Generation Rent

By Colin Lee
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With young families holding off buying a house, preferring to rent instead, experts predict homes built to rent will takeoff in Australia over the next five years

The Great Australian Dream of homeownership is starting to fade for many, especially in the major cities. Where to from here if not to rent? For some, it is a necessity due to high costs of home ownership; for others, it is a lifestyle choice.

Renters, however, cannot enjoy relationships with property like homeowners do. That’s because the default setting for Australian tenancies is ‘insecure’. Agreements are on initial fixed terms of 6 or 12 months before continuing on a weekly basis. They can be terminated without a reason; renters never know how long they can stay in their rented home.

In certain European countries, anything less than a three-year agreement is considered short term. Tenancies in Sweden, Germany and the Netherlands are indefinite and cannot be ended without legal grounds.

As the demand for rental increases, work is needed to bring down the cost for developers. They need to receive incentives in order to forego the quick and easy profits of build-to-sell apartments, in favour of the build-to-rent ones with quality long leases and low vacancy rates for the long-term rewards

In the Australian context, our tenancy agreements are also indefinite but can come to an end without legal grounds. This can be rectified with a change to Australian renting laws. In Victoria, it was recently proposed to have leases of more than five years along with a raft of other reforms.

The difference exists as most Australians have lived in their own homes rather than rented ones. Renting issues such as short-term starting out to independence while studying or building careers and saving for a deposit to eventually buy.

In Europe, the focus is less on homeownership. Their renting laws seek to protect tenants with greater emphasis on security of tenure.

With the changing landscape in Australian society, perhaps the focus should change too. Some Australians will rent for the most part of their adult lives, if not being permanent renters.

Housing experts predict that homes built to rent is set to takeoff in Australia over the next five years.

Adam Hirst, General Manager of Capital Allocation at Mirvac, says, “This isn’t in conflict with the Great Australian Dream. This is not the end of homeownership or mum and dad investors. It’s a lifestyle choice of millennials, young families and downsizers, and the choice of a growing number of people.”

Hirst says that there are currently 2.5 million rental homes in Australia and he sees that growing in the next few years with purpose-built apartment buildings for the rental market. “It’s well established overseas but in Australia it’s a new form of housing and there’s a lot of excitement around it,” he says.

That’s because there’s nothing like we have seen before—building managers looking after apartments, staff looking after leases and running ‘community’ events, onsite cafes, shops and work spaces. There will be long-term rolling leases with tenants able to transfer to other allied blocks in different areas should there be a change in circumstances, eg relocation and job transfers.

Such purpose-built homes will also create a new asset class attracting large institutional investors like super funds, injection of overseas capital with some degree of government support and involvement.

With the rate of capital growth slowing due to softening property prices, rental yields will become more important—as noted at a recent Australian Housing and Urban Research Institute conference.

Currently, 31% of Australian households rent. Nearly 30% of them are millennials (aged between 16 and 35), 24% are baby boomers, 21% are Generation X (35-51) and 20% are Generation Z (under16s). According to research by Ernst and Young Australia, of those millennials, 66% believe they will never own their own homes.

Richard Brice, Director of Real Estate Advisory Services at Ernst and Young, says “The real driver for build and rent in 2017 is those millennials. They are very different in their wants and needs. They want to be near services and jobs and entertainment facilities, and they are looking for onsite flexibility and having places to work within their buildings.”

Tyrone Hodge, JLL Regional Director (Institutional and Middle), says that as the demand for rental increases, work is needed to bring down the cost for developers. They need to receive incentives in order to forego the quick and easy profits of build-to-sell apartments, in favour of the build-to-rent ones with quality long leases and low vacancy rates for the long-term rewards.

“The key is we’ve got to make costs go down. You can’t do anything about construction costs but you can do something about getting the land prices or taxes down,” says Mr Tyrone. “We’re now seeing developers partnering with companies like US apartment colossus Greystar and Westfield to use airspace above shopping centres, for instance, or the government can provide the land.”

“The rate of increase of rents over the past ten years has been higher than other asset classes like retail, industrial and office. And in a low interest rate environment, we’re seeing real structural change. Home ownership isn’t likely to be the norm in the future” — Princess Venture

Other measures and incentives could involve speeding up the planning process, cutting red tape, negotiating minimum apartment sizes, tax credits and lower rates of land tax, extra density allowed in return for build-to-rent projects.

This seems to be a ripe time for a build-to-rent revolution, with unaffordable housing, people staying in education longer, a more mobile labour market and millennials embracing the sharing economy, says Mr Hirst. As a result, build-to-rent homes can be seen as a tradeable asset like building a hotel with a rent roll to it.

Princess Venture, Economist and Director of Urbis, says that all factors are aligning now. “Rental yields should increase going forward and we aren’t likely to see the crazy capital growth we’ve seen earlier in the residential sector,” she says.

“The rate of increase of rents over the past ten years has been higher than other asset classes like retail, industrial and office. And in a low interest rate environment, we’re seeing real structural change. Home ownership isn’t likely to be the norm in the future,” she adds.

Scott Langford, Group CEO of St George Community, explains that the original build-to-rent sector was the affordable housing sector for essential workers with subsidised rents enabling them to live close to where they work. “But now we’re talking more broadly about a structural shift in the Australian market to allow more people to rent.” The good news is that these properties will most likely be of similar standard to build-to-sell ones—the fittings and finishes will have to survive a number of moves and the white goods installed will also need to be long-lasting and durable.

The developers or institutional investors will employ managers to facilitate community events to help create atmosphere in buildings. It is set to be a major game changer. Tenants enjoy great security of tenure, no longer living in fear and constant worry of having to move out should the landlord wish to and without legal reasons.

 

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