Mark Fischer, Global Head of Real Estate & Co-Founder, Qualitas

Mark Fischer, Global Head of Real Estate & Co-Founder, Qualitas

BTR Key in Addressing Housing Crisis


If Australia is to address its housing crisis, then build-to-rent housing needs to be a bigger part of the solution, Qualitas says.

Housing affordability in Australia is not looking to improve anytime soon as population growth hit record levels in 2023, while the country is also heading towards its lowest point in dwelling supplies in a decade.

While the average growth of the Australian population was 279,000 people a year between 1982 and 2023, the net growth in 2023 came in at 624,000. This is especially worrisome as the number of new dwellings delivered in 2023 was a mere 174,400.

“The dramatic growth in population in 2022 and especially in 2023 is clearly not being met with a suitable growth trajectory of new dwelling production,” the Urban Development Institute of Australia (UDIA), a not-for-profit think tank that represents the housing development industry, said in its “UDIA State of the Land 2024” report published in March.

“Across the past two decades Australia has significantly under-delivered new dwelling supply across the nation. This undersupply has contributed to the ongoing erosion of housing affordability and to driving down homeownership rates and increasing household indebtedness.

“Without drastic change to boost housing, we are headed for a decade low supply that will push prices higher.”

If we are to address the undersupply and the resulting housing affordability crisis, then Australia needs to rely less on homes that are intended for sale and construct more rental apartments, or build-to-rent dwellings, Qualitas, an alternative real estate investment manager, said at the [i3] Property Forum in Melbourne last month.

“The problem with build-to-sell is the model in a sense is challenged,” Mark Fischer, Global Head of Real Estate & Co-Founder at Qualitas, said.

“Traditionally, a build-to-sell developer buys a parcel of land, gets a planning permit and goes on a pre-sale campaign. Then they go to their builder and get a construction price and then try to get a loan to fund their project.

“Think about it from a general business perspective, it is a terrible business practice to sell your product and lock in the price, and only then work out what it costs to produce it.”

A shortage in building materials, inflation and the increase in interest rates by the Reserve Bank of Australia has made this model nearly impossible as costs can change quickly.

Build-to-sell developers have been trying to adjust their business models by seeking to lock in their construction price and their funding cost, and only then work out the revenue required to make it a viable undertaking.

But change in the industry is slow because banks, which have traditionally provided capital to new housing projects, are subject to regulation that is largely based on a pre-sale model.

“The build-to-sell developer has to put a lot more equity in, has a materially higher construction cost and has a materially higher cost of capital. The result of that is that they can’t get a lot of their projects to work and so supply is incredibly hard to introduce,” Fischer said.

“We think that’s a structural issue. It’s not going away.”

He said it was unlikely Australia will see a sudden rebound in pre-sales or banks will suddenly fund zero pre-sale developments, which means the build-to-sell sector will continue to struggle to solve the housing shortfall.

Instead, the solution will have to come, in part, from build-to-rent housing.

“If Australia is to solve this housing shortfall, it is evident on the statistics that we need to have build-to-rent to do that,” Fischer said.

Pioneers No More

The build-to-rent sector in Australia is still in its early stages and comprises only 0.2 per cent of the total housing market. This is very different from international markets, such as the United States, where build-to-rent has a market share of 12 per cent.

This underrepresentation of build-to-rent is also noticeable in the density levels of Australian cities. Many build-to-rent developments consist of apartments, which leads to higher density levels. But when comparing housing density between Australian and international cities, the differences are striking.

For example, in Melbourne less than 10 per cent of housing supply is medium to high density, while in London it is 38 per cent. For Miami, this percentage is about 32.

Fischer argued Australia had plenty of room to increase its medium and high-density housing to help address the chronic undersupply of housing in the country.

“When you look globally at cities of 5 million people or more and look at what percentage of their total housing stock is medium and high density, then Melbourne and Sydney are miles behind,” he said.

From an investment perspective, the build-to-rent market is also relatively young. For example, there are no suitable benchmarks yet for investors against which to compare performance, requiring them to take an off-benchmark view on the sector.

Fischer said the current state of the market reminds him of where infrastructure was 20 years ago. But as more buildings come to market and liquidity starts flowing, more investors will be attracted to the sector.

“Exit liquidity is a genuine challenge, but as there are now buildings being completed stabilised assets will come to market. The early pioneers will look to exit them and it will introduce liquidity [to the market] and that will encourage further capital to dip their toe in the water,” Fischer said.

“We’ve seen this before. If you wind the clock back 15 or 20 years in the infrastructure space, then there were concerns about liquidity on some of those assets. That’s well and truly yesterday’s news. I think the same thing will happen over time in the build-to-rent space, particularly when we start seeing completed assets over the next 12 to 24 months.

“Our view is we have progressed beyond what we call the ‘pioneering phase’ in this sector. It is still early, but we’re no longer pioneers. It is a good time to capture dominant market positions.”

This article is sponsored by Qualitas. As such, the sponsor may suggest topics for consideration, but the Investment Innovation Institute [i3] will have final control over the content.


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