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Print Posted by Kiribiss.com on 11/09/2017

Lessons from build-to-rent apartments (and why they should be taken seriously)

Lessons from build-to-rent apartments (and why they should be taken seriously)

by Richard Wakelin

Financial Review 

There is some buzz and excitement around the term build-to-rent at the moment.



Several developers – not least giants Mirvac and Stockland – have made public comments indicating support, to varying degrees, for the model. It's an approach that would see developers, either using their own book or on behalf of institutional clients, build residential apartment blocks and then lease individual units to tenants. In short, the developer (or their client, say a superannuation fund) would become a long-term owner of the apartment block and its property manager.

Advocates for build-to-rent believe its time has come. In the past, investing institutions have favoured commercial property over residential property due to the superior yields. But commercial office yields have been falling in recent years such that build-to-rent yields would be at a similar level of about 4.5 per cent. And, of course, gross yields would be higher than the 3 per cent or so older style properties typically yield.

Moreover, with an oversupply of new apartments putting a dent in the traditional build-and-sell model, opportunities to market build-to-rent as part of the answer to falling affordability and the prospect of being able to earn tax breaks from the federal government along the way, build-to-rent activists believe they have a good narrative.

For me, what makes this push fascinating is what it reveals about the failing conventional business model that proponents are trying to upend.

The conventional model is of course build-and-sell developments. Or, to be more accurate, sell-and-build, because developers usually sell the units "off the plan" – especially to offshore buyers – and start building only when enough orders have been received to make the project viable.

Quality v marketing

Now I have lamented on more than one occasion that this build-and-sell model tends to incentivise developers to under-invest in the integrity of the build quality (because quality is always expensive) and over-invest in marketing those properties (as it is relatively cheap). Too often, many developers know they just need to include enough "bling" – fancy extras such as European appliances – to sell off the units, leaving the poverty of the designs and workmanship as a problem for the new owners.

Build-to-rent is becoming a serious proposition because the consumer market is becoming increasingly wise to these tactics and developers are fearful of being left with unsold stock.

Clearly, a build-it-cheap approach can't be adopted with the build-to-rent model because, as the ongoing owner – or where they sell to an institutional client, because of the various warranties they would be beholden to – developers will have to live with what they have built.

If the building doesn't have the requisite integrity that the market and tenants expect, the developer will suffer low rental yields and high vacancy rates and they will lose money.

It will be interesting to see if Mirvac and other developers can actually make the economics of this model work or, if they can, whether it will be possible only with contributions from the federal government through the various affordable housing initiatives announced in the May budget.

Ultimately, this is the developers' challenge. But for the rest of us, it is also a reminder that the conventional build-and sell business model for new apartments isn't designed to maximise the interests of the private investor.



Richard Wakelin is a director of Wakelin Property Advisory. wakelin.com.au



AFR Contributor

Read more: http://www.afr.com/personal-finance/lessons-from-buildtorent-apartments-20170907-gyd0y7#ixzz4sOQVRi3O 

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