Macquarie on reinventing build-to-rent

This article is sponsored by Macquarie Asset Management

The UK and Australia are playing catch-up with the US in the world of purpose-built, professionally-managed rental accommodation. From a near standing start just a few years ago, the build-to-rent (BTR) sector in the two countries has continued to grow.

BTR developments have gone up in prime locations across Melbourne, Manchester, Sydney, Birmingham, Edinburgh and London. A growing market offers growing opportunities, both to continue to offer premium rental apartments but also to cater to a broader customer base.

Macquarie Asset Management has worked with experienced developers to form Local in Australia and Goodstone Living in the UK to create offerings that cater to a broader customer base that has found it increasingly difficult to get onto the property ladder. Macquarie Asset Management managing director Paul Checchin and senior vice-president James Bechely-Crundall explain why the BTR sector is well placed in Australia and the UK, how the two markets differ and where their model fits into this increasingly competitive market.

How has the housing market changed over the last year?

James Bechely-Crundall: The story in the UK has been the continuation of the well-documented narrative of stretched housing affordability. This has been around for some time and will not be solved anytime soon.

House prices have outstripped wage growth for over a decade now. Prices are up 12 percent over the past 12 months and London median prices now represent more than 13.5 times average incomes. Combining this with tighter credit conditions for first home buyers and growing cost-of-living pressures has created more and higher barriers to home ownership, although unlike in Australia, rents held up pretty well during the pandemic.

Paul Checchin: Low interest rates have been a key driver of house price growth in Australia, and in the calendar year of 2021 house prices were up 22 percent Australia-wide, which is obviously very strong.

Even before the recent appreciation in house prices, house price growth has outstripped wage growth in Australia. In the 20 years to 2021, house prices in Australia have grown at 6 percent per annum, whereas wage growth has only been 3 percent. It has resulted in the same dynamic as in the UK, where affordability has deteriorated to now be at very stretched levels.

From a rent perspective, following the onset of covid in 2020, rents generally initially fell, but it did differ between markets. In the past six months rents have begun to grow quite strongly, coinciding with the reopening of borders and fading fear of covid lockdowns.

One of the key factors for that is that vacancy rates have declined quite substantially. In Sydney, for example, the vacancy rate is currently 1.6 percent, down from 3.4 percent 12 months ago. In Melbourne it is 1.9 percent versus 4.4 percent last year. What we are seeing is a flattening of house price growth and an acceleration of rental growth.

Does this mean there is a growing trend towards rental in the future?

PC: The shift to renting is not new and has been happening for the past two decades. The proportion of renters has been growing and we expect this will continue, taking into account unaffordable housing and demographic trends in Australia. Collectively these factors provide a strong tailwind for growth in the rental market.

It starts with population growth. Australia has one of the highest rates of population growth in any developed economy. There has also been an especially large increase in the key 20-34-year-old demographic over the past decade, who are the main renter cohort. This cohort is now tending to place greater emphasis on flexibility and convenience, and the idea of renting gives them a greater freedom in that respect.

JB-C: Similar to Australia, favorable demographic and lifestyle changes have been postponing home ownership over the past two decades. The average first time buyer in the UK is now 34 years old versus 26 in the late 1990s, which further emphasizes that more people are renting for longer.

What makes BTR the best way to respond to these trends?

PC: In Australia, the existing rental offering has generally delivered a poor experience to the renter. The supply of high-quality, purpose-built accommodation that offers security of tenure, well thought-out and purposefully designed amenity and living spaces and service that is desired by consumers has a strong case in Australia.

JB-C: In the UK the story is almost exactly the same, except that the quality of the existing housing supply is generally much worse and, simply, often not fit for purpose. This is not surprising once you consider that the UK has the oldest housing stock in Europe, with around 40 percent of it having been built before the end of World War Two.

The pandemic has been a trend accelerator for the global build-to-rent sector. It has become the catalyst for residents to demand more from the space where they live, work and relax. This fundamental demand shift has created an opportunity for BTR groups, like Goodstone Living and Local, to develop new residential homes that leverage the latest in design, amenity, customer experience and sustainable building.

PC: In BTR it is also easier to deliver positive ESG outcomes relative to traditional build-to-sell apartments. For example, investing in solar becomes viable, as the owner will benefit from reduced ongoing operating costs. It is similarly more feasible to invest in initiatives that deliver water and waste efficiencies.

In the specific case of Local, the platform will also deliver a positive social impact by providing specialized accommodation for people with disabilities, affordable housing for key workers and single women over the age of 55, a demographic which has been identified as particularly vulnerable to homelessness.

Is now the right time to enter the market?

JB-C: We think so. Customers are demanding more, and there is no shortage of them. What there is, however, is a severe lack of high quality, purpose-built rental homes.

To put it into context, the UK has 5.2 million private rental households, which is 19 percent of all households. On the supply side, there are fewer than 100,000 operational BTR units, which represents less than 2 percent market penetration. The sector is much more mature in the US, where market penetration is approximately 37 percent.

Our strategic approach to this sector has been to create and grow specialist developer/operator businesses to take advantage of this market displacement. We think this is the best way to play this early-stage growth market.

PC: In Australia the sector is still in its infancy but we believe it will institutionalize. We invested in a specialist BTR developer and operator – Local – founded by industry veterans Dan McLennan and Matt Berg, who have a lot of experience in the BTR sector in Australia.

Local is differentiated in that it is targeting a broader range of customers in a broader number of target markets than most of the other operators. This means that rather than focusing on the exclusive and premium end of the market, Local will deliver a very high-quality product catering to renters from diverse communities comprising all age groups and backgrounds. Ultimately this means that the addressable market is large, catering to the whole spectrum of the growing renter population.

JB-C: We recently established Goodstone Living, a specialist real estate platform focused on the UK’s build-to-rent sector. Similar to Local, our investment is partnering with two developers, Darryl Flay and Martin Bellinger, 35-year veterans of the residential sector.

The business has been set up to create a better way to rent. This means designing, delivering and operating the next generation of rental communities designed around three core principles: better homes; bigger, better spaces; and better, simpler service.

Goodstone Living takes a highly analytical approach to its building locations and amenity offering, while also prioritizing customer wellbeing through enhanced access to open and green spaces. The team is currently delivering these next generation schemes across two sites – Camp Hill Gardens in Digbeth, Birmingham, and Skyliner in Leith, Edinburgh. Both are excellent projects and the business has a deep pipeline of development opportunities.

Additionally, Goodstone Living is focused on delivering its private units for long-term rental at an accessible price point. This means that at least half of its units are accessible to at least half the local community – providing its customers with a combination of the flexibility of renting and the certainty of homeownership.

What does the future hold for BTR?

PC: BTR is an exciting opportunity in Australia. We think the proposition for the consumer is compelling and superior to existing rental options. If you look at the US, multifamily accommodation accounts for about 11 percent of the total housing market. In Australia it is not far off zero, so if we transition to just 1 percent of housing stock to BTR it is a A$90 billion ($62 billion; €60 billion) opportunity.

JB-C: The UK market is still early stage and has a very bright future. The growth of this sector in the US is a useful gauge of scale and therefore potential; applying the US penetration rate to the UK implies a market for a further 2 million purpose-built and professionally managed rental homes. This has very much crafted our approach in focusing on earlier stage markets that exhibit strong underlying fundamentals.

Has working from home had an effect on the BTR market?

JB-C: Yes, certainly. Today’s renter is demanding more flexibility from their home and the existing housing stock isn’t conducive to home working. This provides an opportunity for new purpose-built rental homes that incorporate workspaces within the building to align with customer behavior.

PC: Working from home has certainly made people think more about what they want from their space. Renovation activity in Australia is high, with people seeking to enhance comfort and wellbeing in their homes whilst often also accommodating the ability to work remotely effectively.