THE institutional housing or build to rent market could be a real game changer for the Australian property market, according to a panel of experts speaking at the Australian Property Institute’s conference.
The API Capital Markets Breakfast moderated by Property Funds Association CEO Paul Healy with a panel including APN Property Group non executive director Howard Brenchley, SG Hiscock & Company director Grant Berry and AustralianSuper senior investment manager – property Christine Phillips, said there is definitely a market for institutional housing but a number of key fundamentals have to fall into place.
AustralianSuper senior investment manager property Christine Phillips said AustralianSuper is already an investor in the sector in United States, where the sector also known as multi-family is classed as a commercial investment along with offices, industrial and retail assets.
“We do invest in the US multi-family currently, it is an established market there. The UK is also established and outside of London we are seeing prices firming.
“I don’t dispute the demand side of it, I think that there is definitely a market for institutional owned professional run, rental accommodation, they can get security of tenure.
“These would offer exception amenities, so you have gyms, swimming pools and recreational areas. But the question is how do we unlock the supply?” she said. “I’m sure that the demand is there, more and more people are coming to the decision that they don’t want to own a house anymore,”
Phillips said the supply side is more problematic because of the mums and dads investors, who are “very actively involved” in the residential property investment sector.
“Land prices are also so high,” she pointed out.
“So to make it work, you basically got to disrupt the feasibility at some level, you got to get the land cheap, build more cheaply.
“You’ve got to take development profit out and proof up the income side… and you’ve got to generate efficiencies to operate and run them,” she added.
Having said that, Phillips said there are players in Australia who are demonstrating the capabilities to do it.
“We do have some operators that are closer to able to do that, Lendlease and Mirvac. They are able to not take a development profit, they probably got land that is sitting there at a cost that makes the numbers stack up. They’ve also got the end operation, so they have advantages,” she continued.
Having said that, the most important fundamental, Phillips said the question that has to be asked, “What return do we need to invest in the sector in Australia?”
“And that is proving difficult?” Phillips said.
SG Hiscock & Company director Grant Berry said SG Hiscock are also investors in the US multi-family sector through equities.
Berry said in the past, the sector was not as attractive when compared to other asset classes such as offices, for example which was previously generating yields in order of 7% whilst residential was providing 3.5% to 4% yields.
However conditions have changed, Berry said because of prices.
“Now office yields are down to 4%, take it down another 100 basis points, it is down to 3%,”
Berry said the differences between offices and residential is that offices can have vacancies of up to 20% whereas residential does not.
In the US, Colliers International research shows the occupancy rate nationally was 96.1% during the second half of 2016 with rental growth averaging 3.7% annually.
In comparison, the US office vacancy rate was 16%, according to real estate research firm Reis Inc.
Colliers research shows demand for multi-family housing is strongest amongst the millennial and baby boomer generations for different reasons.
The millennial generation prefer urbanisation and living closer to cities whilst baby boomers are downsizing and unlocking their home equity.
“I think that it is something that is coming and could be a real game changer,” however Berry added that, “There is a lot of work to be done. The government needs to be involved and be proactive here.”
APN Property Group non executive director Howard Brenchley recalls being in the US in the early 2000s and speaking to a fund manager who said told him “they were no longer investing in the multi-family sector because yields have tightened too much,”
“He told me they were now down to 8%,” he said.
“I think some of our residential landlords here would love that sort of yield. Certainly better than the 3’s and 4’s we have, probably even less these days.
“I have seen some modelling where the developer leaves their development profits and then rents them out and those numbers showing it could stack up. But could only stack up for this moment whilst interest rates are low and you could get the cheap debt, so you could get the 4% to 5% yield from the residential development.
“It will only ever stack up if residential yields move up further – that’s the bottom line,” Brenchley said.
Australian Property Journal
