In contrast to the enthusiasm with which foreign pension investors invest in build-to-rent, or multi-family, property, Australian super funds are still searching for the most suitable investment model that would work for them, Florence Chong writes.
While Australian super funds mull the merits of investing in build-to-rent (BTR) apartments – as distinct from affordable housing – foreign pension entities hold no qualms about the future of the BTR sector.
Foreign institutional and pension money from Canada, Singapore and Europe has flowed in to kick-start BTR in Australia.
Unlike Australian super funds, foreign pension funds are well-versed in the fundamentals of BTR, or ‘multifamily’ as BTR is known in North America, home of the world’s largest, deepest and most liquid multifamily industry.
It hardly comes as a surprise, then, that a US operator has become the industry pioneer in Australia – a country where rental housing has long been a cottage industry populated by mum-and-dad investors.
The trailblazer is New York-based Sentinel Real Estate, which bought three sites in Perth back in 2015. Today, it has a portfolio of 1,600 BTR apartments either operating or under construction in Australia.
The firm told [i3] Insights it has a target of building out a $2-billion portfolio in Australia over the next five years.
Unlike Australian super funds, foreign pension funds are well-versed in the fundamentals of BTR, or ‘multifamily’ as BTR is known in North America, home of the world’s largest, deepest and most liquid multifamily industry
Sentinel, a long-established operator and investor in the US multifamily sector, is no stranger to Australia. It has played a key role as an investment conduit for a large Australian industry fund in the US multifamily sector since the 2010s.
More importantly, Sentinel has encouraged foreign capital into Australia.
Last year it brought the Dutch pension fund, PGGM, into its Australian BTR fund, along with an unnamed British institutional investor.
Greystar and Hines, both from the US, were among other early BTR movers, bringing offshore institutional capital into Australia to fund their local ventures.
APG and Ivanhoe Cambridge, a subsidiary of Caisse de Depot et Placement du Québec (CDPQ), last year backed Greystar’s $1.3 billion Multifamily Venture I Fund, which plans to build 5,000 apartments.
More recently, APG has come into the market for a second bite, so to speak. Together with the Dutch pension manager, Bouwinvest, APG has committed to Scape Australia’s new rent-to-live platform, which is seeking to own 10,000 apartments by 2030.
The Scape platform has as its initial target a $1.5 billion portfolio, but the ambition is to grow that to $5 billion over time. APG and Bouwinvest are long-standing investors of Scape Australia’s student housing funds.
Cadillac Fairview, the real estate arm of Ontario Teacher’s, has formed a partnership with Hines to develop and acquire up to $1.5 billion in Australian BTR assets.
Oxford Properties, the property arm of OMERS, took over Australia’s Investa Property Group seven years ago. It now jointly runs the Indi BTR platform, to develop, operate and manage apartments now underway in Sydney and Melbourne.
Singapore’s GIC is invested with two Melbourne-based groups, led by Tim Gurner and Daniel Grollo’s Home platform.
Gurner works closely with Qualitas, a Melbourne-based alternative financier. Qualitas and Gurner recently raised capital from an unnamed offshore institution to support their next BTR fund.
Mirvac, which has been looking for like-minded investors for its BTR club, in June announced that its cornerstone investors include the Federal government’s Clean Energy Finance Corporation and Japan’s Mitsubishi Estate.
Momentum Building
Globally, the so-called living sector, led by BTR and student housing, is the top thematic for investors seeking to capitalise on what is now a global housing shortage, compounded by affordability hurdles to home ownership.
In Australia, as elsewhere in the world, home ownership seems likely to become an ever-increasing challenge for future generations of Australians.
Investors say income from multifamily, whether it is in Japan, the United States or elsewhere, has not been disrupted by the global COVID pandemic. They speak of having “sticky tenants” and a resilient business in uncertain economic times.
In its inaugural Australian Multifamily Report, Savills refers to the firm’s third quarter 2022 Investor Sentiment Survey, which found that two-thirds of European investors said they were likely to invest in multifamily in the next 12 months.
The Savills analysis shows that the number of funds targeting Australian residential investment strategies has grown exponentially over the past 18 months.
In Australia, as elsewhere in the world, home ownership seems likely to become an ever-increasing challenge for future generations of Australians
By the third quarter of last year, Savills had recorded commitments mostly from foreign investors totalling $15.85 billion, allocated to BTR in Australia – making BTR the most active sector for offshore players.
A further uptick in investment dollars heading to Australia is already evident since that survey was conducted. In its May budget, the Albanese government levelled the playing field for foreign investors by cutting withholding tax for managed investment trusts (MITs) from 30 per cent to 15 per cent. All foreign investors in Australia are required to use MITs as holding structures for their investment.
Although not exactly a game-changer for the sector, the disparity in tax treatment between domestic and foreign investors has been an ongoing bone of contention, with investors having to face a host of other issues, including high land prices and zoning problems.
A spate of projects has been announced since May, among them a plan by Singapore’s City Development Ltd (CDL) for two projects in Brisbane and Melbourne to provide 500 apartments.
Australia is CDL’s second BTR market. CDL sees BTR as a natural extension for its lodging/hospitality business globally and is currently working on several projects in the UK.
Brookfield, a major offshore investor in Australia, has just made its own foray into the BTR sector, lodging a development application for a $400-million, twin-tower, 560-apartment project in Brisbane.
Australian Funds
In contrast to the enthusiasm of foreign pension investors, Australian super funds have chosen to sit on the sidelines. Although keen on residential as an investment option, they say they are still searching for the most suitable model that would work for them. The likes of Aware Super and HESTA are committed to affordable housing, which is a different segment of the market to BTR.
Affordable housing, driven in part by ESG considerations, is targeted at fund members who have been priced out of inner-city suburbs where they work. The accommodation is rented at a below-market rent.
BTR caters to a different clientele – high-income, young professionals who opt for the convenience of inner-city apartment living with all the bells and whistles. For that, tenants pay a premium to market rent.
Conal Newland, national director, operational capital markets, at Savills, told [i3] Insights that two things need to occur before Australian super capital will start to flow into BTR.
“One, they need to see more data on the operational side of the business. Two, they need scale,” he says.
To date, most BTR players have a modest-sized portfolio. Newland believes there will be opportunities for aggregation among some of the BTR groups over the next two to three years.
When that happens, BTR will likely become more attractive to super funds. For now, they hold a watching brief.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.