Globally, shopping centres are embracing a mixed-use future, becoming the community hub for all aspects of modern living. Build-to-rent (BTR) can now be an attractive investment addition to a retail centre. Titanium Property Directors Tim Atkins and Paul Oates run through the trends, demographics, financial metrics and important planning and investment considerations for property owners thinking about BTR…
Shopping centres are increasingly evolving as places to not only stock up on everyday necessities, but also as a community hub for services, leisure and entertainment, a location to eat, drink and socialise; a trend that has been accelerated by remote and hybrid work. But those shopping centres are also in the hot-seat when it comes to capitalising on another trend – build-to-rent (BTR).
We have been creating master-planned communities for 30 years and BTR can now be considered as another part of the solution in many instances.
Driving the demand for rental accommodation in Australia is a white-hot property market that has locked out many of the younger generation from becoming homeowners. This has seen rental vacancy rates fall dramatically during the past three years.
Coupled with this already tight supply, the total number of apartment completions nationally has failed to recover after the boom conditions of 2015–17, when record numbers of apartments were constructed. According to a Knight Frank report, 2023 is likely to mark the low point for high-density completions, which are forecast to reach just over 6,000 units in the four largest markets. They further forecast that BTR could take up some of the slack and, if we follow the rapid UK growth in BTR, and the long-standing multi-family model in the US, we would have 55,000 completed BTR apartments by 2030.
According to EY, the BTR sector in Australia has the potential to grow significantly. Currently, it makes up about 0.2% of the value of the total Australian residential sector; if this were to increase in the longer-term to approximately 3% of the total value (which is below the UK and US), this could equate to a potential BTR sector worth close to $290 billion or the equivalent of about 350,000 apartments.
Australian demographics are also changing; during the past three decades the proportion of single-person households has grown at a far faster rate than larger household sizes. In fact, the number of single-person households has more than doubled, from 1.1 million to 2.4 million. This rise in single-person and dual-person households, who also tend to have higher disposable incomes, represents a prime opportunity for property owners.
It’s also important to bear in mind the target market for build-to-rent is environmentally conscious, and property owners must think about energy efficiency and sustainability in their developments, along with providing facilities to charge electric vehicles, and spaces for ride-share. Those prospective tenants also want to live somewhere that’s central to shopping, entertainment and transport, and will often use public transport or an Uber, an e-bike or walking, to get around. These are the typical characteristics of locations occupied by shopping centres.
How do the returns stack up?
As with all asset classes, returns for BTR vary dramatically depending on all the component parts of the feasibility and the operation of the asset. The markets in which BTR has worked tend to have lower land values, a high proportion of renters, flexibility in planning approvals and a young demographic.
The returns for BTR are relatively tight versus other asset classes with low initial yields and skinny development margins, partially offset by stronger than average rent growth, according to JP Morgan.
Long-term ownership and ‘through the cycle’ returns are attractive to many shopping centre owners, and this can play to a BTR solution.
When assessing a mixed-use investment, the site characteristics, zoning, demographics and existing residential market all have to be viable. For BTR to be part of the mixed-use solution, the owner’s investment criteria must also be well understood.
How does the ownership and operation of a shopping centre and BTR compare?
Shopping centre owners invest in real assets with a stable and growing rental income linked to population growth, customer market demand and inflation. The assets are attractive with diversity in rental revenue, continuous growth, security of income and low risk of downside capital erosion. These investment criteria are also applicable to the BTR investment decision.
The ongoing ownership of a shopping centre involves active management and a good operating model across multiple tenants, similar to BTR. Success is linked to controlling operating expenses, maintaining high occupancy levels, and reinvesting where the customer perceives value.
Shopping centres’ end customers and BTR customers have many of the same requirements, and so the key to success is maintaining market relevance.
In certain locations, BTR holds great promise for shopping centre property owners seeking to capitalise on the land they hold while further diversifying their income stream. But it’s a move that must be made with open eyes. Investing in and managing a shopping centre with a BTR component can be complementary and enhance the overall returns from the asset. In many instances, it can make sense to capitalise on the demand and growth for rentals, as well as the shift in demographics to one and two person households through BTR as part of a mixed-use solution for a retail asset.
Sources:
• Breaking the Shackles: The Rise of BTR, Knight Frank, 2023 • Build-to-Rent Sector Key takeaways from call with EY Real Estate Advisory, JP Morgan, October 2023
• A New Form of Housing Supply for Australia: Build-to-rent Housing, prepared for Property Council of Australia,EY Real Estate Advisory Project Management, April 2023.