Citylife International is a private Australian real estate agency, advisory and consultancy company, with a focus on selling units in the St. Kilda Road precinct of 416, 416A and 418
With the 'Build to Sell' model so established in Australia, many people have been wondering why so many developers and global funds are turning their attention to Australia's burgeoning Build to Bent (BTR) market.
Here are some of the key reasons.
1. Steady, consistent, stable, proven income stream
A consistent income stream is at the top of the list. Australia has low rental vacancy rates, a highly paid workforce, high employment rates, and a shortage of new residential developments. With a rising population and increasing migration, the demand for rental property is increasing.
As many BTR developers are substantial institutions wishing to hold for the long term, they are attracted not only to the steady rental income the BTR model offers, but also the ability to diversify their holdings alongside industrial, commercial, offices and other forms of real estate.
As Covid has proven around the world, the residential asset class has outperformed the commercial/industrial asset classes in times of turmoil.
2. Potential better returns
The amenities BTR projects offer means developers can boost their returns, because more rent can be achieved.
BTR projects don’t use the conventional models for valuation. instead, they tend to be valued by the merits and the ability to achieve long-term rental income.
For the investor wishing to understand why huge corporations and property funds would want to place billions into the asset class, we hope this simplified example will give you some indication.
TRADITIONAL BUILD TO SELL:
PER APARTMENT: CONSTRUCTION COSTS, LAND COST, CONSUTLANTS ETC SAY $600,000
SALES PRICE: $850,000
PROFIT BEFORE TAX $250,000
INVESTORS RENTAL YIELD IF THEY PURCHASE FROM THE DEVELOPER 3.6% ($30,600 PA)
BUILD TO RENT
COSTS TO CONSTRUCT: $600,000
RENTAL RETURN: $33,660 (Typically a 10% premium on BTR assets)
ON COMPLETION CAPITALISATION RATE (Yield) 5.61% YEAR ONE
VALUATION OF APARTMENT AFTER THREE YEARS IF 5% PA RENTAL GROWTH;
$1,080,000
3. More Desirable Renters
One of the main reasons investors love BTR projects are the renters they attract. Since these projects are usually high quality developments and managed by the same company throughout the entire lifespan, they tend to attract more desirable renters.
The BTR model lends itself to couples without children and singles in Australia. This is the largest family demographic in Australia. BTR projects also tend to be located in better areas with more desirable amenities nearby.
4. More Amenities, In-House Management
While this might seem like a benefit only for tenants, it works for developers too.
With BTR projects, you get built-in amenities, which can help to increase the marketability and the rent for the properties. Tenants will enjoy having amenities and they will understand why rent is higher compared to a similar rental without such amenities. And because all managment is done in-house, there are economies of scale for the developer.
5. Absorption Rates are Faster
Unlike building homes to sell, BTR properties tend to be faster with absorption rates. Since renting is much faster than buying, these projects will fill up faster, which is a good benefit for developers. The asset will not be sitting empty for months, and is some cases for years, like build to sell apartments.
6. Renters Love New Properties
There is nothing better for renters than a brand new apartment. They love finding a new apartment that is unlikely to have any type of issue in the near future. Renters don’t like making maintenance requests.
7. Ability to minimise costs
With Build to Rent there’s an opportunity to minimise costs in both the construction build phase and ongoing.
This could include having maintenance facilities done in-house, bulk purchasing of - for example - TV's, and wholesale prices for apartment fit outs.
Negatives of BTR for developers
1. Investment Risk
While BTR development is extremely popular and successful in other parts of the world, it’s still a brand new concept in Australia. That means developers need to spend substantial time and resources on research into the product they intend to build, to match the tenant demographic, and are there enough tenants willing to pay premium rentals for the product?
2. High vacancy rates
As BTR can be more expensive than the private rental market , developers potentially face empty apartments if they get it wrong.
3. Missing rent increases
Even if they get it right, select the correct area, build the right product for the tenant demand, they still run a risk of missing out on rent increases if they have tenants locked in on fixed rents for years.
