Aussie BTR Sector Primed for Consolidation as Market Favours Scale: MTD TV

Australia’s build-to-rent (BTR) sector is primed for consolidation as high operating costs create opportunities for larger players to gain a market edge through economies of scale, according to senior executives from Local: Residential, Sentinel, Scape and Aware Super. Watch the full recording>>

With land taxes, utilities and labor costs all rising in the build-to-rent realm, institutional grade returns are only achievable through big projects and large-scale platforms, Dan McLennan, founder and co-CEO of Local: Residential; Keith Lucas, managing director for Australia at Sentinel; Stephen Gaitanos, managing director and group CEO of Scape; and Anjana Moran, portfolio manager of property at Aware Super told Mingtiandi’s 2024 APAC Residential Forum on Thursday.

“These are operating assets, they have on-site management teams, facilities teams, so there’s a certain level of fixed costs,” McLennan said. “So ensuring that you’re operating at the right scale at an asset level and platform level is really important…all of the things that are critical from an investor’s standpoint…are really only achievable if you’ve scaled appropriately. That’s why, whilst there’s quite a lot of BTR operators in the market, I do see in the future a level of convergence and consolidation that will happen, just because of the scale that you need to operate efficiently in Australia.”

The panel discussion, which was sponsored by Yardi, comes as Australia ranked second in Asia Pacific for multi-family investment with $2 billion in asset trades during 2023, nearly double the previous year, according to data from MSCI Real Assets.

Scaling Up

Gaitanos echoed the need for scale, predicting that the country’s BTR universe could begin to consolidate in the next few years as interest rates moderate and investors in residential ventures begin to grapple with the complexities of operating consumer-facing assets.

Scape, which specialises in owning and operating purpose-built student accommodation, currently has over 25,000 units nationwide and has set a target of reaching 50,000 units in 2028 through both development and acquisitions. In May last year Gaitanos and Scape co-founder Craig Carracher also formed an A$1.5 billion (then $980 million) partnership with Dutch fund managers APG and Bouwinvest to develop and acquire assets in the emerging build-to-rent sector.

“There are plenty of operators that will come to market, realise that it’s one thing to acquire a piece of land, another thing to build a building, but to then operate these assets in perpetuity, it’s difficult,” Gaitanos said. “It’s the hardest part of our business. And I think you will see, probably not in 2024 but certainly in 2025-2026 once rates come off, you will see some M&A in the space and that will drive consolidation.”

In addition to extracting operating efficiencies through scale, Lucas, who oversees New York-based Sentinel’s 1,600 BTR units in Australia, emphasised the need to manage both capital expenditures and operating expenses throughout the asset life cycle in order to achieve attractive valuations in an eventual exit.

“Our vertically integrated approach allows us to look at what it actually takes to operate these assets on the back-end and design them accordingly,” Lucas said. “Part of the reason why I moved to Australia was to be involved in refocusing the design decisions to focus a bit more on longevity and life cycle costs, so that we can position the assets to perform in their operational phase, as well as to maintain value at the disposition at end of the asset’s life cycle.”

Surging Rents

Australia’s BTR sector has been attracting more institutional capital as population growth, rising home ownership costs, and growing acceptance of leased housing as a long-term solution continue to drive up rental demand. Australia saw net inbound migration of 518,000 people in the first half of 2023, more than double the figure for the same period in 2019, according to the Australian Bureau of Statistics.

With Australia having surpassed the UK as the second largest student housing market globally behind the US, international students make up a major slice of that migration, helping Scape to maintain full occupancy and enjoy rising rents across its student housing portfolio.

“We’ve been inundated with arrivals in Sydney, we have waiting lists in Melbourne as well, so the portfolio is nearly 100 percent full,” Gaitanos said. “We’re seeing rental growth in all our properties…double digit and in some cases well over 20 percent year-on-year rental growth. Valuations are up, not driven by cap rate compression, but by additional cash flow that wasn’t there during Covid.”

Housing demand has led to a surge in rents in the mainstream build-to-rent market as well, with average asking rates for 2-bedroom apartments in Sydney and Melbourne having jumped 38.5 percent and 21.2 percent respectively from 2020 to 2023, according to JLL. An already tight market has been exacerbated by disruptions during the pandemic and regulations which do not always favour high density development, helping to drive housing costs still higher.

“The supply is interlinked with the affordability ultimately, because that’s what is driving some really large increases in rent last year,” said Moran. Aware Super, Australia’s third largest superannuation fund with A$170 billion of assets under management, has been investing in the Aussie BTR sector since 2018 and currently has 500 operational units, with 1,200 units under development.

While developers are set to roll out around 63,000 BTR units from 2024 to 2027 to fill the market gap, according to JLL, supply is set to remain constrained as high density housing projects stall on the back of opposition from local city councils, according to Moran.

“We need a lot more housing quickly,” Gaitanos said. “The capital’s there. The returns are somewhat challenging today given where construction costs are. Land pricing – we’re not seeing that really move, particularly in Sydney and Melbourne. There’s always a queue of people ready to buy the best sites. The issue really is around unlocking planning quickly. And once we can do that, I think the conversation around the housing crisis will just disappear.”

On to Hong Kong

With the Australia panel concluding Mingtiandi’s APAC Residential forum for this year, MTD TV will go on the road in May for an on-location event at The Ritz-Carlton Hong Kong at the ICC in West Kowloon.

The all-day forum will kick off with a keynote panel featuring Kenneth Gaw, president and managing principal of Gaw Capital Partners, and Rebecca Lam, managing director for real estate at CPP Investments, followed by a keynote interview with Link REIT CEO George Hongchoy.

The programme, which will also be streamed on MTD TV, will continue with panel discussions focusing on opportunities in the lodging, industrial and office sectors, as well as talks on value-add and opportunistic strategies and the mainland China market.