically resisted policy changes to reduce tax barriers to a successful build-to-rent (BTR) sector, for fear of being viewed as favouring institutional and foreign investment ahead of the traditional (presumed) Australian dream of home ownership.

However, that resistance is perhaps a position that has contributed to compounding challenges for home ownership affordability. Support for a BTR sector will result in a significant increase in the supply of desirable rental stock that will serve as a viable long-term option to being an owner/occupier.

This could then see the supply of rental stock supplementing the supply demand for freehold ownership. And if supply is meeting demand, affordability challenges alleviate.

THE RENTAL REALITY

As we mentioned in Part 1 of our BTR Series, rental housing demand has been on the increase in Australia, with a shift to long-term renting, particularly as home ownership has become increasingly unaffordable. Statistics strongly indicate that not only is the number of household renters increasing, but renters are renting for longer, with around 43% of renters having rented for at least a decade (per Private Renting in Australia – A Broken System (PEXA & Longview)).

The intergenerational report just released by Treasury confirms this, reporting that the Australians are buying homes later, and projecting that circumstance to worsen for coming generations.

It is apparent that the rental housing market will continue to form a major component of the long-term housing solution in Australia, requiring diversity in housing options to accommodate the changing demographics and needs of Australia’s population. Not only will the rental market demand the supply of apartment accommodation, but there will be an increasing demand for rental houses.

Examples of this can already be seen in jurisdictions that Australia is traditionally closely associated with both geopolitically and in terms of our social structure—the United Kingdom and the United States—where the BTR sector has reached maturity in its supply of apartment stock, and the focus is now on the single-family rental sector. The BTR sector is now responding to demand for communities of family homes for rent.

Given increasing affordability challenges, it is inevitable that Australia will reach the same destination.

The supply of all forms of rental stock from institutional landlords is a reality of the here, the now and the future.

THE RENTAL MARKET

In December 2022, the NSW Government introduced legislation to prohibit real estate agents from soliciting rent bidding for residential rental properties.

National cabinet has, in August 2023, agreed to limit the number of rental increases for residential rental properties to once a year.

These sound like Band-Aid measures for residential rental markets that are otherwise landlord favourable under free market forces, signalling imbalanced supply/demand.

So, what is the tenant experience once they have rented the average apartment or home from a non-institutional investor, whose asset is being managed by an agent with a significant book of other rental properties, which they do not own? How readily can their services or pre-existing dilapidation be repaired, and do their landlords currently have the available funds to do so?

Is the average residential landlord incentivised to manage their reputation in the market?

THE RENTAL FUTURE

With demand for rental housing set to continue to increase due to affordability challenges and changing demographics, the circumstances are primed to support an exacerbation of landlord favourable market forces.

If only the BTR sector was established and mature.

But now, with government policy shifting, we may start to see the institutional BTR sector becoming a long-awaited reality, and this will provide renters with increased supply, and a whole lot more.

BTR assets are developed and operated in a manner to attract renters. In a world where investment in the BTR sector is encouraged and supported, renters will have available to them a range of communities to choose to live in. So, naturally, thriving BTR platforms will be managed by operators with a care for reputation, because they will wish to establish their product as desirable amongst the options available.

In this pursuit, developers and operators of BTR assets seek to offer superior amenity to competing products in the relevant rental price range.

These amenity offerings come in various forms. For example, BTR communities can offer an array of curated and green spaces, communal gathering or working facilities, entertainment facilities, health facilities and other services. Many of these are also available in your usual strata schemes or serviced apartments, but a competitive BTR sector can drive the quality of offering to tenants. Ultimately, superior building amenities foster a sense of community within the building. This results in long-term occupancy (in many cases with no bond payments) and consistency of cash flow during the operation period.

It follows that the extent of amenities and services available within a BTR community will impact the rental pricing on offer, but the variance in offering will also respond to different demands among various demographics. This is an example of another avenue in which the BTR sector can respond to demand and provide supply options, whether for premium rentals, meeting the needs of key workers or supporting affordable housing options.

In addition, BTR platforms can respond to the changing needs of tenants and their accommodation demands. Rather than forcing tenants back into a landlord friendly rental market, BTR platforms can offer tenants the opportunity to move between accommodation options, providing a BTR operator/investor with continuing rental income, while offering the tenant the security of continuity of supply and landlord relationships. 

BTR developments are usually located in prime locations in close proximity to public transport as well as education and employment opportunities. Typically these locations include a significant proportion of young professionals who can afford the rental rates and opt-in amenities.

In addition, the security of well-funded landlords offers tenants the comfort that their dwellings will be well maintained. A market with competing BTR operators with an eye on maintaining a reputation for offering quality rental stock within desirable communities will deliver healthier outcomes for tenants.

Suddenly, with a healthy BTR sector, the ground will have shifted, from the government seeking Band-Aid solutions to a market imbalance, to a rental market that supports a modern, rewarding rental lifestyle.