The benefits and risks of Build to Rent

build to rent plans

The traditional property ‘development and ownership’ model tends to progress through the following stages for developers (drastically simplified here for the sake of brevity):

  1. Purchase land
  2. With planning approval obtained, commence construction
  3. Sell the completed development for an intended profit

Australia’s residential property market and demographic has undergone significant changes in recent years. Affordability constraints, population growth, changing lifestyle and a shift in consumer demand has inevitably led to the emergence of new markets.                                                        

One of these growing sectors is Build to Rent (BtR).

Increasing numbers of developers have been exploring this option, many with considerable success. A notable example is Meriton, Australia’s largest apartment developer, who last year released 237 ‘luxury lifestyle’ apartments in its ‘Signia’ development in Mascot NSW, boosting their total Build to Rent portfolio to over 3500.

So why are so many developers seeking alternatives to the reliable ‘tried and tested’ model by retaining, rather than selling, their residential projects?

Are they purposefully providing the ‘supply’ to a previously untapped and underestimated market? Or is it a result of a slowdown in sales activity? In other words, are they opting for Build to Rent out of choice or necessity?

Build to Rent is proving to be a responsive and financially robust model that allows property investors to achieve long-term investment returns while providing an ever-expanding and diverse marketplace of renters with more options and better quality of housing.

And there are other clear advantages:

  • No requirement for presales
  • No real estate agent sales commissions
  • Potential savings in GST (if held for more than five years)
  • Potential of benefiting from future capital growth

That’s not to say it’s not without its risks:

  • Tighter LVR lending restrictions. Typically the ‘as if complete’ LVR can be reduced to between 40% and 60%. Given the completed properties are not being sold the construction financier would need to be convinced the debt can be refinanced on completion
  • Residential leases have shorter tenures (typically six to 12 months) in comparison to commercial leases which can be north of 15 years (with option periods)
  • Historically the rental yields on residential property are lower, rendering standalone servicing more difficult. Lower interest rates are strengthening this proposition.
  • Residential tenancy lease agreements tend to favour the tenant
  • If held in an SPV, the annual tax benefits of negative gearing are not achievable

Feel free to reach out if you have a scenario or another deal you’d like to workshop.