Australia’s property market is forecast to see around 55,000 build-to-rent (BTR) units by 2030 in an effort to help alleviate the rental crisis, but its true impact will be minimal.
A recent Knight Frank report explained how there are around 8,350 dedicated BTR apartments under construction nationally (as of September 2023) and a further 12,900 units are approved for development in the near term.
The majority of the construction pipeline is concentrated in Victoria, which accounts for nearly 50% of the national forecasted increase.
The data shows that in Melbourne, 4,920 BTR units are under construction, with a further 8,250 approved.
Next in line is Brisbane with 1,743 under construction and 2,567 approved.
Meanwhile, in Sydney, 1,529 BTR units are being built, with 965 more apartments approved for construction.
To date, development has focussed on one- and two-bedroom apartments, representing 36 per cent and 44 per cent of overall apartments respectively.
Knight Frank Chief Economist and report author Ben Burston the acceleration in Australia’s BTR sector mirrors the beginning of the expansion phase that occurred in the UK from 2015 onwards.
While our government’s plan to encourage corporations to build large-scale accommodation complexes for long-term rental is a step in the right direction for helping solve Australia’s supply shortage problem, it’s not nearly enough to have any real impact.
As Knight Frank says in its report, if the total BTR stock grows to 55,000, it would still only represent 1.5% of the total rental supply in Australia.
Burston said after a long gestation period, the BTR sector in Australia had sprung to life and the quantum of committed and planned development was increasing fast.
Yes, it’s true that the scheme “underlines the potential for scale”, but our governments will need to do a significant amount more for it to even begin to catch up with the oversubscribed demand seen for rental property across the nation.
And while I encourage this (as I would encourage any incentives that would help dampen our rental crisis) it’s not enough, and it’s not soon enough to move the needle.
Realistically, it’s unlikely to offer ‘affordable’ accommodation either.
Recent research by Charter Keck Cramer suggests that rents are 19% to 27% higher in build-to-rent properties compared to privately owned apartments.
I’m also not pleased about the seemingly unfair tax advantages that these large corporations will be given as part of the scheme, which is in addition to the large profits they’ll be making off the builds.
These are tax breaks that have to be filled in from other sources.
That means it is ordinary Australians, some of them property investors themselves, who are being used as ATMs by governments, who are lumped with the financial burden.
The truth, unfortunately, is that there is no easy fix for Australia’s rental crisis.
The only way to increase the supply of rental properties is to encourage more private investors into the market.
There are two things that governments can do to achieve that.
Firstly, make sure rental laws are balanced by providing enough protection for renters whilst still giving landlords enough control over their valuable assets.
Secondly, we need to improve borrowing capacity.
For example, lenders test a borrower’s ability to service a loan at 3% above current rates, which means interest-only investment loans are being tested at a rate of 8.70% p.a.
That means that, for example, principal and interest on a 25-year loan will see repayments on a $1m investment loan at around $94,000 p.a. – almost double actual repayments ($56,000 p.a.).
In my view, the 3% buffer is no longer necessary if we are close to the top of the interest rate cycle so the benchmark interest rate needs to be reduced.
I see a window of opportunity for property investors with a long-term focus right now.
You see…we are at the beginning of a new property cycle, something that doesn’t happen very often.
Not that I suggest you try and time the market- this is just too difficult, and in truth, you’ve missed the bottom which occurred in early 2023.
But if the market hands you an opportunity like this, why not take advantage of it?
Taking advantage of the upturn stage of a new property has created significant wealth for investors in the past.
Moving forward, demand is going to outstrip supply for some time to come as we experience record levels of immigration at a time when we’re not building anywhere as many properties as we require.
Of course, in due course, consumer sentiment will rebound when it becomes clear that inflation continues to fall and interest rates have peaked.
At that time, pent-up demand will be released as greed (FOMO) overtakes fear (FOBE - Fear of buying early), as it always does as the property cycle moves on.
And strategic investors will take advantage of the opportunities our property markets offer over the next couple of years maximising their upsides while protecting their downsides.
But rather than trying to hunt down a bargain, focus on buying an investment-grade property in an A-grade location because these types of properties are in short supply but are still selling for reasonably good prices… Plus they’ll hold their value far better in the long term.
While it might feel counterintuitive to buy at a time when there are so many mixed messages in the media, you can benefit from less competition, low consumer sentiment, minimal downside risk and minimal risk of oversupply.
And you can be part of the solution to our rental crisis at the same time.