- During 2021 -2023 we were cautious on construction finance due to building challenges and had lower levels of new commitment than in the preceding five years. However, we still had a material level of loans to new projects and witnessed the pain of developers, as many projects were late by 6-12 months due to delayed building times.
- This month we have several borrowers with projects that have just reached practical completion, including 51 Albert Street in Auckland (hotel/residential) and 32 York Street in Sydney (office). Additionally, several other projects are nearing completion at the month’s end, including Melbourne Place Hotel and River Street in South Yarra (office).
- With $650 million of developments coming to completion and repayments expected via refinance and sale over the coming 6 months, we have been actively engaged in due diligence on new developments with a major focus on infrastructure and residential sectors.
- In the residential space, we are in advanced due diligence on our first loan in the emerging Build-to-Rent (BTR) sector after monitoring broader market acceptance of the product by institutional buyers and tenants.
The Build-to-Rent subsector in Australia is still in its infancy compared to the well-established Multifamily Home markets in the US and UK, having gained traction only in the last five years. Despite assessing numerous opportunities, we have adopted a cautious approach, given the market’s early stage and the need for broader acceptance of the concept. However, our interest in BTR development is growing as the sector evolves.
A significant housing deficit persists due to a mismatch between apartment supply and migration-driven demand, with national vacancy rates tight at 1.3% as of August 2024 (SQM Research). By 2027, Australia is expected to face a shortfall of 175,000 homes, primarily in the unit market, driving demand for BTR developments to help bridge the gap (Housing Australia).
BTR developments provide renters with stable, long-term housing options, often offering leases beyond the typical 12-month term, helping to address the affordability crisis as an alternative to home ownership. The BTR market in Australia is rapidly growing, with over 6,100 operational units by the end of 2023, 11,000 under construction, and a projected annual pipeline of 52,000 units between 2025 and 2029, valued at $39 billion (CBRE).
We have long awaited the introduction of government incentives to support the growth of the BTR subsector in Australia and assist with models stacking up. Gradual changes are being introduced, such as land tax discounts for BTR developments in Victoria and tax incentives designed to boost housing supply by encouraging investment. These include tax incentives for managed investment trusts (MITs) to attract foreign investment in the BTR sector.
We are currently conducting due diligence on our first mandated BTR project in inner-city Melbourne. As part of our diligence, we are exploring the process of lodging a subdivision plan to convert the project to BTS (Build-to-Sell) if required, providing an alternative exit strategy should market conditions for BTR deteriorate in Melbourne.
Given our extensive experience in financing residential construction and residual stock facilities, along with favourable macroeconomic conditions supporting BTS developments, the alternative BTR model enhances our appetite for deploying capital into the undersupplied living sector.
