Article:

A bank’s perspective on Build to Rent

12 July 2021

Chris Catanzaro, Partner, Corporate Finance |

The purpose-built rental housing model, Build to Rent (BTR), continues to gain momentum across Australia, changing the way we experience apartment living. However is Build to Rent all it’s cracked up to be?

To investigate further, our property team discussed the BTR model with the ANZ institutional bankers in Queensland, exploring what is and isn’t working from a bank’s perspective.

What is working well?

One version of the BTR model is targeting young professionals who tend to value and prioritise convenience, location and high quality amenities. This demographic are willing to pay for the privilege, usually a 5-10% premium compared to normal rental stock.

In Queensland, BTR apartments are a relatively generous size and located in areas with good public infrastructure and relatively low vacancy levels with limited existing rental availabilities. There also isn’t a lot of competition in the pipeline within these areas with restricted new supply coming online.

From ANZ’s perspective, the BTR offering is more attractive than some alternative assets that have been supplied in Brisbane over recent years. Optionality with the BTR model is the key differentiator here, with an ability to sell the building in-one-line or individually subject to the original approval conditions. BTR allows for alternative uses (e.g. opportunity to strata title the apartments in future) and the possibility to reconfigure during the design phase of the project.

Successful developers also often adopt relatively consistent (but still stylish) design templates across projects, allowing for simple construction processes and reduced costs. The key opportunity for developers is to unlock additional revenue streams where possible, for instance parcel locker rentals, transportation hire, room hire, hiring storage and car parks among the options. To do this, the asset owner may simply engage a third party to deliver the service and by providing the space, generate the additional revenue.

What are the key challenges of BTR?

According to ANZ, one of the key challenges is the lack of ‘pre-sales’ or ‘pre-leases’ available under a BTR project at the commencement of funding.

As such, developers have tended to extend the term of their construction facilities to include the ‘lease up’ period, which might extend for up to 12 months after the construction period ends, by which time the project is usually around 60% + leased. At this point the project income can pay the bank’s interest costs on a monthly basis. This will of course depend on deal size, leverage and the rents that can be generated on the project.

In addition, low yields for the sector are a reality. However, investors appear to have accepted this particularly in the current low interest rate environment. ANZ explained that it’s important to take a long term view on interest rates and given the current low rate environment, hedging rates could be explored.

Although site costs are currently reasonable in Brisbane, construction costs, both labour and some materials, are rising. If the Olympics bid is successful, it is likely that these construction costs will continue to inflate further.

What is the bank's verdict?

Overall, ANZ seem supportive of the BTR asset class, although it is clear banks like ANZ will assess the opportunity on a project by project basis as well as dealing with the right sponsors to manage construction delivery and operating risks.

If you would like to learn more about the BTR model and how you can invest in these projects, please contact a member of our real estate and construction team.