Market Update H1 2021:
Operational residential real estate is an umbrella term describing the purpose-built rental housing sector including Student Accommodation (PBSA), Coliving, Build to Rent (BTR) and Senior Housing.
These subsectors are all designed to attract institutional investment and provide for a more stable rental sector. These assets are generally located in high amenity transport orientated locations, delivered in high density, held in single ownership and professionally managed.
In the latest Operational Capital Markets – Market Update H1 2021 report, Savills Australia provides an update on two of these operational residential real estate sectors, Student Accommodation and Build to Rent, which have seen an escalation of activity across Australia and New Zealand over the past 18 months.
Student Accommodation
With international student mobility particularly impacted by the pandemic, student accommodation has been the most affected of the operational residential asset classes in Australia.
According to Paul Savitz, Director, Operational Capital Markets at Savills Australia and author of Savills Operational Capital Markets – Market Update H1 2021 report, despite international borders being closed, demand for Australian Higher Education remains strong.
Currently international students can still enrol at Australian universities and study online as they wait for borders to reopen. Some institutions have offered discounted fees for online learning, while others are paying the full amount” he said.
At a national level, international student enrolments are only 11% below 2019 peak levels and remain above 2018 levels, so the disruption is not being felt equally across the sector.
Mr Savitz went on to say that although geopolitical tensions with China linger, which is consistent with key Higher Education competitors, enrolments from Chinese students remain high.
“Total Chinese enrolments fell to 128,535 in 2021, from 128,946 in 2020, and 135,428 in 2019. Up from 124,412 in 2018. International and Chinese enrolments have really held firm, sitting above 2018 levels” he said.
Support for the Return of International Students
In the May 2021 Federal Government Budget, assumptions detailed small pilot programmes for international students commencing in 2021. These pilots will provide a useful proof of concept for a larger scale return of international students.
According to Conal Newland, National Director, Operational Capital Markets at Savills Australia, South Australia is the first state to have its international student’s arrival plan supported by the Federal Government.
“This pilot plan will see 160 students at a time flow through a dedicated quarantine hub in Adelaide.
“A separate plan, tabled to Federal Government by the New South Wales (NSW) Treasurer to bring back students, is expected to be approved shortly as well.
“This pilot plan would enable up to 7,000 international students to be back in the state by year end” he said.
Committed PBSA Pipeline Reduces
The development of purpose-built student accommodation has strengthened in 2021, after a year of caution and delayed delivery.
According to Savills Australia data, off the back of evidence highlighting demand for an Australian tertiary education remaining strong, and support for the return of international students from State and Federal Government emerging, new PBSA schemes are being progressed through planning and development.
“PBSA remains a resilient asset class with investors taking a positive view on projects with completions from 2023” said Mr Newland.
Since 2010, 45,900 new purpose-built student accommodation beds have been delivered across Australia’s major markets. A further 15,240 beds are expected to be delivered in the three-year period between 2022 and end of 2024. Delivery will be scaled back over the next few years in comparison to the last three-year period 2019 to 2021 where 20,431 beds were, or are, scheduled to be completed.
Mr Savitz believes investors maintain a focus on high quality opportunities in Sydney and Melbourne, recently evidenced with Scape’s approval for more than 1,800 beds in five buildings close to University of New South Wales, scheduled to open from Semester Two 2023 onward.
“79% of all completions in 2020 and 2021, and 67% of all expected completions over the next three years focused on Sydney and Melbourne” he continued.
Student Accommodation Outlook
The Australian border remaining closed is a key risk to the sector, says Mr Savitz.
“Throughout the Covid-19 pandemic there has been a significant shift to remote working, and students have been forced into online learning, as either University campuses reduced the amount of face-to-face teaching or international students became locked out of their study nation.
“The Higher Education sector is continuing to adapt to a hybrid model of online and campus learning for a large proportion of courses as the pandemic continues.
“The flexibility of online learning for University students is not without its challenges as it is considered by some to be a poor substitute for on-campus tuition and the holistic student experience. Attending University is an opportunity for young adults often living out of the family home for the first time to establish professional connections and build their first adult networks, whilst meeting friends and mentors that become future contacts and colleagues. Students also mix with inspiring academic staff who are leading experts in their chosen field. These are experiences and skills that cannot be replicated through an online Higher Education experience”.
Mr Savitz believes that the growth of PBSA globally over the last 20 years has enriched young people’s opportunities to engage with other students and meet new people through this period.
“Experience based learning through on-campus education coupled with the added attractiveness of living in PBSA are two key demand drivers that we consider will help the Australian Higher Education and student accommodation sectors to rebound once the international border restrictions start to lift.
“Australia is also looking attractive to globally mobile students compared to key competitors based on the government’s handling of the pandemic and perceived quality of lifestyle post pandemic.
“Demand for student accommodation is likely to recover quickly as and when restrictions and borders are removed” he said.
Build to Rent
Australian Update
The past 18 months in Australia has proven to be a challenging year for nearly all real estate sectors.
Despite significant headwinds, investment into Build to Rent has performed remarkably well and this year has seen record levels of investment into the Australian sector.
Mr Savitz said this was led by Greystar securing its largest capital raising to date to support new projects in Australia. The $1.3bn raising for the Greystar Australia Build to Rent Venture I Fund backed by institutional investors Ivanhoé Cambridge and APG Asset Management is planned to deliver upwards of 5,000 dwellings.
Mr Savitz is seeing a growing demand pool as private rental was once a route to home ownership.
“Now it is a destination for many. Ownership has been delayed, become unattainable or been “traded off” for flexibility and being able to live in desirable locations.
“Most renters are younger households who are not yet ready or able to buy a home, which is being made harder through rising house prices across major cities such as Sydney, Melbourne and Auckland in New Zealand, and stagnating wage growth.
“With household incomes expected to remain subdued and stimulus winding down, it is likely affordability will continue to be a challenge.
The current pandemic has demonstrated that cities that offer affordable and high-quality living, will be more competitive, resilient, and attractive to people and businesses.”
According to Savills Australia data, Build to Rent housing has the potential to provide long lasting community benefits, with greater housing choice for tenants who would have access to high-quality dwellings, in a stable rental environment.
Increased rental security may also have wider social and economic benefits, with tenants better able to establish themselves in a community.
“Since Build to Rent schemes are typically institutionally backed and owner-operated, the building must perform as an asset for both the investors and residents” said Mr Newland.
“Investors, targeting long-term income streams, have a vested interest to ensure the wider environment they create is high-quality and well-integrated into the wider community. Tenants are more likely to stay
longer and pay a premium for this quality of experience”.
Development Pipeline
Australia’s Build to Rent stock now includes 3,000 completed units with a further 4,200 units under construction. The future pipeline currently stands at 21,450 units, including those in the preapplication
stage. This brings the total size of the sector to around 28,650 units once built. The pipeline is unbalanced, dominated by developments in Melbourne, where 65% of all pipelines is proposed.
Land availability and land value are the main factors supporting the growth of the nascent sector in Melbourne, over Sydney.
NZ Update
Around one third of New Zealand households now rent, up from one in ten in 2001 (Stats NZ), with the private sector catering to over 80% of renter households. By contrast, home ownership is currently at its lowest rate since 1951.
“Rental demand continues to strengthen. Factors underpinning the growth of the rental sector are well documented, with the market boosted by both housing and labour market conditions.
“Societal attitude changes towards factors such as relationships, families and career choices are also driving factors, resulting in smaller average household sizes.
“House price growth in New Zealand is amongst the highest in the world, significantly outstripping wage growth” said Mr Newland.
Outlook and Potential Value of the Build to Rent Sector
The total value of the Australian housing market is estimated to be $8.2 trillion, with around 10.65 million dwellings represented within that figure.
According to CoreLogic, this puts Australian residential property at around four times the size of Australian GDP, and around $1 trillion more than the combined value of the ASX, superannuation and commercial real estate stock.
“If Build to Rent housing grew to 1% of the total housing stock, roughly 110,000 dwellings, a similar size to Australia’s existing student accommodation stock count, that would loosely value the sector at over $85 billion at today’s values” said Mr Savitz.
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