Political clarity, sustained rental demand, stabilising construction costs and rate cuts are driving optimism for Australia’s residential real estate sector, some of the world’s largest real estate investors said at the Mingtiandi Singapore Forum on 13 May.
The Labour Party’s recent landslide re-election win ensures continuity for the policy-influenced sector for at least four years, said Matt Berg, founder and co-chief executive of Local Residential, the Melbourne-based build-to-rent platform backed by Macquarie Asset Management.
“So you’re looking at a really long runway of investment where you have a huge amount of certainty on what your tax position is going to be in build-to-rent (BTR) in Australia,” he said. The Labour government passed legislation last year for a 50 percent reduction in withholding tax on fund payments for foreign investors in BTR projects.
Resilience Amid Volatility
The Australian living market’s strong fundamentals make it attractive to international investors amid volatility brought by the trade war, said Bianca Solomons, managing director and head of investor relations for Asia Pacific at American multifamily giant Greystar.
Matt Berg of Local:Residential on stage the Singapore Forum
“Residential has always outperformed for the last 30 years…Australia, on a relative basis, is screening incredibly well,” Solomons said. “Market fundamentals in Australia for residential are incredibly strong,” she added, pointing to the country’s persistent undersupply of housing.
Stabilized build-to-rent (BTR) assets in Australia have achieved a 15 percent to 25 percent rental premium against the private market, proving demand for sector, while prime stabilized assets now have occupancy of around 97 percent, noted Solomons. There are about 30 operational BTR assets in Australia, of which 70 percent are premium developments located within a 6.5 kilometre (four mile) radius of a central business district.
Rental Growth, Rate Cuts
Executives from Warburg Pincus and living sector platform Kio Investment Management also share an optimistic outlook of the country’s residential market, citing an encouraging supply and demand outlook as well as expected rate cuts.
“The fundamentals are very strong. We think that vacancy will remain very low. And as a result, rental growth should be well above inflation levels. And against a backdrop of most likely an easing interest rate environment, that should translate through,” said Andrew Fitzpatrick, a principal overseeing Asia Pacific investment at American private equity giant Warburg Pincus.
“We just can’t build enough houses…So, whilst last year was a somewhat slow market from a capital perspective, we took the opportunity to enter and acquire assets and build into that low vacancy environment. We think it’s compelling at the minute,” said Sam Bisla, founder and managing director of Sydney-based real asset manager Kio.
Backed by Warburg Pincus, Kio has acquired five sites in cities including Melbourne, Brisbane, and Sydney. All the projects are now under development and will yield approximately 1,000 BTR and co-living units upon completion, according to Bisla.
Most economists are predicting a 25 basis point rate cut when the Reserve Bank meets this week, with National Australia Bank forecasting a half-percentage point reduction. Economists anticipate two to three more cuts this year.
Stabilising Construction Costs
While supply chain shocks first triggered by the pandemic have driven up construction costs over the last five years, the industry is now stabilizing, the speakers agreed.
Construction costs are projected to rise by about two to three percent on an annual basis for the immediate future, down from nearly ten to 15 percent in 2022 and 2023, said Local’s Berg. Overall, building costs have more than doubled over ten years to approximately A$450,000 to A$500,000 per apartment unit, he said.
Berg noted that shortening the time frame in which investors are exposed to construction cost risks is key to delivering dependable returns.
“Construction cost escalation isn’t necessarily the devil. It’s the period of time that the escalation could occur…Our strategy really has been around putting investors into projects rather than land, making sure that we’re looking at new innovative structures around limiting cost exposure and interest rate risk exposure,” said Berg.
Including both completed properties and projects under development, Local Residential ranks as Australia’s largest BTR provider, managing five assets comprising approximately 2,900 apartments.
A Panel in Pictures
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