Build-to-rent gains momentum in Perth
By Claire Tyrrell | WA Business News | 5/4/22
Sentinel's Scarborough proposal.
Recent development proposals show WA’s build-to-rent market is finally gaining ground.
Build-to-rent offerings are stacking up as an attractive proposition for investors and tenants, amid an evolving property market in Western Australia.
The model, where apartments are built to be rented out rather than sold, was brought to Australia by global developer Sentinel Real Estate in 2019 with its Element 27 project in Subiaco.
BTR then gained traction quickly in the eastern states, where policies were altered to incentivise developers to adopt the approach.
In WA, meanwhile, progress stalled. However, recent industry activity in WA shows an increased push for more BTR projects in this state.
Australian Development Capital’s (ADC_) plans for the Perth Girls School site in East Perth include two towers of 500 BTR apartments, which make up close to 70 per cent of the proposal’s dwelling types.
A second WA BTR project from Sentinel, in Scarborough, will add 175 BTR apartments to the market, while Perth co-living space The Switch has provided 288 BTR dwellings.
In addition, Sydney-based fund manager EG Funds Management is planning to bring BTR to Leederville with its Frame Court proposal.
The state government is also exploring BTR as part of an affordable housing initiative for Highgate’s Stirling Towers.
But the market is still well behind other states, with just 1,238 dwellings built or in the construction pipeline in WA, according to property and economics research group Urbis.
This compares to Melbourne, with approximately 10,000 and Sydney with about 3,000 BTR dwellings.
Market forces
Chief executive of Perth BTR consultancy Kingston Development Group, Justine Roberts, told Business News economic conditions were ripe for the BTR model to take hold in WA.
“The demand side is very strong, which helps give investors and developers confidence,” Ms Roberts said.
As BTR developers do not rely on pre-sales to start construction, delivery time for these developments are often far less than under the more traditional build-to-sell model.
Ms Roberts said this speed-to-market advantage of BTR projects could make them an ideal proposition in the current market.
“With unprecedented rental demand and housing crisis on our hands in WA, BTR delivers supply in an efficient manner,” she said.
However, as Property Council of Australia WA Division executive director Sandra Brewer explained, the state’s legislative approach made the model less attractive in WA than in the eastern states. Soon after Sentinel entered the market with Element 27, Sydney and Melbourne moved to offer tax relief to attract BTR investment, Ms Brewer said.
“What we’ve seen is exemptions from foreign buyer surcharges in most states, or substantial land tax discounts,” she said.
In WA, BTR developers face the highest rate of land tax, whereas in NSW, Victoria and South Australia, 50 per cent land tax incentives are offered for the alternative housing model.
Ms Brewer said WA’s lack of action on land tax reform has resulted in the major players shifting their focus east.
“A recent visit to Melbourne … was confirmation that the global capital that’s available to invest in Australia is focused on Sydney and Melbourne,” she said.
“Perth needs to do more to get the attention and attract the desperately needed rental supply in our state.”
Ms Roberts agreed that government incentives would help the sector in WA, but the fact developers were going ahead with BTR regardless of these policies showed their viability.
“For WA, initiatives such as land tax reform and offering additional height bonuses for BTR developments would be a fantastic step forward, as would a BTR pilot program, similar to that created by the Queensland state government,” Ms Roberts said.
Issues around high construction costs and supply chain interruptions, coupled with WA’s laws around GST and land tax, meant BTR project financials often needed to work harder than for-sale developments to stack up, Ms Roberts added.
“However, from an investor perspective, BTR can provide a lower risk, more stable investment with a longer-term hold approach,” she said.
Urbis director David Cresp said the model, which was well established in America and the UK, was fast becoming a sought-after asset class in Australia.
“There is a lot of activity happening around the country with BTR projects and … it has very quickly become an asset class that a lot of the major existing funds in Australia are looking at very seriously,” Mr Cresp told Business News.
“Residential in Australia is relatively low yielding, and part of that is that traditionally mum and dad investors are often looking more for capital growth, rather than an income return out of investments.
“But as we’ve seen, yields, interest rates [and] bond rates have come down and there is a huge weight of money chasing income-earning investments across Australia and across the world.”
Ms Brewer added that BTR offered investors something original and new in residential property.
“And with investors clamouring for asset classes, which deliver stable returns year in year out, it is almost like the perfect scenario for these two factors to come together and create this economic opportunity,” Ms Brewer said.