Danny is a co-founder and director of Debuilt Property and has a professional career spanning architecture, construction, project management, development and property finance. Debuilt provides a wide range of property, development and monitoring services to investors, financiers, property owners and developers.

Debuilt Property assisted Coles with its development strategy for Richmond Plaza which resulted in a sale and leaseback to Grocon’s Home Residential for a build-to-rent mixed use development.

Australia’s property sectors are continually evolving and adapting to market forces. In the residential sector, Build-To-Rent (BTR) projects are gaining more traction each day – it seems each week a new project is being considered.

Also known as multi-family housing, BTR projects comprise of apartment developments with a focus on service and amenity, typically aimed to appeal to long term tenants. With only a handful of key players, Australia’s BTR market is shaped by every new project.

BTR identifies its purpose in the name – projects are built to rent and hold as a residential investment. The process of developing the project results in the investor ‘acquiring’ the completed property at the ‘wholesale’ price. As the development margin is retained in the project, the economic result is a more viable investment return.

In actual fact, BTR is not a new concept in Australia. The 1950’s and 60’s saw a proliferation of small blocks of walk-up flats built in our inner suburbs by developers, often European migrants, who built with the aim of holding as a family investment. However, today’s BTR is a much larger proposition.

BTR is a long-established asset class around the world. Families in New York City, for example, have traditionally held large apartment blocks with the sole intention of generating income from leases. Assisted by tax settings, it is the second largest institutional real estate sector in the USA closely behind offices.

In the UK when BTR was first evolving, all levels of government worked with industry to get it off the ground which resulted in favourable tax settings.

In Australia however, BTR has typically been perceived as incompatible with acceptable corporate property returns, exacerbated by Australia’s tax settings. Media and academic reports often explain that stamp duty, land tax and other authority charges hinder a company’s ability to purchase land worthy of BTR developments and make suitable returns.

Many industry leaders say that relief of these taxes would assist in kickstarting the industry at a wholesale level.

Despite these challenges, a handful of BTR projects continue to appear across the country, leaving the question, why now?

There are probably a few reasons.

Larger residential developments through 2018 and 2019 were challenged by the impact of the banking royal commission and a softening apartment market. Developers found it increasingly difficult to secure adequate pre-sales and funding to commence projects. This created the opportunity for corporates, who have the financial capacity and a strategy to hold residential investments, to initiate significant projects without pre-sales.

This also provided the opportunity for businesses that already had a vertically integrated platform (to develop and to hold), or those interested in creating one, to view residential projects as providing a long-term business return.

With low interest rates and returns on other property assets classes (such as offices) tightening, residential as a corporate investment is getting closer to being plausible. In addition, sectors such as retail (and potentially now offices) have become less predictable and is therefore losing some of its shine.

The BTR sector may now be a reasonable option for investors to diversify their portfolio, buying into a new asset class with comparative yields. There are only so many office and retail buildings one can buy – the BTR sector would seem a logical next step for investors.

Superfunds have begun to do just this by including stable, long-term BTR investments in their portfolios. AustralianSuper, for example, recently purchased a 25% stake in Assemble Communities, in which it plans to invest in boutique smaller build-to-rent-to-sell projects for occupants.

And for capital partners that may already be investing in multifamily options overseas, A-grade residential investment in Australia can be a compelling proposition.

One of the first examples of institutional BTR in Australia was the Commonwealth Games Villages on the Gold Coast, where Grocon developed 1,250 apartments for the athletes village. These were then repurposed for rentals after the games, now known as the Smith Collective.

Mirvac and Grocon’s Home business are the leaders in this emerging asset class in Australia, showing that they believe it can be viable. Mirvac recently completed its Sydney Olympic Park BTR project in Western Sydney and leasing has commenced.

As BTR gains traction and support from developers, AREITS, overseas operators, superfunds and occupants, the market will likely segment and different groups will be able to find niches.

Like other sectors, the future of BTR is uncertain during the Covid-19 pandemic. However, many suggest the outlook is becoming more positive despite the continued outbreaks. As job and income insecurity rises, Australians may be less willing to incur debt, and lenders may tighten lending criteria – the rental sector could see growth.

Working-from-home practices have also seen a shift to focus on quality of living during the pandemic. BTR projects often target higher income occupants and provide quality amenities like gyms, theatres and co-working spaces, as well as creating a strong sense of community. Interestingly, recent reports from the US and UK suggest that BTR projects have had limited rent recovery issues relative to other asset classes.

There has been much discussion about the need for increased affordable housing options. Regardless of the challenging project economics, this is a sector that has been relatively active as build-to-hold providers. However, without further government assistance and tax reforms the real opportunity will not be realised.

Whilst there is a lot written about BTR, the sector is only in its infancy and will not reach its true potential without tax reform and government cooperation.

It will be interesting to see what the future holds for BTR.