BTR Series Part 7: Residential Sector — Impacts on the Home Ownership Market and Other Sectors Such as Retirement Living | K&L Gates LLP
In part seven of our Build to Rent (BTR) series, we take a look at the current BTR market in Australia and the potential impacts of BTR developments on the residential sector.
The latest Australian Bureau of Statistics (ABS) data estimated the total value of residential dwellings in Australia as of the March 2023 quarter at approximately A$9.9 trillion based on a total of 11,020,300 residential dwellings in Australia.1
In contrast, Ernst & Young estimated the value of the armored personnel carrier sector in Australia at approximately 16.87 billion Australian dollars at a similar time,2 Being a small part of the total value of the housing sector.
Much of this is explained by the relative newness of Australia’s armored personnel carrier sector, having been constrained by the tax and policy challenges described earlier in this series. There have been only a few completed armored personnel carrier development projects that have appeared on the market in the past few years, and most of them have been completed since the beginning of 2022.
However, the line of armored personnel carrier projects is growing. There are 72 projects reported across Victoria, New South Wales, Queensland and Western Australia.3 This figure will rise further as Australian and international developers, along with a number of institutional investors, announce plans to capitalize on unmet demand for residential housing through the BTR model.
In fact, Oxford Economics Australia has forecast that by the end of 2030, the Australian BTR sector will offer an active inventory of around 100,000 apartments, with a total value of around AU$100 billion.4 Oxford Economics Australia also expects investment in new BTR projects to exceed investment in other real estate asset classes.5
So, what are the potential impacts of the expansion of the APC sector on existing residential markets?
Impacts on home ownership
Part Six of the BTR Series discussed the benefits of developing BTR as an alternative to traditional residential rental, including the potential for improved amenities and facilities as well as the ability to provide tenants with increased supply.
The growing BTR sector also has the potential to disrupt the homeownership market.
Historically, Australians have shown a strong preference for ownership over renting. This culture of the Great Australian Dream may not change in the near term, but it is an aspiration that is becoming increasingly less achievable.
ABS data shows 66% of Australian households owned their own home in 2019-2020 (down from 71% in 1999-2000), with 31% of households renting.6 Australians are less likely to own a home at any age than previous generations. The homeownership rate at age 30 fell from 65% for those born in the late 1950s to about 45% for those born in the 1980s.7
BTR may offer consumers a more viable alternative to home ownership (relative to private rental housing), particularly in the context of an unprecedented housing affordability crisis.
BTR may be particularly attractive to younger generations, or those seeking new home or apartment ownership. From an amenity perspective, a BTR product (which has so far been introduced in Australia predominantly as a premium offering) will typically offer improved building and lifestyle amenities compared to shared ownership in a subdivided building or residential property. There is an incentive for the owner of a BTR building to maintain facilities at a high standard to ensure consistent rental demand, unlike in shared building or condominium properties, where cost and management considerations typically act as barriers to maintaining (or improving) facilities over time.
The BTR building owner may also have greater power to enforce building amenities, unlike corporate owners (or equivalents), which may lack the power or capacity to manage impacts caused by, for example, short stays.
From a geographic standpoint, BTR projects are typically located in desirable residential locations where the cost of new home ownership may be prohibitive. Australia’s current APC development pipeline is overwhelmingly located in major cities, typically five to seven kilometers from central business districts and in close proximity to transport and other infrastructure. This may be an important lifestyle consideration as home ownership may force the consumer to look further.
While home ownership provides the consumer with the ability to modify and customize their home, some of these benefits may also be available (to a more limited extent) in some BTR offerings. For example, some BTR building owners may allow changes through painting, floor coverings, or other modifications that provide the occupier with a greater sense of place.
This is particularly likely to be the case in BTR communities that offer “single family rentals” (known as SFR). SFRs are single family homes developed for the armored personnel carrier sector and have become the focus of the armored personnel carrier sector in jurisdictions such as the United States and the United Kingdom. While residential buildings prefer to keep facades consistent (which may limit the extent to which units can be changed in a way that is visible from the outside), this is less important in SFR communities.
The one aspect of home ownership, which cannot be replaced by living in a BTR, is the potential for capital growth. The relationship Australians have with home ownership and wealth is well entrenched and has been the driver of the Great Australian Dream for generations. However, many Australians are aware of the fact that buying a home today is not the automatic path to wealth as it was for generations past. The prospect of more modest capital growth, a more volatile economic climate (both at home and abroad), and even uncertainty about future homeownership taxation may gradually erode Australians’ overwhelming desire to own a home of their own. .
All of these factors are, of course, considerations for the build-for-sale developer, whose competition may previously have been limited to existing housing and competing build-to-sale product. How bids to build and sell might respond to the growing APC sector is something that will evolve over time. At a minimum, it is reasonable to expect the marketability of lower quality or ‘investor grade’ buildings to be affected for the sale of apartments. On the other hand, it may lead to a positive shift towards better quality and better designed residential buildings in all areas.
Conversion of other asset types – offices, retail shops and serviced apartments
A significant barrier to any residential project is the enormous cost and risk of financing a new development, especially in the face of uncertainty about construction costs and other pressures that affect a typical residential development. The BTR sector is not immune to such pressures, despite the ability to take advantage of innovative financing structures (such as financing through or take-out models) not available to a residential building for sale developer.
There is also potential for the APC sector to renovate existing built assets, such as underutilized offices or serviced residential buildings, by converting them into APC products. In many cases, existing buildings may, due to technical service and other considerations, be unsuitable for converting sub-units into apartments (allowing individual apartment ownership), but may be suitable for converting APCs.
The prevailing weakness in the lower-grade commercial office market post-coronavirus provides special opportunities. For example, recent research by the Real Estate Board of Australia has identified nearly 90 office buildings in Melbourne’s CBD that have the potential to be converted, creating up to 12,000 new homes.
In summary, BTR may provide opportunities for investors to acquire and renovate existing buildings, resulting in cost efficiencies and mitigation of some development risks. Of course, this will require the support of local councils and state governments to allow such transfers. Hopefully, this will be a natural response to changing demographics and housing needs.
If Australian developers adopt this strategy with appropriate government support, it will reverse the increased flow of office-to-condominium conversions that are occurring in the US. Shifts in the United States are being fueled by a combination of factors including high office vacancy rates and a persistent housing shortage. Conversions from offices to residential units are also favored by developers as the floor space can be re-appropriated and used to add additional square footage in the building, ultimately enhancing the investment value.
Similarly, serviced apartments may offer the opportunity to convert into an armored personnel carrier, with the potential that the apartments already meet applicable design guidelines or provide facilities that can be easily upgraded or converted to fit an APC building. Converting the BTR may also provide owners of serviced apartments an opportunity to exit the saturated tourism sector in certain markets.
There is also a potential opportunity for investors with existing retail properties in prime locations to expand into BTR. Existing malls and other major retail centers are likely to offer proximity to transport hubs, infrastructure, employment centers and major activities, which are attractive for BTR locations. The price of such land is typically a barrier to entry for BTR projects, but retailers may be able to leverage their land holdings to enter the BTR market as a complement to their retail operations, to provide additional income and increase demand for retail tenants.
Older renters and retirement living
BTR could also have a role in responding to Australia’s aging population. By 2031, people over the age of 65 are expected to make up 19% of Australia’s population.8
The number of older Australians renting homes is also increasing. The proportion of people over 55 who rent a property from a private landlord has increased from 8% in 2011 to 11% in 2021.9
For BTR investors, older tenants may be viewed as responsible tenants who provide a steady source of rental income. BTR projects may also be attractive to downsizing to older Australians, offering flexibility in renting properties, with the benefit of increased amenities, avoiding the need for home maintenance, and the potential lifestyle advantages offered by a development location and longer-term tenure than traditional private rentals. While typical BTR models may require adaptation to be attractive to older Australians, ensuring adequate security of tenure and appropriately designed facilities, there is potential for the sector to offer an alternative to traditional housing models for older people such as retirement villages.
1 Australian Bureau of Statistics, The total value of housingJune 13, 2023.
2 Ernst & Young, A new form of housing supply in Australia: building rental housingApril 4, 2023, page 18.
4 Oxford Economics Australia, Research Brief: Barriers to build-to-rent in Australia have been removedJune 5, 2023, page 6.
5 Ibid., page 5.
6 australian bureau of statistics, Housing occupancy and costs, May 25, 2022; australian bureau of statistics, More families are renting as home ownership declinesSeptember 17, 2019.
7 Australian Institute of Housing and Urban Research, Final Report No. 404: The Transition to Home Ownership: A Quantitative EvaluationJuly 2023, page 3.
8 australian bureau of statistics, Population projections, AustraliaNovember 22, 2018.
9 Wendy Stone, Margaret Reynolds, Berette Ferruga, Emma R. Power, Francesca Peruggia and Amity James, Aging in the housing crisis: housing insecurity and homelessness among older people in AustraliaAugust 2023, page 59.