A global view of Build to Rent (BtR) – comparing Australia, New Zealand and the UK

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A global view of Build to Rent (BtR) – comparing Australia, New Zealand and the UK

A global view of Build to Rent (BtR) – comparing Australia, New Zealand and the UK

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May 16, 2024

The Build to Rent (BtR) sector is rapidly transforming urban living across the globe, offering a unique approach to residential development and housing. As interest and investment in the sector grows in Australia and New Zealand, we compare the early chapters of BtR projects in these countries with the UK's more mature sector and note some of the factors influencing the sector across the globe.

How mature is the sector?

The BtR sector in the UK is well established and growing rapidly. By the end of 2023, the total number of completed units had reached a significant milestone of 100,000, with a further 54,000 under construction and 112,000 in the planning pipeline.¹The sector has also continued to expand geographically – during 2023, 38 new local authorities added BtR schemes to their planning pipeline, giving a total of 208.²

By contrast, the sector is very much in its infancy in both Australia and New Zealand. In New Zealand, as at December 2023, there were 1,307 units completed, 850 under construction and 3,395 units in the pipeline nationwide, with the majority of those units in Auckland.³In Australia, as at January 2024, 5,398 units had been completed with another 11,582 (more than 31 projects) under construction and 21,627 units (across 54 projects) in the planning pipeline⁴with an assumed completion value in the region of approximately A$39 billion.

What are some headwinds facing the market?

As with any real estate asset, there are potential disadvantages to investing in the BtR sector. These include the potential for high and/or unpredictable maintenance and management costs. Although these costs are typically passed on to the tenants, they can act as a deterrent and therefore affect profitability. The sector is also vulnerable to market fluctuations affecting rental income and property values.

Globally, new BtR developments face the same challenges as the wider construction sector – in recent years, these have included increasing labour costs, skills shortages and construction cost inflation.

Both New Zealand and Australia have historically contended with challenging factors in relation to BtR, including regulatory and planning requirements in New Zealand, and detrimental tax and planning constraints in Australia.

In New Zealand, the Overseas Investment Act (OIA) is also seen as a barrier to foreign investment as the Act requires non-New Zealand domiciled investors to undergo a lengthy and expensive consenting process before investing in any residential land. While OIA changes that are currently proposed by the government are a positive step towards increasing offshore investment in BtR, there are a number of other barriers to entry to large-scale investment in the sector. The Property Council NZ has identified that, in addition to OIA changes, changes to the rules around interest deductibility and depreciation, as well as changes to the Residential Tenancies Act, are also required to allow large-scale BtR investment to grow in New Zealand.⁵

A similar requirement also exists in Australia where foreign investment approval must be sought from the Foreign Investment Review Board (FIRB). The task of the FIRB is to examine significant foreign investment applications that fall within the scope of Australia's foreign investment policy and the Foreign Acquisitions and Takeovers Act, and to make recommendations to the Treasurer, on behalf of the Australian government, on those proposals. The FIRB acts to ensure foreign investment proposals are consistent with Australia's national interest and the Australian government reviews major foreign investment proposals on a case-by-case basis.

The Australian government has recently made positive commitments to foreign investment in Australia – on 1 May 2024, the Hon Dr Jim Chalmers MP (Treasurer) announced "we [the government] are overhauling and reforming, strengthening and streamlining, the foreign investment framework" with the intention of strengthening the process to minimise risk and maximise the right kind of investment. In particular, investment that is in Australia's national interest will be streamlined and more transparent. Chalmers also stated that "there will be financial incentives, regulatory changes and other enablers".⁶The risk-based approach will focus scrutiny on high-risk investments to protect the national interest, while streamlining low-risk investments to bring in the capital Australia needs quickly. The Treasurer announced: "Streamlining means investors who we already know, who are making investments that don't raise any sensitivities, and who have a good compliance record, get decisions faster."⁷

One example of the proposed financial incentives specifically in relation to BtR projects is the reduction in FIRB application fees. For example, on a A$40 million acquisition of land for BtR, the FIRB fee will reduce from approximately A$1.1 million to A$14,000.

The UK also faces headwinds. Despite record numbers of completed BtR homes in the UK, 12-month rolling completions outnumbered rolling starts in the statistics in the final quarter of 2023 for the first time since 2020, and this trend continued into the first quarter of 2024.⁸Additionally, the number of homes at detailed application stage is down 31% compared to Q1 2023, meaning new sites are needed to ensure long-term delivery of new homes.

What are the positive drivers of the market?

BtR offers a number of advantages to investors. There are economies of scale in funding and managing multiple units compared to the traditional single occupancy private rental, as well as predictable rental income for stable cash flow and the potential for long-term capital gains. Additionally, BtR schemes are typically run by professional property managers, meaning little to no ongoing involvement is required from the owner-investor in terms of maintenance and dealings with tenants.

The sector is also bolstered by strong rental demand. There is a significant shortage of rental properties across all three markets, particularly in major metropolitan areas. A combination of demographic and economic trends is also changing attitudes towards home ownership and apartment living for many people, making the BtR sector a realistic alternative to home ownership, with the benefit of long-term living arrangements without the high cost of home ownership reducing barriers to entry for much of the market.

BtR can offer renters conveniently located homes with few maintenance obligations and excellent building facilities. It also provides more stability to tenants than conventional residential rental agreements, with longer rental terms and no risk of the landlord selling or repurposing the property. BtR's attraction for tenants is reflected in recent UK statistics – Savills' latest research shows that tenants are willing to move almost twice as far for a BtR property when compared to those in the wider private rental sector.⁹

As noted above, both Australia and New Zealand have recently tabled legislative changes with the aim of increasing investment in the BtR sector. The Australian government has released for consultation the "Treasury Laws Amendment Bill 2024: Build to rent developments", together with explanatory materials and a policy fact sheet – the objective of the proposed legislative changes is to stimulate Australia's BtR sector and address housing supply challenges through the offering of tax concessions for construction and investment.

It is considered that the proposed Australian tax changes will make a significant impact on incentivising construction of new BtR developments.

In New Zealand, the government has agreed to make changes to the OIA to better support BtR development by creating a streamlined consent process. While formal legislative change has not yet been secured, the associate finance ministers have recently issued a formal ministerial directive letter to the Overseas Investment Office, instructing it to consider investment in BtR – including in existing developments – as a benefit to New Zealand "unless there is compelling evidence to the contrary".

In the UK, increasing demand is reflected in the sector expanding beyond high-end metropolitan developments, into more family focused units such as townhouses. We expect the UK's BtR sector to become more like the US "multi-family" sector, which comprises a diverse range of property styles and locations.

What opportunities are available in the market?

In the UK, BtR continues to expand and we are seeing increasing opportunities for successful BtR schemes outside the major centres.

For Australia and New Zealand, BtR represents an exciting opportunity for investors to create much-needed rental homes while capitalising on lessons learned in the UK and the US, where the markets are much more mature.

Both New Zealand and Australia are small markets in comparison with the UK (and the US). This can have both positive and negative implications – smaller markets can be nimbler, but do not benefit from the efficiencies of scale of larger markets. The geographical location is, similarly, both a challenge and a benefit – the distance from Northern Hemisphere markets can be an issue, particularly for supply of materials to projects, but both countries are remote from geopolitical "hotspots".

Dentons' perspective for BtR investors

With any BtR development, the property fundamentals are key, particularly location. Ultimately, the property needs to be somewhere that tenants will want to live (and, for many developments, be happy to pay a premium for).
Although many BtR developments have a focus on urban locations and upmarket building facilities, BtR is not just for high-earning young professionals living in major cities – there are increasing opportunities for different types of developments, such as townhouses and medium-density developments. We are seeing increasing investment in alternative BtR developments in the UK and expect the sector will eventually catch up with the US model, with Australia and New Zealand to follow suit in the long term.
ESG and "green building" considerations are becoming increasingly important across all sectors but especially so in BtR – they can be a major selling point to tenants.

Dentons' real estate practice offers proactive and commercial solutions, leveraging specialist industry knowledge in the BtR sector across multiple jurisdictions. We advise a diverse client base, including funders, developers, investors, occupiers, operators, and insurers, operating globally.