Knight Frank is pleased to launch a new Residential Investments Division in Australia, building on the market-leading global presence we have in this sector. The team will be led by Tim Holtsbaum and will focus on the Private Rental Sector (PRS), which includes the ‘Build-to-Rent’ (BTR) asset class. This is an exciting opportunity in our market and will provide another measure to maintain pace with housing supply demands and affordability requirements across Australia’s major cities over the next 10 years.
The PRS is set for significant growth in Australia and is an already-established asset class in the UK and US, where Knight Frank is considered a market leader.
Mr Holtsbaum said that typical investors in the PRS space include institutional local and offshore pension funds, insurance funds, private equity, fund managers and integrated developers seeking low-risk and stable income.
To view insights into this emerging investment class, go to EV website: KnightFrank.com.au/ExclusiveView
Following the success and growth of purpose-built student accommodation (PBSA) as an institutional real estate investment class in Australia, evidenced by an increasing supply pipeline, is interest and activity in the Australian residential private rented sector (PRS), otherwise known as the Build-to-Rent (BTR) concept. The professional, large-scale institutions now focussing on this new investment asset class are looking to build and construct, keeping these dwellings for the long term, and harvesting the income from rents in the same way as the new wave of PBSA institutions are operating.
Renting in Australia is not a new concept, or a model of investment which needs convincing. Since 1994/95 the proportion of all residential households in New South Wales, Victoria and Queensland that are rented privately from a landlord increased by 6%, 8% and 9% respectively to 2013/14. Across these three Eastern states, between 25% and 30% of all households are renting privately from a landlord. This figure excludes those who rent from a social landlord or housing association.
An increase in residential apartment construction, a favourable investor lending and tax environment, historically low interest rates, the rise of the overseas buyer, and the rapid increase in dwelling prices are a collection of reasons, which combined, are increasing the proportion of rented housing across Australia. The current economic climate and housing market environment suggests that the proportion of privately rented households will only increase. Knight Frank Research projects that New South Wales, Victoria and Queensland will have approximately 31%, 30% and 33% of all households privately rented from a landlord by 2019/20.
Institutions, often backed by pension/super funds, are actively looking at the BTR sector. Availability of suitable sites, viability against other uses, low rental yields, and high build costs are all factors weighing on the growth of the sector. However, strong population growth across the Eastern Seaboard will keep groups interested as they look to tap into a sector which harbours constant occupier demand and provides predictable profits.
The population of New South Wales, Victoria and Queensland is projected to increase by 1.22 million over the five years from 2016 to 2020, at an annual rate of 1.6%. This growth and rising housing purchase costs will feed the demand for additional rental accommodation going forward, and will give rise to an institutional residential investment class here in Australia
We speak to Tim Holtsbaum and Paul Savitz…
What are the economic and demographic fundamentals driving the Australian Build-to-Rent sector?
Paul: The latest data release from the 2016 Census has shown an 11.5% increase in the number of rented dwellings in Australia over the past five years. Currently, 2,561,301 or 30.9% of all dwellings nationally are rented, having risen by an average of 55,000 per annum over the past 10 years. Factors driving this growth can be attributed to the rise in investor lending and substantial increases in apartment values across key cities such as Sydney and Melbourne reducing affordability and increasing deposit requirements for first time buyers and younger households.
Are there any hurdles to accelerating this sector?
Paul: Investors and developers often identify planning policy as one of the biggest hurdles for the sector at present. Land supply is seen as another key hurdle, especially in Sydney and Melbourne. But issues relating to tax at this stage currently appear to be the major obstacle with the Property Council of Australia and the Australian Tax Office currently establishing ways of levelling the playing field to be more in line with commercial investments.
In its infancy here in Australia, who will be the target market for these developments?
Paul: The main characteristics of tenants in the private rented sector across Australia are those between 20 and 39. These tenants can be categorised in a number of ways, iGens; early twenty somethings who are about to graduate or are in their first job and prefer inner city urban living. Nesters; millennials to late thirty something couples who enjoy urban living and are generally saving for a deposit. Soloists; millennials to late thirty somethings who live in a flat on one’s own, usually in the close proximity to the City and prefer services within their apartment blocks such as a 24hr concierge. Sharers; millennials to late thirty somethings who live in a flat share or with friends and live close by to amenity and public transport. Young families with one or two young dependent children, who are saving for a deposit and prefer living in a location which suits them in terms of childcare, access to parks and retail amenity.
What services can Knight Frank offer their clients in this sector of the market?
Tim: Knight Frank Australia will have the benefit of our market leading global platform in Residential Investments or ‘Multi Family’ as it is referred to in the US. We currently provide our clients with a range of services including Research and Consulting; Valuation: Capital Markets: Property Management and Leasing services. The sector incorporates a vastly different range of participants including institutional and private equity investors; developers; consultants and passive land owners who require a range of services depending on the nature of the transaction. The Residential Investments division not only includes traditional residential accommodation but also Student Accommodation and Co-Living’ aimed at the young professionals demographic.
Do you expect to see foreign investment in this sector or will it be driven by local investors and developers?
Tim: Based on our experience in the Global ‘Private Rental Sector’ (PRS) we expect to sign significant investment from off shore institutional investors seeking exposure to good quality assets in markets with strong fundamentals. This include not only direct investment from pension and insurance funds but also from traditional fund managers, private equity and specialist PRS companies, such as Greystar, who seek to develop and manage the investment. From our analysis of Australia’s major capital cities we are able to provide our clients currently investing in the UK, EU and US markets advice on gaining exposure to the key markets within Australia.
In addition to off shore investment in the sector, our major local institutional developers such as Mirvac and Lendlease have been actively investigating the sector over the past 18-24 months building their knowledge base and getting their investors comfortable with the investment thesis. Based on reports in the press, I expect to see the first institutionally funded ‘Build-to-Rent’ investment in the next 6-12 months.
From you experience of working with the team in the UK, how do you think the market will take shape over the next 5 years?
Tim: I believe the Australian market will be in a state of rapid education on the PRS sector. This educational journey will not only be for those developers and investors in the sector but also the broader communities in major cities. Approximately 31% of all Australians live in rental accommodation with a very small portion of these people having what I would define as a professional landlord. Using examples from around the world we can see many great benefits to living in purpose built rental accommodation with a professional landlord. These benefits not only include tangible additions such as pools, gyms, communal areas but also that of community and convenience. No doubt the market will take some time to fully understand the benefits of this accommodation however as more assets are delivered to the market we expect to see an evolution in the way PRS accommodation is viewed by the general public.
Given the stabilised nature of the market in the US and developing PRS market in the UK, I expect the sector to evolve rapidly with several assets delivered, especially in Sydney and Melbourne, in the next 3-5 years.