Build to rent: where’s the market heading?

The unique characteristics of BTR

The stand-out feature of a BTR development is community, achieved through communal spaces and shared services and amenities. These might include a rooftop garden, children’s sandpit, games room, gym or workshop – spaces that residents want and make them feel part of something bigger.

The apartment itself may be modest with the spend focused on communal outdoor space and amenities.

“For the time being, BTR has established itself in the premium market ­­– as it forges a path in the intersection of residential, luxury hotel service and workplace design – but this is evolving.” Karen Wong, Director, Bates Smart

How BTR differs from BTS

Designing for longevity

The lifespan of a residential development is around 30 years so build to rent developments need to be built for longevity. Greater capital expenditure demands design that focuses on quality, reduces operating costs and has strong sustainability credentials.

A building services design team might look at 4 different mechanical systems, for example, with the most expensive in initial outlay, potentially, offering the most cost effective return over the building’s lifetime. Lifecycle analysis therefore becomes an important part of the conversation early on and a real drawcard for quality. A project team will analyse capital expenditure, durability, operational costs and maintenance.

“Designing for longevity hasn’t always been a focus for the residential sector. It’s refreshing to prioritise quality and be part of this change towards a more sustainable residential sector.” Damian Condello, Market Sector Lead, NDY

A new funding and ownership model

A BTR developer can get the debt they need for design and build more easily than a BTS. Typically, this would be a 3-year construction debt with stabilisation rolled up in the back end, as opposed to relying on presales to secure the debt. This expediates delivery and speed to market.

“As the development is owned very differently from build to sell – with one owner rather than fragmented ownership – decisions can easily be made to ensure quality is maintained. Gathering 50 landlords in a foyer, in a BTS, to decide on whether they’re going to approve a new carpet is going to hold up repairs and refurbishment. This won’t happen in BTR as it’s in the owner’s interest to maintain the standard of the building.” Trent Bell, Senior Development Manager, Investa

A single owner also means there’s one leasing strategy for the entire building. This enables an investor to grow rents and maximise profitability, when the time is right.

Melbourne’s #1 on the BTR chart

“To date, investment in Australian BTR has been dominated by overseas investors, at around 80 per cent. They’ve focused, primarily, on putting their hold on the top-tier cities of Melbourne and Sydney, which are considered a safer bet, before they move to other cities like Brisbane and Adelaide.” Tristan Quinn, Principal, Franklin St

Land rates in Melbourne have made it a much more feasible location than Sydney, alongside construction costs and rental value. Melbourne’s population growth has also contributed to this success with an increase in almost 170,000 people in 2023, a greater number than any other Australian city.

The more stable the market, the more confidence investors will have in the sector and the more product will be generated in other locations.

How BTR helps to address the rental shortage

“BTR currently makes up a tiny proportion of residential real estate in Australia, at much less than 1 per cent. Compare this to the United States where approximately 20 per cent of rental properties are BTR.

“As the Australian figure increases, we’ll see more rental properties becoming available. This will help to satisfy demand which will hopefully also mean more affordable housing coming onto the market.” Damian

In May 2024, build to rent makes up 2 per cent of the rental market in the United Kingdom, 1.5 per cent in Ireland and around 0.1% in New Zealand. Statistics are unavailable for the build to rent market in Canada.

The appeal of BTR

Comparing BTR to a traditional rental

Residents can build their community in a BTR from the get-go. It can be daunting moving to a new city, not knowing anyone. A BTR offers an immediate community with in-built opportunities to meet locals – social events are organised within a development. There may also be the opportunity for 3- or 6-month rentals in a furnished apartment.

For those that have friends locally, there’s the opportunity to move into the same development with separate apartments. With old friends and on-site social events, they have a vibrant social life immediately.

BTR also offers a low-maintenance lifestyle with a building management team that looks after everything. Residents can get an immediate response if something needs fixing or they want to book a room, there’s no waiting for a landlord to consider their request and approve a budget. This is a big appeal for young professionals.

Amenities are likely to be close to the ground floor and entrance, so residents feel that sense of community when they walk in. Retail and essential services can be incorporated into the space, offering everything a tenant needs to live comfortably in their building.

“Perhaps the most distinct difference to the traditional rental market is that a resident is treated like a genuine customer. BTR is a professional operation where there’s honesty about availability, transparency over assessment criteria and security of tenure.

“Prospective residents don’t need to line up with 50 other people and jostle to be heard, only to find out later that the property had already been leased and was subject to references.” Trent

Prefabrication and modular design provide enormous opportunity to minimise costs and construction waste. A sustainability-driven development is likely to be targeting a rating such as NABERS or Green Star.

When it comes to the social aspect of ESG, this includes maintaining good relationships with employers, tenants, suppliers and the community as a whole.

Governance covers a company’s leadership, audits, internal controls and more.

Tenants are demanding more

Data shows us that tenants are also looking for more sustainable homes. In the US, 80 per cent of apartment residents believe that living in a green multifamily [BTR] community is good for their health. An estimated 61 per cent are willing to pay more for the privilege.

The social impact potential of BTR

“This residential asset class is one that’s centered around psychographics over demographics. How might we improve a tenant’s lifestyle or strengthen their social connections? The more connected and socialised residents are, the less likely they are to move on. And, as we know, less turnover leads to more stability for both the resident and landlord.” says Karen

A new development in Melbourne from Investa – Indi Footscray – is located adjacent to the train station and just 5 km from the CBD. Residents can be in the city centre in just 20 minutes, making it ideal for professionals. The development is also a stone’s throw from the local high street and the amenities the inner city suburb has to offer.

“As a suburb, Footscray has lagged in terms of development. Only recently have investors started to channel money into the area. Indi Footscray is a great example of how BTR will boost the liveability and appeal of an area, over time bringing people from other suburbs to live there. We hope it will set a benchmark of what great apartment living can be.” says Trent

Another successful BTR project, LIV Munro by Bates Smart, is situated at Queen Victoria Market, Melbourne. A 500-space car park had dominated the area before it was put underground. On top, there are 490 apartments. This is a development that has attracted a wide demographic and really lifted the suburb.

BTR has the potential to invigorate those suburbs, close to city centres, that don’t have that buzz. They bring amenities, diversify the demographic and give communities the opportunity to thrive. This sense of community is what makes a place a destination.

The financial viability of BTR

Challenges

“The cost of construction and increase in debt – all around the world – has impacted BTR feasibility for investors. We’ve seen a 30 to 40 per cent increase in construction costs. A $200 million project has jumped to $300 million, just like that.

“Planning has also made feasibilities tough. It takes time to get a permit and an asset owner has no idea what that permit is going to look like. There’s too much uncertainty and lack of clarity in the current planning system. While the BTR planning process is potentially quicker than BTS, it can still take years to get planning approved and start a build.” Tristan

Balancing tenant expectations and viability

Balancing tenant expectations and financial feasibility is important. Which services offer that value add, premium feel? Which are going to shift the dial from profitable to out of pocket?

“Some of the baseline customer-first services include CCTV, security, room and car park booking. However, there are levels of sophistication for these services and the specification is always going to involve discussions between our financial controllers and designers.” says Trent

“Some value adds might be a system which allows a resident to order a coffee from a café downstairs or tech within the apartment which enables a resident to control heating, cooling or lighting remotely. However, technology’s expensive, and so a small cost across 500 apartments adds up very quickly.” says Damian

A design team needs to work with the asset owner to develop cost-effective solutions that satisfy both parties. They need to discuss how they see the market evolving and design for adaptability.

Opportunities

“We anticipate a rise in modular design and prefabricated construction. There’s a lot of repetition in a development and this will help with the efficiency and speed of build. We’ve seen considerable productivity gains with prefabricated bathrooms in Melbourne-based BTR developments, let’s expand this.” says Karen

The housing crisis, and lack of current and proposed supply, give BTR a lot of opportunity. The country is crying out for more housing and this is one of the fastest and most cost-effective ways to deliver.

Boosting revenue streams in BTR

Over time, we anticipate revenue streams in a BTR becoming more extensive and mainstream. While the market is still putting down its roots, many of these additional services may be offered at no cost in order to build trust and reputation. There’s a fine balance between creating a sense of community and monetisation.

Potential revenue streams include:

• Car parking – in a typical BTS development, a resident would automatically get a car park. When this becomes an add-on, it lowers the cost of entry for tenants who don’t need one and is a more efficient use of space.
• Furnished apartments – for someone who’s relocating from overseas, moving out of home for the first time or living a transient lifestyle, this is an ideal option. Along with short-term rental options – perhaps 3 or 6 months – it provides a practical solution to setting up home somewhere new. Only 10 to 20 per cent of Australian BTR is currently furnished, but the market is still young.
• Embedded networks – this is a great value add for residents. The landlord is able to offer a discounted rate for a top-tier internet service. At the same time, the landlord still generates revenue.
• Vending machines – while these may not be a huge revenue generator, they add a point of differentiation. A wine distributor may pay a rental fee to offer a machine where residents can buy a single glass of wine. Another retailer may install a tool library which tenants can rent per use.
• Printers – BTR apartments are generally quite modest so they may not have the space for all the usual equipment a home office could contain. A printing room is a simple service that can be monetised.
• Shed or workshop – if you live in an apartment, you don’t normally have the luxury of a dedicated space where you can take your bike apart and put it back together again. This is another opportunity for BTR to stand out.
• Cinema room or a lounge area – these could be rented out for parties or simply included within the cost of rent.

The essentials of a successful BTR project

It all starts with the briefing process. This needs to be thorough and explore the target market, location and site. Some questions we ask:

What’s the product mix?

“The most successful projects come together when a project team is working together collaboratively towards a common goal – the development of a quality product. And, that project needs to meet operational requirements and fall within budget.

“Ultimately, the client needs to walk away with a development they’re proud of and happy to retain for the next 30 years.” Damian

“From an asset owner’s perspective, having the foresight to know what your operational platform might be and how it operates really helps to hit the ground running. Getting ahead of that early on is super helpful.” says Trent

The future of BTR

Diversity in the market

We’re at the very beginning of the BTR journey but we see enormous potential. Now that construction costs and debt look to have stabilised, there’s going to be much more diversity in the market. BTR will expand out into all price points, moving into different typology and locations.

“We’re going to see more diversity than simply 500-unit developments in high density locations. How about a 50-unit development or collection of town houses in lower density areas? These developments don’t need to be located in the inner-city suburbs of our top-tier cities, they could be near our smaller transport connections and lower key suburbs.” Trent

Planning reform

The current proposals for new legislation and incentives are unsettling for overseas investors. We need stabilisation of legislation with real tax incentives and improvements in the speed of planning. This is, possibly, the biggest issue in getting BTR off the ground.

“With the BTS market not moving, there’s a huge opportunity for BTR to bring more housing to the residential market. But to do that, we need updates to planning and permits.

There’s plenty of discussion within planning taskforces about whether BTR should have its own asset class with its own set of Better Apartment Design Standards (BADS)?” Tristan

“This all comes down to human-centered design. We need to be continually asking the question – what do people want from their living space? If they have a shared coworking and outdoor space, do they need so much room in their apartment? With the great gardens and amenity that a resident enjoys, could we remove the stipulation that each apartment needs a balcony or outdoor area?” says Karen

Perhaps people are simply looking for a smaller unit that they can call home? Let’s deliver this by designing studios that share amenities, enabling units that people can actually afford to rent.

Keeping track of what lies ahead

“We’re optimistic on how this first tranche of BTR development will perform. Every investor is forging their own path in this new operational model of professional rental ownership.

“For us, the success of BTR lies in how successful the community is. Does the development help to establish and foster thriving communities? Has it lifted the area through diversification in demography and amenity?” Trent

Through this will come brand trust and as one BTR brand expands into another city, it may retain its customers who move with it. We’re not there yet but, in the future, people may choose a brand before they choose their location.

“There may be a grading system for BTR, similar to commercial buildings. So, at the beginning of its 30-year lifetime, it starts as an A-grade asset and moves down to a C grade asset after a couple of decades. Then a new owner may come into the picture and bring it up to A grade again.” says Tristan

In a world where anything is possible, what does the ideal BTR look like?

“It’s about a living space which has everything: safety, a workplace outside my apartment, gym, pool, childcare and grocery store.” says Damian

“It’s about feeling supported and safe in a place where the kids can swing round to the neighbours for a play. It’s somewhere that changes with me, where I can downsize when the kids leave home, retaining my familiar community and getting rid of the overheads I no longer need.” says Karen

“It’s a home that has a train station over the road, a beach on the doorstep and is close to the city! While that might be wishful thinking, that is what BTR has been trying to achieve. My ideal BTR would be an apartment that feels and acts like a home I own.” says Tristan

“It’s a development that’s grown a thriving community and has left a positive legacy on the city. And, in my perfect world, it has a craft beer vending machine.” says Trent