Rental crisis offers mid-size developers a new asset class.
Restrictive bank lending practices and a national residential rental shortage could provide the impetus for smaller developers and investors to move from traditional build-to-sell (BTS) models into the emerging build-to-rent (BTR) sector, currently dominated by major institutional investors and top tier developers.
Unlike the standard build-to-sell development model widely favoured in Australia, BTR can provide a steady income stream for medium-size builders and developers, while also offering capital leveraging in a restrictive lending market.
DFP assists smaller to mid-scale developers navigate a plethora of funding hurdles faced by borrowers, and believe BTR offers a compelling alternative to BTS.
“Australia has a critical undersupply of rental properties with a current national vacancy rate sitting at around 1 per cent, according to SQM’s latest research, and there is every likelihood that the rental vacancy rate will continue to fall until the housing crisis can be addressed.”
“BTR is a great way for second and third tier developers to build equity in their property portfolios, without having to meet stringent pre-sales requirements placed on them by many lenders.”
A prime example of how developers can turn around a failing off-the-plan project struggling to meet its lender’s pre-sales targets, into a financially viable BTR project, was successfully negotiated by DFP and its project management partners recently (August 2022).
Matt Royal, Director at DFP assisted a client that couldn’t meet its lender’s pre-sales targets on a 50-apartment project in Brisbane’s inner-northern suburb of Chermside.
“The project was heading towards failure in its current format, so we brought in our development management partners, Highgate Management, which specialises in distressed project work-outs.”
Highgate Management worked closely with DFP to determine the best use for the site and together with Sydney-based co-living rental specialist, BNTO, they gained development approval for a fully reconfigured build-to-rent project featuring 138-micro-rental (co-living furnished apartments) over 11-levels.
“Under the new BTR configuration – targeting young, professional tenants – the project will deliver substantially higher returns than the 50-apartments previously approved and most importantly, as a BTR, it now stacks up as financially viable for its initial investors.”
Matt said the reconfigured development presented a compelling and robust business case to lenders and has enabled DFP’s client to retain and develop the site.
The asset will have strong passing income given its central location in Chermside and within walking distance to major retail and public transport hubs, plus the Prince Charles Hospital, that is earmarked for a $6 billion upgrade, creating an additional 4,000 jobs.
“BTR is a way for second and third tier developers to add another asset class to their portfolios, without the need for pre-sales, allowing projects to be built sooner with less upfront equity.
“Additionally, the appeal of build-to-rent is that the end project can either be sold in one line or it can be retained in whole or in part as a rental pool, to create cash flow and added to the balance sheet to give the developer greater borrowing strength for future projects,” Mr Royal said.
“While institutional capital both from international and domestic investors is beginning to flow into Australia’s fledgling BTR sector, Matt said it was only a matter of time before smaller players also entered the market, “I believe the time is right given there is huge demand for rental properties in almost every metropolitan and regional centre throughout the country.”