The Australian BTR sector set to outperform

The Australian build-to-rent sector (BTR) has the potential to outperform over the next decade, with commercial investors needing to look for opportunities outside traditional buy-and-hold strategies.

According to asset manager DWS, strong rental growth across Australia, driven by a severe shortage of rental properties, will see the BTR sector continue to expand.

“Combining our house view rental growth and yield forecasts over a 10-year time horizon from 2024, we believe that the residential sector (Australia BTR) will be among the top performers, with high, unlevered property-level total returns expectations over the next few years,” DWS said.

DWS said individual strata-titled landlords owned most residential assets, with the level of institutionalisation still nascent. 

“The BTR housing model has, in recent years, gained traction among institutional investors looking for first-mover opportunities,” they said.

“The fundamental drivers for rental housing remain intact.”

DWS said the key challenge in the current investment environment is that straightforward buy-and-hold core strategies may not meet the steeper returns hurdle that institutional investors increasingly seek, even among core-focused investors. 

“Faced with higher financing costs and risk-free rates, we have seen investors turn towards to value-added deals offering at least double-digit returns,” they said.

Across the Asia Pacific, DWS said high-interest rates continued to hamper real estate investment volumes, with asset repricing trends more advanced compared to six months ago. 

“We expect the price correction trend to continue, with cap rates hitting a peak this year before easing in 2025 as monetary conditions ease,” they said.

Following rapid interest rate hikes since 2022, traditional lenders have been under increased pressure to tighten lending conditions and retreat from new loan approvals, DWS said.

They said that this had opened a window of opportunity for alternative lenders to enter the debt markets and access more attractive risk-adjusted returns relative to equity in the coming years, especially in Australia.

In the Australian office market, DWS said vacancy remained elevated in the 12 to 14 per cent range, although incentives appeared to be near a peak. 

Meanwhile, prime logistics assets have benefited from strong rental performance, particularly in Australia where there is tight supply and a lack of available modern warehouse space that has driven vacancy rates below 2 per cent. 

Structural post-Covid tailwinds of rising e-commerce retailing trends remain intact, with resilient occupier demand from third-party logistics providers and omnichannel retailers have been supporting take-up and occupancy levels, particularly in locations with good transport links and low availability of prime assets.

For the retail sector, slowing growth in discretionary spending in Australia continued to weigh on leasing with incentives remaining at record high levels.

While it’s estimated that hotel occupancy rates during the first eight months of 2023 are around 90- 95 per cent of 2019 levels, with Sydney believed to have grown by 11 to 18 per cent in 2023.

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