BTR investment volume up 361% as housing crunch continues, says Savills report

The Australian Build-to-Rent (BTR) sector is experiencing a period of rapid growth – and ongoing investment could help the Australian Government deliver its ambitious target of 1.2 million new homes by 2029, according to leading agency Savills Australia’s latest research report, ‘Australian Multifamily Market & Trends’.

According to Savills, residential vacancy rates remain tight across major cities, driven by narrowing purchasing affordability combined with lower off-plan sales to investors. Amidst these conditions, BTR remains a resilient asset class, says Savills, with investment volumes climbing a staggering 361% in 2023 compared to the previous five-year average.

While yet to reach the level of maturity seen in the US, changes to tax policy could play a significant role in accelerating the growth of Australian BTR, as an increasing number of developers consider alternative options for residential development beyond traditional core locations of Sydney, Melbourne and Brisbane.

Australian BTR is tipped to play an increasingly important role in meeting housing demand, and Savills forecasts that economic conditions and ongoing low vacancy will solidify the high growth potential of the sector.

Resilient BTR sector could relieve housing crisis

Australia’s current housing crisis is well documented, with demand significantly outstripping supply and vacancy falling below 1% across all major cities. The BTR sector has capitalised on sustained population growth, a continued imbalance between supply and demand, and high levels of rental growth, all of which can deliver stable returns despite an uncertain economic backdrop. This growth has led to inflation-matching returns, while yields have proven resilient, comparative to other Australian core asset classes.

As it stands, 13,265 BTR units are currently underway in Australia – equivalent to 1% of the Government’s 1.2 million target – all of which are scheduled for completion within the next three years. A further pipeline of over 32,000 BTR apartments could be unlocked following planning approvals and delivered by the end of 2028.

However, Savills’ analysis of the pipeline reveals that only 42% of all announced BTR pipeline units are funded and have a likeliness of being delivered by the end of 2028. The remaining 19,000 units are either not funded, or the feasibility of the previously capitalised development is no longer viable.

“Unlocking the significant pipeline of Build-to-Rent development projects should be a key focus to help reach the ambitious housing delivery target of building 1.2 million new well-located homes over the next five years,” said Conal Newland, Head of Operational Capital Markets at Savills Australia.

Tax policy changes to drive foreign investment in BTR

Savills expects that a change in the Australian tax landscape will further spur investment, with the reduction in Managed Investment Trust (MIT) withholding tax to 15% for foreign investors in BTR – expected to take effect from 1 July 2024.

However, BTR projects are still currently subject to onerous tax regimes, such as the inability to claim back Goods and Services Tax (GST) on BTR construction and land costs, which are available for those delivering private for-sale schemes.

“Policy changes at a federal level are fundamental to ensuring that the true growth potential of the BTR sector is fully realised,” said Mr. Newland.

Positive economic outlook bolsters BTR sector

In 2023, the BTR sector captured 8% of all transactional dollars across the Australian real estate market – considerably above the five-year average of 1%.

The long-term tailwinds – coupled with the fact that Australia is not building enough new homes to meet long-term need over the next decade – places the sector in good stead for its next phase of growth.

Savills report also revealed that rolling annual residential starts are at a decade low at 165,000, with completions 22% below their 2017 peak. The reduced level of new housing stock will buoy demand for rental properties, sustain elevated occupancy and support the demand for BTR assets.

The tail end of 2023 saw inflation consistently fall more than expected, and economic commentators now expect the cash rate target to be cut from its current peak of 4.35%, much earlier in 2024 than previously anticipated.

“While we are not out of the woods yet, the outlook on interest rates is much more positive now than it was six or even three months ago. These conditions should bring additional investment and growth into the Australian Build-to-Rent sector,” said Paul Savitz, Director, Operational Capital Markets at Savills Australia.

Case Study: Melbourne shows BTR achieves a higher rental price

Savills analysed a range of two-bedroom rental apartments across six newly developed and operational BTR schemes, spanning Melbourne’s CBD, East, South and West. The analysis compared median BTR rental prices to privately-owned two-bedroom median prices in the same suburbs and identified that BTR schemes command 18 – 26% higher rents. The schemes analysed are all reporting occupancy of 90%+ as of Q1 2024 or report strong lease up if recently launched, suggesting there is solid demand for good quality rental product.

“BTR is a different offering to the private rental sector and should be considered that way, and be treated that way in aspects of policy, planning and taxation. Fundamentally, this higher rental pricing is largely due to the value-add offering provided to a resident in a BTR scheme when compared to one in the private rental market. The higher rental rate accounts for that professionalism, sustainability, amenity provision, tenure security, and quality difference across the two housing choices,” concluded Mr. Savitz.

The notable rental premium and markedly low vacancy of these schemes, coupled with favourable economic conditions, are a positive indicator of market appetite for increased levels of BTR investment.