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Industry Interrupted: Build-to-Rent. Embracing Market Disruptions.

Industry Interrupted: Build-to-Rent. Embracing Market Disruptions.

Nigel Hobart, Managing Principal, Rothelowman.

The future is near and architects need to assist the construction industry and regulators to overcome their resistance to change so that innovative housing models, such as build-to-rent and co-living, can succeed in Australia.

While successful build-to-rent projects have been happening in the USA for more than 30 years, their arrival in Australia has raised eyebrows among the local construction industry and regulatory bodies, which are not known for their propensity to innovate.

According to a recently published construction industry productivity report by the McKinsey Global Institute, the global construction industry barely increased productivity during the past 50 years, compared to the agriculture, manufacturing and retail sectors which recorded up to 1,500 per cent growth in productivity for the same period.

McKinsey valued that lack of opportunity for change within the construction industry at about US$1.6 trillion, which is a massive pent-up opportunity for industry disruption.

Build-to rent, whereby developers and investors build housing with the intent of retaining the building long-term and renting it out to semi-permanent residents, can be part of that disruption. It is relevant to our industry because it is new in Australia, it is gaining momentum, it will require adjustment and its implications on design are far reaching.

Solid understanding of the forces that make such models appealing is critical to the success of any designer attempting to facilitate change and broker non-standard design solutions with authorities.

The maturation of the social generation and subsequent normalisation of the sharing economy (via enterprises such as Uber and AirBnB), housing affordability issues, and widespread adoption of automation are the primary drivers making build-to-rent an appropriate solution for now.

When you think about the social generation, millennials are really the first demographic to have emerged with social media as the norm. Relationships on social media tend to be stylised and based outside reality. Surely there is a link between the experience of those who’ve been raised on relationships-lite and their desire to live in a more integrated way.

What they seek, perhaps more so than any previous generation, is authenticity and connection in the way they live and this has contributed to the rise of a sharing economy in which co-living and build-to-rent belong.

However, of the aforementioned forces, affordability is perhaps the most critical. That said, on its own, it has not been enough to force the change.  It is the combined amplification of these forces that has led to industry heavyweights pushing hard to make build-to-rent a mainstream offering.

Historically, residential property has produced net yields of around three per cent, which has been too low to attract institutional investment. However, with the weight of capital now causing yield compression on old-school investment grade assets to the point where shopping centres and office buildings return between five and seven per cent, the delta between residential and commercial is slimmer than it has ever been.

Add to that the propensity to quickly create large-scale build-to-rent portfolios as well as the universally accepted belief that residential property is lower risk than commercial, and the appeal of build-to-rent as a potential destination for institutional investment becomes apparent.

But it’s not all rainbows and butterflies, as two major barriers stand in the way. The first being tax structures (particularly land tax, which paints an ugly picture for intuitional investors) and the second, The Hon. Scott Morrison MP’s recent announcement that managed investment trusts should be forbidden from investing in residential property unless it is affordable housing.

These are massive constraints on the Australian superannuation industry in particular; an industry that represents the largest pool of capital in our nation by a country mile. The fact that this kind of funding is unavailable for investment in institutional scale build-to-rent represents a massive missed opportunity that if unaddressed, will help to sustain existing affordability issues. Private developer-investors building 50 apartments at a time will not be enough to propel the build-to-rent offering into the mainstream.

If allowed to flourish, the impact of market disruptors such as build-to-rent and co-living on the construction industry will be felt as profoundly as automation’s impact on the car manufacturing industry.

The transformation of personalised transport is a barometer for the rate of change upon us in modern western society. With some 35 separate manufacturers already advanced enough to have public road access for automated vehicle testing in the US state of California alone, it is clear that we are in the middle of a significant period of change, not at the beginning. Some say we may be even experiencing the change of an era, not just an era of change.

This is but one example of automation; another being The Boring Company and Virgin Hyperloop One’s testing of technologies that could reduce travel time from Sydney to Melbourne to a 53 minute personalised journey. This would have a direct correlation to lifting density along transport corridors by providing accessibility to suburbs that were once considered rural or inhabitable due to lack of infrastructure.

The cornerstone of all this change, including expected disruption to our local construction industry, is timing. Many household names in the Australian property industry are seriously invested in creating sustainable build-to-rent solutions and if we embrace the change now, we could go a long way to solving affordability issues within the next decade.

This scale and rate of change is unprecedented and is likely to be met with resistance. Expect resistance from banks and financial institutions, who coincidentally are some of the more conservative members of our business community. Expect resistance from town planning authorities, who presently dictate that co-living – a niche version of build-to-rent – must occur on land that is zoned as mixed use, despite such zoning accounting for only around one per cent of urban land in Australia.

Regardless of resistance, consumers have asked for new and innovative housing solutions and consumers generally win in the end.

Architects have a vital role to play in ensuring that future generations can live collectively and affordably in Australian cities. By harnessing their understanding of the confluence of driving forces that have led to the rise of build-to-rent and co-living models, architects can work creatively to broker innovative non-standard design solutions with authorities and encourage change.

For some time now, Rothelowman has been presenting progressive yet considered solutions to authorities and it is important that architecture and design practices such as our own continue to lead the way by encouraging the broader industry to participate and enjoy the ride.