Building a fix for Australia’s rental market

The ‘Great Australian Dream’ of families, rich and poor, owning a home is dying a slow death. Growing in its place is the traditional Australian rental market primarily made up of mum and dad investors.

Consumer advocates say this doesn’t always lead to the best deal for renters. The lack of formal  disclosure on the quality of the property when a rental lease is signed, poor transparency around what tenants can expect from property managers and landlords, along with limited certainty over things like bringing pets into the home mean renters face a lot of unknowns when they move in.

Yet consumers could soon have another option. Build-to-rent accommodation could be a driving force towards professionalisation of the rental industry.

Known as multi-family accommodation in the United States and United Kingdom, it refers to housing developments that are built to be rented, not sold individually. Any introduction onshore could herald a landmark change for certainty and transparency for renters.

It is a well-established sector abroad that scarcely exists in Australia. But over the past year, a range of powerful interests have expressed a renewed desire to see purpose built rental homes take hold locally. 

" Renting in Australia still comes with too little certainty and too few guarantees to make it a desirable long-term choice.” 

Developers including Mirvac, Grocon and Lend Lease are looking keenly at it - as are large overseas investors such as APG and Invesco. Policymakers are exploring ways to kickstart the sector as a solution to the woes of the rental market, as well as possible flow-on impacts to housing affordability.

Graeme Torre, head of private real estate in the Asia Pacific for Dutch pension fund APG, believes it is only a matter of time before built-to-rent homes are a feature of the Australian property landscape. They have the potential to give renters a better product than they get now, he says.

“We think it’s a sector just waiting to happen,” Torre says. “Residential property in Australia that is available for rent is a very segregated, disparate market.”

“There are many different owners of one or two or three units. There is very little branded and properly managed, purpose-built rental accommodation like you would find in the US or Europe or even Tokyo.”

On the rise

Australia’s 2016 Census showed a continuation of a long, slow trend away from home ownership towards renting. Renters made up 30.9 per cent of households, up from 29.6 per cent in the 2011 Census. In the last 25 years the number of Australians who own their home outright has declined by more than 10 per cent.

The driving force behind this is a sustained undersupply of affordable housing for new entrants leading to a change in lifestyle choices from younger generations.

Millennials are changing jobs more and starting families later than their forbearers, embracing the flexibility of renting rather than taking on decades of mortgage repayments.

But renting in Australia still comes with too little certainty and too few guarantees to make it a desirable long-term choice. Governments have scarce expectations for landlords in exchange for the tax breaks and incentives they are given and consumers have too few rights to make their rental properties into homes.

Lauren Solomon, CEO of the not-for-profit Consumer Policy Research Centre – which is funded by the Victorian government – says the lack of formal information disclosure when a rental lease is signed makes it distinct from almost everything else consumers sign up for.

Renters are unable to gain clarity on the quality of the building, for example, and minimum standards are inadequate.

A missing floorboard, leaking pipe or drafty window could significantly impact the usage of utilities. This makes it impossible to determine energy and water costs until after a tenant has moved in.

“The lack of information disclosure at the point of rent is a massive gap,” Solomon says. “Product disclosure fact sheets are common across financial services, energy [and] the telecommunications market.”

“There is a requirement to disclose the features of the product that you are offering. But for whatever reason this hasn’t really happened in the housing market.”

There is also a lack of transparency around what level of service consumers can expect from property managers and landlords. They don’t have to worry about developing a bad reputation because it is rare for word to get around about the quality of the service they are providing.

This is further compounded by the limited availability of stock, forcing renters into an untenable position of selecting a property with no information and often being afraid to raise the issues once these defects are discovered post move.

As the population ages there aren’t reliable processes where tenants can request and make reasonable upgrades to suit their changing life needs–such as hand rails and additional lights.

Security of tenure is another issue but Solomon is wary about mandating longer rental terms.

“We strongly support tenants having the right and capability to enter agreements with longer tenure,” Solomon says. “But we also need to ensure there is flexibility, consumers don’t want to be trapped in a contract they can’t move on from if their job situation changes or life situation changes.”

Professionalisation

Could the emergence of a multi-family sector flag to the players involved in the broader rental market that they need to lift their game? Simon Redman – Invesco managing director, global head of product management–believes it would be a driving force behind greater professionalisation of the industry.

“If it takes off in a sizeable way, but this is quite a few years ahead, it will just change the way that providers of rental accommodation have to treat their tenants,” Redman says. “They would go from being tenants to being customers.”

He says purpose built rental homes would offer a lot of perks most renters currently don’t enjoy. The concierge would collect laundry, promptly resolve maintenance issues, and collect parcels from the mail.

For Torre, the formula would be simple.

“[These developments deliver] well-managed and designed properties that provide a relatively maintenance-free living environment,” he says. “They would ideally have a gym, be in a good location for transport, be affordable and offer secure rent.”

The relatively new student accommodation sector – which has a business model that shares similarities with multi-family–has given early indications build-to-rent could work in Australia. Both APG and Invesco have invested in student housing in Australia.

But there are key differences. Student accommodation is often built on university land as a public-private partnership. It also tends to be targeted at international students who are willing to pay and have different expectations to the broader rental market.

Barriers

Torre says there are some hurdles to be overcome before APG gets involved. For starters, there is no specific planning designation for rented housing sites which means build-to-rent developers would have to bid against others building to sell.

Paying the general market price would mean they would have to accept the low yields of residential property. This is a similar issue to that seen in the retirement village market.

“Most investors expect high yields and high risk when it’s an untested sector,” Torre says. “It’s a bit of a quandary, we are not yet sure what the yield would be on this asset.”

Being a new investment class in Australia with no past trading evidence to go by, no experienced operators and no established brands, he thinks it is unreasonable to assume the yield would be the same as other institutional property types such as prime offices. A specific planning designation would help, he says.

“It would be great to see the sector supported by the state or federal governments in their planning policies so that certain sites can be designated to multi-family,” Torre says. “Then if you buy that site you are only competing with other multi-family developers.”

This presents a challenge for governments who would need to make a direct market intervention and justify the prioritisation of this emerging industry over the rest of the property sector.

Ultimately land prices dictate the rent that would be charged, and this would determine whether this accommodation could be affordable enough for essential workers or whether it would be limited to higher-paid professionals, Torre says.

Another issue is the rules around Managed Investment Trusts which are the preferred vehicle for foreign entities to hold these developments. MITs give beneficial withholding tax treatment when profits are sent overseas. Rented residential developments aren’t currently a permitted investment under that tax status.

Also banks are unlikely to finance these developments so APG would have to finance the development itself or look to non-bank lenders.

“At the moment when banks won’t lend to the sector it raises the risk because if you want to sell it you have to find an investor with 100 per cent of the equity available or is prepared to use non-bank sources,” Torre says.

The New South Wales government last year created a taskforce that consulted with high-profile figures in the property industry to explore build-to-rent, but so far nothing concrete has come out of those talks.

Torre believes these issues will eventually be resolved. APG is sounding out potential partners to attempt the sector but is still “watching and waiting”.

“We believe in the reason for build-to-rent, and the opportunity,” he says. “We believe it’s a sector with longevity. So even if we don’t get in right at the beginning, we can still participate at a later date.”

Ben Hurley is a freelance journalist