MORGAN STANLEY AUSTRALIA SUMMIT: Inexorably rising rents across Australian capital cities will help make build-to-rent projects more attractive to offshore as well as domestic investors, according to the managing director of Charter Hall.
David Harrison told the Morgan Stanley Australia Summit that overseas investors were the most seasoned when it came to what they refer to as “multi-family” property and were now testing the waters in the Australian market following the federal government’s recent halving of the 15 per cent withholding tax they are subject to.
“A lot of these global investors have had multifamily housing in their portfolios for 15 years, and it has performed. So they’re naturally going to be more confident to go there.
But ironically, the super funds have got a 15 per cent tax advantage because they don’t have to pay withholding tax which the foreign investors do,” Harrison said.
Brookfield applied for a development application for its first Australian BTR project at Portside Wharf in Brisbane.
The Canadian asset manager’s head of Australian real estate, Sophie Fallman, said investors were looking to BTR to diversify their portfolios away from office and industrial. “I think interest in multi-family housing is very much in line with the growing interest for alternative real estate in Australia.
“The huge pressures on Australian housing, are not too dissimilar to conditions in many parts of the developed world; [and] are creating much more demand for residential rental product,” she said.
However, Harrison said BTR was only part of the solution when it comes to the housing supply and affordability crisis. “There’s obviously a lot of politics involved.
The Labour government is pushing hard for super funds to invest in social and affordable housing. The reality is, we’ve got a bigger problem in the mass market, a rental housing crisis, and reform is needed at that level.
“But I think there are going to be solutions at the affordable level for essential workers. There are a lot of people getting crunched on 20-30 per cent rent increases, and there is a lot of talk from governments around rent control,” he added, referring to Queensland which has introduced caps on the number of rental increases that landlords are permitted to impose on their tenants.
Government intervention in the rental market was now more of a threat, Harrison continued. “The risk is that [governments] go to the next level and cap rents. “So a lot of things are going to change before there is a stabilised view of [the potential returns from] multi-family housing.”
Construction outlook dents confidence
Fallman noted that it was a “tough construction environment”, with the highest cost escalation in 40 years and acute labour shortages.
“We are starting to see a softening of some cost inputs but there is a long way to go,” she said.
Harrison said there was pressure on fixed-price contracts, but they were still Charter Hall’s preferred options because of the cost escalation that occurs on a variable price contract between the beginning and end of the construction period.”
Higher interest rates are exerting downwards pressure on capitalisation rates in all sectors, as macroeconomic theory dictates.
Harrison estimated that capitalisation rates in the office sector could fall by as much as three to six per cent. “The office sector is as bad as I’ve seen it. There is a bifurcation emerging between old and new assets. But interestingly, occupancy levels are holding up in the CBDs – in Sydney it is up around 97 per cent.”
Fallman agreed with the bifurcation trend, painting it as a “tale of two property classes – the best assets and everything else”. A property’s ESG credentials were fundamental to ensuring they would be in demand by tenants, and maintain strong valuations, she added.