Drawing on their experience from overseas, a new report from Ernst & Young proposes building homes, generally apartments, specifically for longer-term renters in another attempt to tackling the current housing affordability crisis, especially in the Sydney and Melbourne markets.
The idea suggested here is rather than building apartments to sell down to individual owners, large companies or groups of investors work with developers and build-to-rent (generally apartment blocks) and maintain their interest in the apartment block property as a whole, with individual apartments then offered out to long-term renters creating a new opportunity for renters to participate in a long-term rental market.
The model is a proven asset class in the US and Europe but hasn’t become popular here mainly because this model goes against the underlying dream here in Australia to own your own home, but the report highlights some potential positives here to consider for investors and renters alike.
To support this type of model, the report recommends the need to be able to offer longer term leases (more than 12 months), a responsive ongoing onsite centralised building maintenance service, competitively priced rents and overall greater flexibility for tenants so they feel more ‘at home’.
The build-to-rent model focuses on building apartment blocks within 15 km of the CBD, close to transport and infrastructure and employment areas. With each apartment block designed to create a first-class living experience, with fast building maintenance and on site repairs, long term security in terms of your length of stay being 3, 5 & 10+ years, and more flexibility with the ability for renters to add a homely feel to their living space all in a modern apartment style living environment. Overseas, there are families that have lived in this style of arrangement for two and three generations.
The psychology behind the model is that by offering a longer-term lease there is more security in the mind of the tenant so they tend to treat their rented living environment much more like their home, rather than the current model, which is more of a rented short term transactional space where the owner can give a couple of months’ notice after the first 12 months lease ends to sell the property or move back in etc.
It Feels More Like Home.
In the overseas build-to-rent model, the tenants are given more flexibility on how they can decorate the inside of their apartment, which creates a homelier feel for the renter as opposed to the current model where you often need to seek permission to hang a new picture, change the colour of the paint or mount that large screen TV on the wall. The model also helps to overcome one of the challenges from the current landlord’s perspective, being that renters don’t take care of their rental property as much as they feel they should or could be doing, because there is a greater sense of attachment as long-term-renters become more ‘house proud’ and as a result tend to care more about their rented property.
The suggested model also has the potential to create a new asset class, where mum and dad investors can invest in shares in a residential real estate investment property trust (that manages the build-to-rent process), so the mum and dad investors can get a percentage of the rental income, with the liquidity and flexibility of being able to sell their shares, if they decide to sell, without actually having to sell the property they are invested in.
But Who Wants To Rent Long-Term?
The question for investors and developers is… Is there a growing market out there for people who wish to rent long-term? Due to the current housing affordability crisis, you get a sense there is the start of a growing shift in the national psychology around owning your own home, with high-profile public figures suggesting they don’t see a way the kids are going to be able to afford to own their own home in the future. And with the new trend with millennials and the Generation X moving away from actually owning a car to renting a share car via their smart phone, the times they are a changing!
The build-to-rent model would give long-term renters and investors something to seriously consider especially those renters who have being forced to move out after their 12-month lease expires, when the owners decide to move back in or sell their own property.
Moody’s Downgrade the Big Four Banks.
The four major banks ANZ, CBA, NAB and Westpac’s credit ratings have been recently downgraded by Moody’s, a large US firm that advisor’s investors, due to perceived risks in the Australian housing market. Moody’s has cut all four major Australian banks long term measure of their creditworthiness from ‘AAA’ the highest rating to ‘AA’ the second highest rating.
Sydney And Melbourne Property Prices Rise, In The Year To March 2017.
The Australian Bureau of Statistics recently reported that in the year to March, the weighted average of the eight capital cities residential property prices increased on average by 10.2 percent. The big movers were the Sydney and Melbourne markets up 14.4 per cent and 13.4 per cent respectively.
Victoria Announced As The Most Popular State For Domestic And International Migration.
Melbourne is enticing people to move south with a wealth of job opportunities combined with a lower cost of housing compared to its northern neighbour, figures from the Australian Bureau of Statistics reveal. And this trend is set to continue with recent high-profile company announcements to move to or set up in Melbourne.
Can The Build-To-Rent Model Work On A Smaller Scale – For Medium Density Housing Investors?
The build-to-rent model could also be a catalyst for smaller investors to re-look into the medium density housing model and to investigate ways they could tap into the New South Wales government’s plan to fast track these types of approvals in the future. But rather than on sell the development to individual purchasers and investors, they could adopt more of a build-to-rent model, with a view to maintaining and owning the medium density property asset project and tap directly into the long-term rental market.
All the best on your investing journey.
CEO – Plan Assist Property Team