'Build to rent' could be the missing piece in the affordable housing puzzle Opinion The Conversation By Matthew Palm, University of Melbourne
Updated 29 Aug 2017, 12:53pm
Australia's state governments, as well as some ambitious local councils, community housing providers and forward-looking private developers, are finally taking note of the housing affordability crisis in our cities.
One proposed solution is to provide relief to cash-strapped households that cannot afford skyrocketing deposits by incentivising a new "build-to-rent" affordable housing sector.
Build to rent simply means developers build housing with the intent of retaining the building and renting it out to lower-income families at prices affordable for those families.
Australia has almost everything it needs to kickstart this sector.
These efforts could not come soon enough: failing to tackle the situation will cost us billions of dollars.
However, state and local efforts cannot reach their full potential unless the Federal Government steps in with something only it has: cash.
'Build to rent' could be the missing piece in the affordable housing puzzle Opinion The Conversation By Matthew Palm, University of Melbourne
Updated 29 Aug 2017, 12:53pm
Australia's state governments, as well as some ambitious local councils, community housing providers and forward-looking private developers, are finally taking note of the housing affordability crisis in our cities.
One proposed solution is to provide relief to cash-strapped households that cannot afford skyrocketing deposits by incentivising a new "build-to-rent" affordable housing sector.
Build to rent simply means developers build housing with the intent of retaining the building and renting it out to lower-income families at prices affordable for those families.
Australia has almost everything it needs to kickstart this sector.
These efforts could not come soon enough: failing to tackle the situation will cost us billions of dollars.
However, state and local efforts cannot reach their full potential unless the Federal Government steps in with something only it has: cash.
Melbourne developer Joe Russo says the build-to-rent sector will struggle to take off in Australia despite the likes of Mirvac and Salta Properties making the first forays into the asset class.
Mr Russo, who runs Caydon, the developer of major projects like the $1 billion Nylex site in Cremorne, can speak from first-hand experience having already cracked the $US100 billion ($125 billion) build-to-rent rental market, otherwise known as multi-family, with his first project being a 27-level tower in Houston with 360 apartments.
"Early construction works are under way with demolition of the previous structure complete. I've also acquired other sites in Houston for future multi-family projects so I'm excited about the prospects in America's fourth largest city," Mr Russo told The Australian Financial Review.
But as Mirvac seeks to raise $164 million to fund its first build-to-rent development in Sydney Olympic Park – with a targeted 4.5 per cent initial yield – and plans to do three more, Mr Russo was sceptical of the sector's broader appeal.
"With such a strong rental demand for property in Australia, I would love for it to be viable here," he said.
"However, in the current market, where actual property values are so high, the completed value of a rental building will be less profitable then under a sell [off-the-plan] and build model."
Build to rent is where apartments are built and held by one major investor as opposed to being sold off to many private investors.
Mr Russo added that Australia also did not have the other key factors behind the sector's success in the US, namely a "deep finance market" for build-to-rent product, where there are 30-year loans available at loan-to-value ratios of up to 75 per cent.
Nor, he said, did Australia have the deep pool of buyers "such as [US] pension funds that will purchase a stabilised asset on a 4.5 per cent to 5 per cent yield".
The fact that Mirvac can only fund a build-to-rent project by having no debt was an indication of how it would struggle in Australia, Mr Russo added.
While Mr Russo has strong doubts, the build-to-rent sector is seen as becoming increasingly more viable in Australia now that commercial property yields are tightening below 5 per cent, bringing them closer to apartment yields, where there is also less vacancy risk.
Alongside Mirvac, AMP Capital, student accommodation group Scape, Macquarie Capital and major US real estate group Greystar are all exploring opportunities in the sector.
Earlier this year, private developer Salta Properties run by Australian Financial Review Rich Listers the Tarascio family announced plans for a $330 million build-to-rent tower with 260 apartments and hotel at Docklands.
Salta managing director Sam Tarascio jnr said the developer was likely to bring in "other investors" to fund the project, but conceded that the treatment of GST and land tax were "significant imposts" for the build-to-rent sector. Inhibit growth
Mr Russo said another factor that could inhibit the growth of build-to-rent sector in Australia was the greater willingness of American workers to relocate for work and because they do not have the same aspirations to own their own home as Australians do.
"Most people I meet and do business with in the US don't reside in the city or town they were born in. The norm there is for people to leave high school and go to university in another city or even state.
"They then get jobs which can take them anywhere in the US, so they don't maintain the same connections with their home towns as we tend to in Australia. What this means for property is that Americans are happier with long-term rentals," Mr Russo said.
Caydon has also expanded into Seattle, but won't be doing multi-family projects because of higher local property prices compared with Houston.
"In any market where the outright sale of an apartment or condo outweighs the rental value of the building, it's just more profitable to sell condos," he said.
In June, Domus, the US multifamily rental fund whose tilt at an Australian IPO came unstuck in 2013, raised $US20 million ($26.4 million) from Australian high-net-worth investors to fund the acquisition of a $US168 million portfolio of almost 1300 rental units.
The ASX-listed US Masters Residential Property Fund owns and manages a $1.2 billion New York-area rental housing portfolio. The Dixon Advisory-managed fund is popular with self-managed super funds investors.
There are some people who seem angry and continuously look for conflict. Walk away, the battle they are fighting isn't with you, it's with themselves.
The first lesson of economics is scarcity: There is not enough of anything to satisfy all who want it. The first lesson of politics is to disregard the first lesson of economics. ~ Thomas Sowell.
Who was the fool, who the wise man, who the beggar or the Emperor? Whether rich or poor, all are equal in death.
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