Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 334

How ‘residential for rent’ may change Australian housing

In many global cities, housing demand has typically outstripped supply over the past decade with strong housing price inflation affecting affordability. There are marked changes occurring within the global housing markets with a defined long-term trend from home ownership to rental accommodation.

The maturity of the Residential for Rent (RfR) market around the world varies greatly from the more established countries, such as in the United States, Germany, France, Finland and the Netherlands, to the more immature markets, such as Canada, United Kingdom and Australia. Demographic trends and the evolution of cities are playing an important role in the growth of RfR around the world.

Declining rates of home ownership

Housing affordability has become an issue for younger generations and the aspiration to own a home has waned as priorities have shifted to lifestyle and experiences. This trend is evident in the US where home ownership peaked at 69.2% in 2004 and has fallen to 64.1% in Q2 2019.

"Technology is also advancing rapidly in today’s society, affecting how we live, work and play. This is particularly the case for younger generations who have more readily adopted new technologies. As a result, younger generation’s behaviours and values are now vastly different to those of previous generations. Using Australia as an example, the prime renting cohort are the Millennials (born 1981-1996) who now represent 44% of the Australian work force."
Source: AlphaBeta – How millennials manage money.

Outside of the broader issues such as a shortage of housing in many countries, younger generations are adopting changing lifestyles and preferences which are driving increasing demand for rental properties. This defined social trend is changing the housing landscape within the major cities. The percentage of rental properties compared with owned residential property has been increasing and is expected to accelerate into the future.

Millennials have different life preferences, adopting a ‘You Only Live Once’ (YOLO) attitude to living, which has also influenced spending habits with a focus on experiences over goods.

They are also savvy spenders who are delaying home ownership. Australian home ownership rates have fallen to 66% in 2018 from 71% in the 1960’s. Housing affordability is another major factor, with housing costing approximately 8 times household income compared to 5 times for baby boomers in 1970. The next cohort behind Millennials are Gen Z (born 1996 -2014) who have an even greater adoption of technology and social media and are more financially savvy and debt averse, having grown up through the GFC. They are less brand conscious and more price sensitive.

These social trends and changing behaviours are a major factor in the material changes that we expect in the housing market in Australia. Purpose-built RfR buildings will grow rapidly as experienced in other countries.

The quality of Residential for Rent

Another factor driving the greater propensity to rent is the quality of the amenities. This is particularly evident as the RfR markets mature. The evolution from Government-owned social housing and the renting of individual apartments from 'mum and dad' investors to established, purpose-built rental apartments with high amenity and services is well in train. The old adage, 'build it and they will come', is particularly relevant as RfR markets mature.

Modern RfR buildings contain greater renter amenity than typical standard residential buildings. They have gyms, are pet friendly, have well-amenitised community facilities, parcel delivery, with all services provided by on-site staff.

The standout differences to traditional residential offerings are the services offered through technological innovation. Modern RfR buildings under institutional ownership are typically highly connected, with services offered through the building’s app. The resident’s phone can run everything from accessing the building and the rental apartment, signing the lease, paying rent, requesting maintenance, booking a car pool and interacting with other tenants using social media services.

The buildings tend to be located in close proximity to transport nodes and this feature combining with the car-pooling services, could significantly reduce car ownership, offering extra cost benefits. Other services likely to be included are laundry and cleaning services, child care, removalists and electric bike hire.

The total RfR product offering is a game changer for the renting cohort in Australia. No longer will renters have to deal with real estate agents or individual ‘Mum and Dad’ investors. With extra amenities and services at the touch of button, the rental experience in Australia will be transformed.

The current Australian rental market

The Australian residential rental market is vast with 2.3 million households representing 32% of all households. It is also highly fragmented and non-institutionalised, in contrast to other countries such as the United States. Individual investors own the majority of rental properties in Australia, with 20% of Australians owning an investment property and of those, 71% own a single investment property. Even with the fragmented ownership, the rental market has remained remarkably stable, with national vacancy rates ranging between 2%-4% over the past 30 years. The current national vacancy rate sits at a low 2.5%.

Australia is likely to follow global demographic trends, with the average household size expected to shrink below the current 2.7 person per household, while average dwelling sizes are expected to fall below the current 3.2 beds per household. We believe the home ownership rate will continue to fall, creating excess demand for more rental accommodation. 

Residential for Rent as an asset class

From a comparative total return perspective and on a risk-adjusted basis, the investment case is compelling. RfR cash flows have proved stable through economic cycles, with occupancy levels typically remaining high through periods of economic slowdowns. Rents are correlated to employment and wages growth, demographic trends and supply levels.

During economic slowdowns, new development slows and with the lower job security, renters are typically hesitant to purchase a residence and will likely continue renting. US apartment revenues have grown on average by +4.0% p.a since 2010, with an average increase of 660,000 new renter households per annum during this time.

There are some risks, particularly with regard to regulatory risk. Given the social nature of housing, regulators and governments can act irrationally. While rare, governments responding to popular public opinion can overregulate rental markets through policies such as rent controls. This may result in a shortage of housing, poor quality rental stock, lower jobs growth, higher carbon emissions and a greater reliance on taxpayers to fund affordable housing.

The Australian market is in its infancy, with just 10 mainstream RfR developments that have been publicly announced, or are under development, totalling approximately 3,500 units.

The major developers are the Mirvac Group, Grocon, Salta Properties, Sentinel Property Group, Gurner and Meriton. Developments are typically higher density multi-unit buildings in inner city and middle suburbs well served by public transport.

In Australia, RfR is typically being developed to a 4.5% - 5.0% stabilised yield, depending on the location, but land tax and council rates contribute approximately 30%-40% to total expenses. Also, GST treatment disadvantages RfR, as there is no GST credit on development and operational inputs. This is in contrast to commercial buildings (such as student accommodation) and residential developments where GST inputs can be claimed.

More mature RfR markets have demonstrated stable growing cash flows through a cycle and we expect Australia will be no different. Over time as the market becomes more established, we expect RfR allocations in superannuation funds to become standard.

The future looks strong

With urbanisation driving the population growth of major global cities, demographic and social changes, city housing markets are a going through a defined change. Rapid advancements in technology are influencing lifestyle changes with society’s values now very different from the past. This has led to accelerating demand for rental housing, with institutionally-owned modern RfR buildings being the clear winner.

The supply of purpose-built rental accommodation has failed to keep up with vacancy rates that are low in most global cities. From an institutional investment perspective, the returns are competitive and the investment case is compelling. While Australia has been a laggard, mainly due to unintended taxation policies, the landscape is now changing, which is setting the RfR sector up for rapid growth. 

 

Stephen Hayes is Head of Global Property Securities at First Sentier Investors (Australia), previously Colonial First State Global Asset Management and a sponsor of Firstlinks. This material contains general information only. It is not intended to provide you with financial product advice and does not take into account your objectives, financial situation or needs

Disclosure: At the time of publishing, the Global Listed Property team of First Sentier Investors held investments related to RfR in Equity Residential, Kojamo Oyi and Mirvac Group in a range of the portfolios it manages.

For more articles and papers from First Sentier Investors and CFSGAM, please click here.

 

RELATED ARTICLES

Labor policies and the impact on housing

What real estate agents don't tell you

banner

Most viewed in recent weeks

Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Welcome to Firstlinks Edition 433 with weekend update

There’s this story about a group of US Air Force generals in World War II who try to figure out ways to protect fighter bombers (and their crew) by examining the location of bullet holes on returning planes. Mapping the location of these holes, the generals quickly come to the conclusion that the areas with the most holes should be prioritised for additional armour.

  • 11 November 2021

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Welcome to Firstlinks Edition 431 with weekend update

House prices have risen at the fastest pace for 33 years, but what actually happened in 1988, and why is 2021 different? Here's a clue: the stockmarket crashed 50% between September and November 1987. Looking ahead, where did house prices head in the following years, 1989 to 1991?

  • 28 October 2021

Why has Australia slipped down the global super ranks?

Australia appears to be slipping from the pantheon of global superstar pension systems, with a recent report placing us sixth. A review of an earlier report, which had Australia in bronze position, points to some reasons why, and what might need to happen to regain our former glory.

Latest Updates

Investment strategies

Are these the four most-costly words in investing?

A surprisingly high percentage of respondents believe 'This Time is Different'. They may be in for a tough time if history repeats as we have seen plenty of asset bubbles before. Do we have new rules for investing?

Investment strategies

100 tips from our readers for new investors

From the hundreds of survey responses, here is a selection of 100 tips, with others to come next week. There are consistent and new themes based on decades of experience making mistakes and enjoying successes.

Strategy

What should the next generation's Australia look like?

An unwanted fiscal drain will fall on generations of Australians who have seen their incomes and wealth stagnate, having missed the property boom and entered the workforce during a period of flatlining real wages.

Shares

Bank results scorecard and the gold star awards

The forecasts were wrong. In COVID, banks were expected to face falling house prices, high unemployment and a lending downturn. In the recovery, which banks are awarded gold stars based on the better performance?

Exchange traded products

In the beginning, there were LICs. Where are they now?

While the competing structure, ETFs, has increased in size far quicker in recent years, LICs remain an important part of the listed trust sector. There are differences between Traditional and Trading LICs.

Shares

Should you bank on the Westpac buy-back?

Westpac has sent out details of its buy-back and readers have asked for an explanation. It is not beneficial for all investors and whether this one works for some depends on where the bank sets the final price.

Investment strategies

Understanding the benefits of rebalancing

Whether they know it or not, most investors use of version of a Strategic Asset Allocation (SAA) to create an efficient portfolio mix of different asset classes, but the benefits of rebalancing are often overlooked.

Shares

Six stocks positioned well for a solid but volatile recovery

The rotation to economic recovery favouring value stocks continues but risks loom on the horizon. What lessons can be drawn from reporting season and what are the trends as inflation appears in parts of business?

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.