But build-to-rent could relieve housing pressure over time, says credit rating agency
Amid plans to increase the supply of residential rentals to address chronic housing shortages in Australia, S&P Global Ratings is cautious about the rapid expansion of the build-to-rent (BTR) sector, saying it “is largely an untested residential segment for the country.”
“S&P Global Ratings does not expect Australia’s BTR initiative will roll out in as sweeping a way as government targets would imply,” said Craig Parker (pictured above), managing director corporate ratings at S&P Global. “We do, however, think over time BTR could relieve housing pressure and expand the spectrum of housing on offer to tenants.
“At this stage, Australia’s BTR sector does not enjoy the same maturity as the multifamily/apartment sector in the US. Consequently, equity investors remain apprehensive.”
The credit rating agency, in its build-to-rent report, believes BTR could become a rated asset class, as globally, about 11% of the rated real estate universe includes multifamily or BTR portfolios.
The growth of BTR in Australia is driven by ongoing rental growth, low vacancy rates, and limited new housing supply. Net overseas migration significantly contributes to demand, with a housing supply deficit of 46,500 dwellings in the year to September 2023.
Federal and state governments target 1.2 million new dwellings over five years, with BTR potentially contributing 10% of new housing supply. However, challenges such as site availability, varying regulatory frameworks, and high construction costs may hinder growth.
According to real estate consultancy Urbis, over 50,000 BTR apartments are in various stages of development, though funding constraints delay their completion. Real estate services firm Colliers reports that 4,790 BTR apartments were completed in 2023, with 3,810 more expected in 2024. By 2026, the BTR market is projected to grow to 16,500 apartments. Despite a pipeline of BTR approvals, actual construction lags.
Key issues affecting BTR growth include a shortage of suitable sites, non-uniform tax and policy frameworks, and high project delivery costs. S&P Global said that over time, these obstacles may be overcome through manageable permitting requirements, building vertically, and repurposing other real estate assets into BTR properties. Demand is likely to be robust in major east coast cities, contributing to suburban population densification.
Funding BTR projects requires substantial capital and long payback periods. Encouraged by potential tax concessions, offshore capital is entering the market via equity funds operated by domestic managers. However, low yields on residential properties and a lack of market history make it difficult for investors to assess risk-return ratios.
“Australia’s chronic undersupply of residential units is not, in our view, unsolvable,” Parker said. “We think the market will be able to diversify the property mix and add the housing where it is needed – in areas that exhibit attractive population and job growth. However, it will take time.”
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