Flip to build-to-rent projects good on many levels

Build-to-rent projects are becoming increasingly attractive to developers and investors as younger generations shift away from house ownership amid a national housing deficit.

Traditional developers are also finding it tougher to get their apartment projects up as interest rates rise, which is stalling pre-sales in overstocked markets. Some are switching to the newer build-to-rent format.

Development Finance Partners recently salvaged a project that was unable to meet its lenders’ pre-sales targets on a 50-apartment project in Brisbane’s Chermside.

The private investor approached DFP to look at ways to refinance the project. DFP took the project to their development management partners, Highgate Management, which specialises in distressed project workouts.

Highgate Management and DFP worked with the Sydney-based co-­living rental specialist BNTO to completely redesign the project to yield 138 BTR apartments. Changing the project from build-to-sell to BTR resulted in the development’s approval and a new financial backer.

DFP director Matt Royal said BTR was a great way for second and third tier developers to capitalise on the demand while building equity in their property portfolios, without having to meet stringent pre-sales requirements placed on them by lenders.

“Under the new BTR configuration – targeting young, professional tenants – the project will deliver substantially higher returns than the 50-apartments previously approved and most importantly, as a BTR, it now stacks up as financially viable for its investors,” he said.

While institutional capital from both international and domestic investors is starting to flow into Australia’s BTR sector, Mr Royal said it is only a matter of time before smaller players enter the market.

“I believe the time is right given there is huge demand for rental properties in almost every metropolitan and regional centre throughout the country,” he said.

In a similar vein, Melbourne-based BTR business Local is working with Blue Earth Group on a tower in South Melbourne. Local will acquire 245 Normanby Rd in a turnkey deal and the pair will develop a $280m tower.

Listed developer Mirvac is a sector leader. It opened its first BTR property, Liv Indigo, two years ago at Sydney Olympic Park, and has projects in the pipeline across Sydney, Brisbane and Melbourne. Since opening Liv Indigo, Mirvac’s BTR general manager Angela Buckley said the company had been overwhelmed by the level of inquiry received.

“Obviously the rental market right now is very, very strong, and I think for renters, they’re definitely seeking out alternative opportunities and build-to-rent is one of those,” she said. “One of our biggest learnings is that the reach of where people have relocated to has been far more significant than we expected.”

Security of tenure is one of the biggest reasons people have decided to move into Liv apartments, Ms Buckley said. “They have a choice around how long they want to live with us for … we do give people the option, it’s really their choice as to how long they would like their lease to be,” she said.

Over the past 12 months, Liv Indigo has been leased to between 95 and 98 per cent, which Ms Buckley believes to be a strong representation of interest in the BTR concept. Mirvac has almost completed its second project, Liv Munro, opposite Melbourne’s Queen Victoria Market.

Amid the rising construction costs and a growing rental market, mid-size developers and builders are also entering the BTR market to avoid having to shelve projects. DFP’s Mr Royal said when a project is complete, it can be sold in one line or can be retained in whole or in part as a rental pool, creating cash flow and adding to the balance sheet to give the developer greater borrowing strength.