Government policy and converging financial forces have created a perfect storm in Australia’s apartment building industry which is about to hit hard.
As early as the first quarter of next year, key indicators point to Australia being in the throes of a full-scale housing crisis.
But the country’s newest asset class on the property development and investment bloc is set to rise at scale and speed from the eye of this storm – institutional construction for rent.
“It was always happening, the pandemic just pushed that cliff back a few years,” said Luke Mackintosh, Ernst & Young partner, real estate strategy and transactions.
“Essentially this is the perfect storm… governments, both state and federal, have put all these measures on the construction sector to sell, which has traditionally provided rental supply in Australia, to slow it down.
“And when I say slow down, it’s now practically non-existent.
“They did it year after year. Even the recent announcement that the FIRB (Foreign Investment Review Board) application fee will drop from $6,000 to $13,000 on an investment property under $1 million is another death knell.
“Again, they have killed investors… it is now almost impossible to meet the presale requirements for projects with more than 150 apartments.
“We’ve seen payback rates of up to 40% to 50% on buildings that are pre-sold and as a result developers don’t build.
“While with build-to-let it’s not about selling, it’s just about delivering – so there’s no pre-sale issue.”
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The first generation of build-to-let projects in Australia were backed by overseas institutional capital.
Currently, the sector, also called multi-family, has 60 projects totaling 22,254 apartments with an estimated value of $13.6 billion.
Only 6% of these projects are operational, 11% are under construction and 83% are still in the planning stage. The lion’s share of projects is in Victoria (37), followed by New South Wales (11), Queensland (8) and Western Australia (4).
But according to EY forecasts, over the next decade the sector has the potential to grow rapidly to represent 10% of the country’s rental stock, the equivalent of 375 projects totaling 350,000 apartments with an estimated value of $320 billion.
Mackintosh said that over the past 12 months build-to-let has surged in Australia, with many groups showing interest now that the assets are operational and, importantly, showing attractive rental premiums to the rest of the market .
“Our build-to-let industry has institutionalized much faster and grown at a faster pace than any other country,” he said.
The next phase of growth in the sector is expected to be driven by investments in pension funds.
“Australian pension funds have almost no exposure to the asset class. So that will be where it’s going in the next four to five years,” Mackintosh said.
But he said that to attract the capital needed to boost the multi-billion dollar sector, governments will need to “level the playing field” by adjusting the fiscal levers that have hindered it.
Mackintosh was also quick to point out that while build-to-let has the foundation to generate “meaningful supply”, it will not be the panacea to Australia’s housing supply problems.
“We will always have a housing problem, but there will be ups and downs,” he said.
“But because we’re seeing vacancy rates dropping at a knot rate, the only thing that can really fix that is for the build-to-let product to come together.
“However, this is only part of the housing solution … it also requires state and federal regulators to act to begin freeing up construction to sell in order to get investors back into the market.”