Australia's $300 Billion Multifamily Proposition
According to a new CBRE thought leadership paper, circa $300 billion worth of Australian residential assets could be owned by institutional investors within the next couple of decades if the multifamily sector evolves in the same vein as the US.
Multifamily, also known as build to rent, refers to multi-unit residential buildings owned by a single entity. The asset class is emerging in the UK and has been increasingly on the radar in Australia - with the potential to drive a fundamental shift in the funding mix for residential projects.
CBRE's Head of Research for Australia, Stephen McNabb, said the multifamily sector represented approximately 15% of properties with five or more units in the US - a position obtained after 25 years of growth.
In total, the sector accounts for 20%-25% of the $2 trillion in institutional property investment in the US - ranking it as the second largest investor allocation after office property.
"Factoring in that 35% of Australia's population rent, if the market here evolved to the level of the US, up to 5% of the country's dwelling stock by value could be institutionally owned in several decades," Mr. McNabb said.
"In today's dollars, that represents circa AU$300 billion worth of residential assets or around 300,000 apartments."
CBRE's paper, the full version of which is due to be issued next month, highlights that the applicability of the build to rent sector will continue to progress in Australia as the market becomes increasingly comfortable with four key propositions.
These entail an acceptance of build to rent as a new product paradigm, acknowledgement of the asset class as an investment proposition, understanding the customer value proposition and recognition of the various policy influences.
"Investor and consumer objectives have combined to make market conditions more supportive of build to rent residential than those in the past," Mr. McNabb said, noting that changing investor expectations would be a key driver.
"Required returns are falling across all asset classes and there is now a greater focus on investments which provide income stability and steady growth while limiting capital risk. Residential assets also provide a stable, long term income stream at a time when investor demand for longer tenure assets is increasing as the population ages. The ability to de-risk development businesses and to spread these returns over the life of the "end-product" provides for a compelling risk-adjusted proposition."
CBRE's paper highlights that higher service levels will be critical to attracting tenants from the existing private rental market if the build to rent model is to succeed.
It also notes that while build to rent will take pressure off existing housing stock, it won't, by itself, be a panacea for housing affordability.
"There will, however, be economic benefits in reducing household debt and the potential to transform financing of the sector away from traditional intermediated finance for development and end-product purchasers," Mr. McNabb said, adding that the Federal Government would need to consider how zoning and tax changes can provide certainty to the asset class.
Funding will be another key consideration according to Simon Cowley, of CBRE's Debt and Structured Finance team.
"In the early phases, the capital stack will be formed mainly through equity rather than debt," Mr. Cowley forecast.
"It will entail institutional investment via either the forward-funding or forward-commitment route, via joint ventures with developers and through partnering with asset managers with expertise in this sector. This will be the quickest route for institutional investors to get scale, and by partnering with expert asset managers, they will gain efficiencies in building a platform/brand and start to mitigate the gross - net deductions of managing these projects."