AFL stadium deal could spark build-to-rent trend

Grollo will develop a major site at Marvel Stadium.
Grollo will develop a major site at Marvel Stadium.

It’s taken a property deal with the AFL on a plot of land next to Melbourne’s Marvel Stadium to really spark the public imagination about the promise of the country’s build-to-rent sector.

The transaction revealed this week means footy fans could soon be living on the stadium’s doorstep after developer Grocon picked up the site next to the venue in a $67 million deal.

The company, led by Melbourne property scion Daniel Grollo, has quietly emerged as the leader in the new property arena and it has bought up sites around the country to build apartment blocks to rent out units rather than sell them off.

It has two more sites in Melbourne and another two in Sydney under its wing after winning the backing of Singapore’s sovereign wealth fund in the area. But it is keeping its plans under wraps for now.

The AFL deal is just a marker of the wave of new-style towers being built with the projects now being pitched as one of the few areas of property not being torn apart by the coronavirus crisis.

The notion of build-to-rent has been kicked around for several years by developers but they were often bogged down by complaints about investment and tax structures. Now many are simply getting on with it, with Mirvac at the vanguard of listed companies getting into the area.

“While the fundamentals driving demand for build-to-rent have not changed, the uncertainty caused by COVID-19 is likely to make build-to-rent an increasingly attractive option,” Mirvac’s general manager for build to rent Adam Hirst says.

The company is already building in Sydney, with Melbourne to follow, as it aims to get to 5000 units that it says offer long-term renting which make them akin to ownership.

“When it opens in September, Mirvac’s first project, LIV Indigo at Sydney Olympic Park, will offer residents both the flexibility of renting and the certainty and security traditionally associated with home ownership,” Hirst says. The projects also fit the official demand for “shovel-ready” work that won’t be tied up for years trying to get finance.

“At a time when Australia is looking to construction to revive the economy, build-to-rent projects will turbocharge our recovery as they don’t require pre-sales and are therefore truly shovel ready,” Hirst says.

But he is still hopeful that taxes and regulations will become more favourable for the sector.

“While this has been acknowledged by government at multiple levels, we will need meaningful policy change if the sector is to scale up to its full potential and become a true third housing option in Australia,” he says.

Some players, including global developer Lendlease, have been more active overseas and still see hurdles to the local sector.

Ashurst partner Anton Harris says there is still good appetite for BTR despite COVID-19.

“Build-to-rent projects that are in development have shown no sign of slowing and are still following pre-COVID-19 timelines … some of our clients have projects that will shortly become operational with leases having been recently entered into,” he says.

The pandemic appears to be putting it on the map for more developers. “COVID-19 may in fact see a swing in investment to build-to-rent with apartment pre-sales becoming difficult,” Mr Harris said. There could also be a switch on the demand side with potential homebuyers more interested in renting.

Melbourne CBD build to rent apartments

Melbourne’s CBD.

“It may be the case that a general lack of confidence in the economy leads prospective homeowners to opt for rentals despite the low interest rate environment,” he said.

But the law firm partner also identified ongoing regulatory hurdles to the sector, which could impinge on the area’s growth in major cities.

“It will also be interesting to see whether greater rental demand and population growth in Melbourne and Sydney will encourage investor appetite, but without structural change to support investment, there will continue to be challenges, in particular for foreign investors,” Harris says.

The growth of the area is a real seachange in the way Australians traditionally do residential property. The sector is dominated by mum-and-dad investors taking advantage of negative gearing and superannuation rules. They rent short term to people who normally go on to buy elsewhere.

The sector has some doubters. Luxury apartment tycoon Tim Gurner recently warned that drawing large companies into the area could hurt smaller investors. But the impact of major players, including US giants Blackstone and Greystar, is yet to be tested as their projects are yet to launch despite their initial sites being selected. There is also a wide range of products being developed in major cities, making it hard to generalise.

Canada’s Oxford Properties Group is getting its first development under way in Sydney’s central business district, lodging plans for a luxury 39-storey build-to-rent residential building above the new Sydney Metro Pitt Street station.

At the more affordable end, the NSW government is advancing plans for a Communities Plus build-to-rent project in inner-city Redfern and its plans will be considered by Sydney council next week. Private sector operators will come in to fund, design, develop and manage buildings rising up to 16 storeys under a long-term lease. Three developers have been short-listed since early 2019. But other projects are already under way. And the big end of town is backing them.

Morgan Stanley analysts Lauren Berry and Simon Chan visited Mirvac’s 350-unit project in Sydney Olympic Park. They left impressed with the apartments and amenities but a little concerned about whether it would stack up.

Rents are 10-15% above the surrounding market, and they say Mirvac may only just achieve its 4.5%-plus yield on capital target.

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