Build to Rent (also known as Multi-Family) is an emerging class of residential housing development designed to provide private rental tenants with greater security, flexibility, and lifestyle choices. This emerging housing model is an established asset class in other parts of the world and has gained traction in Australia in recent years, as a promising alternative to home ownership amidst the backdrop of Australia’s housing affordability crisis.
What is Build to Rent?
Build to Rent involves the construction of multi-purpose residential apartments fitted with a range of shared amenities and services, such as gyms, pools, meeting spaces, entertainment areas, and concierge services. During the design and construction stages, emphasis is placed on achieving sustainability and quality, with in-built features such as green spaces and energy-efficient appliances. As it stands, Build to Rent sites are predominantly situated in lively urban areas set to experience high population growth, especially for those typically excluded from the housing market.
Structure of Build to Rent
A Build to Rent development is purpose-built for residential leasing and is usually owned and operated by a single entity, such as a property developer, institutional investor, or real estate investment trust. The entity retains ownership of the project following construction and becomes the landlord under the residential tenancy agreements. The entity will then manage or appoint an operator to manage the building. This differs to a typical Build to Sell project where the developer or investor provides up front capital and then extracts the value on completion of the sale of the dwellings in the building.
Below we explore the advantages and disadvantages of Build to Rent for tenants, investors and developers.
Advantages of Build to Rent
Amenities - Build to Rent allows individuals to take advantage of appealing amenities in high demand locations, which would otherwise be inaccessible if they were to purchase or rent a conventional residential property.
Security - As opposed to traditional rental agreements, Build to Rent also provides tenants with improved rental security through longer leasing periods. Traditional residential tenancies are for periods up to 12 months whereas tenancy agreements in Build to Rent properties tend to extend beyond this.
Flexibility – Build to Rent lease agreements offer greater flexibility in terms of minimal bond requirements, the ability to move between properties within the complex to suit lifestyle changes, and the freedom to renovate without lengthy pre-approval processes.
Diversification - Build to Rent is an innovative asset class that promotes the diversification of investment portfolios.
Consistent income - These investments provide a more consistent income stream with lower risks of cyclical volatility than other forms of investments.
Better returns - Given Built to Rent complexes are designed with state-of-the art facilities in high demand areas, investors enjoy the potential for better returns through charging higher rent.
Income stream - If the developer retains ownership of the Build to Rent building, as owner and landlord to the residents, the developer enjoys the benefit of a long-term stable income stream. There is also a potential for creating office or retail space within the Build to Rent project creating additional income.
Letting vs selling – The letting process is faster than the process of selling apartments within a building, providing an income stream sooner than in a Build to Sell project.
Demand – The demand for rental property tends to remain steady during difficult economic times.
Limitations of Build to Rent
Affordability - As noted above, the rental price is higher for Build to Rent properties due to their quality and locational appeal. In turn, the extent to which Build to Rent can increase housing accessibility is limited to tenants of higher economic standing.
Ownership - Regardless of the various appealing factors associated with Build to Rent properties, tenants still are unable to reap the benefits of home ownership.
No body corporate – Build to Rent projects do not have a regulated body corporate like strata developments which means the landlord and operator (if appointed) make key decisions for the building.
Low yields – Yields can be lower than other revenue streams.
Slow return - Long term return is slower when compared to the return received by investors on Build to Sell projects.
Emerging asset class - As Australia’s Build to Rent industry is still in its early growth period, developers are disadvantaged by the inherent risks of investing in emerging concepts. Similarly, until Build to Rent gains greater popularity, developers risk incurring losses from high vacancy rates.
Rental costs – The above issue is further complicated by the higher cost of rent, and how this intersects with the demographic breakdown of the area in which the development is located.
The discussion surrounding Built to Rent in Australia is set to grow as more projects are passed through the development stage. In light of the various advantages and disadvantages, Build to Rent provides an exciting opportunity to explore and overcome the limits of traditional Buy to Sell approaches, in the interest of bettering the existing housing crisis.
For assistance with understanding Build to Rent, please contact our people.
Ron Zucker 0410 590 111
Eollyn Cortes 0478 727 395
Chelsea Woodward 0404 065 899