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October 23, 2017

Historically slow to flourish in comparison to global markets, Australia’s Build to Rent (BTR) sector is set to take off in the next 10 years as a shifting real estate climate together with growing residential demand is paving the way for institutional investors to enjoy promising opportunities.

BTR generally refers to multi-unit residential dwellings built and designed specifically to be rented out by a longer-term single landlord (institutional or private) and, according to the latest JLL research paper, ‘Build to Rent Residential: Australia’s Missing Sector’, shifting parameters around residential investment and ownership are creating a perfect storm for institutional investors who are looking to diversify and expand their portfolio in the next 10 years.

These changing parameters include: A narrowing of the comparison gap between commercial and residential property yields in the last decade, where residential property yields have remained relatively stable; a shift in the major driver for residential investment gains from capital gains to land values; ongoing tax benefits for residential investors; as well as the potential for buyers priced out of the residential market to invest partially in BTR through REIT structures.

Untapped potential

And while there are challenges ahead, making it too early to predict the growth profile of the BTR sector in Australia, it is one of the few ‘new’ real estate sectors with the potential to create scale.

If Australia were to reach a relatively moderate level where BTR represented 10 percent of all institutional investment in real estate, this would translate to around AU$40 billion, according to the report.  This figure is still less than one percent of all Australia’s residential housing stock institutionalized.

“There are some powerful trends that are working on both the tenant demand side of the equation and in fuelling investor appetite for the product, that will help overcome challenges and see the steady rise of the build to rent sector in Australia over the next decade,” says JLL’s Head of Residential Research in Australia, Leigh Warner.

“Demographically, there will be strong growth in key renter target market segments in Australia over the next decade, particularly 25-35 year olds and ‘empty nesters’. This growth, coupled with clear trends toward higher proportions of the population renting and living in apartments, creates a very favourable demand backdrop for build to rent to succeed.”

Mr Warner said BTR is a major investment class around the world and global investors are actively looking for opportunities within the Australian market. In the United States, BTR (or ‘multi-family housing’) accounts for around a quarter of all institutional investment in U.S. real estate, making it the largest BTR market in the world while the sector also plays a significant part of institutional investors’ portfolios across Europe and the housing market in Japan.

“The BTR sector offers institutional investors potential portfolio diversification benefits, income stability through economic and market downturns (such as the Global Financial Crisis), as well as the fact that on a ‘yield on cost’ basis, BTR can offer similar risk-adjusted returns to other core sectors,” he explains.

Click here to read more around Build To Rent investment

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Leigh Warner

Head of Residential Research - Australia

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