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A once-in-a century pandemic means changes

As the second year of the Covid19 pandemic pushes ahead, property investors are grappling with where their future lies. Build-to-rent (BTR) developments are an increasingly enticing asset class, which may come as a surprise to some observers who had seen BTR take off much slower in Australia than in overseas markets.

With returns of at least five percent on average, BTR developments such as Vellum’s Highland and now Navali (to be completed in mid to late 2021) could be high-rise sector’s new golden goose. With vacancy rates of build to sell apartments in Sydney’s inner-city suburbs and CBD, for example at their highest in a decade, many landlords and investors are concerned that the major cities are not viable investments.  As the COVID 19 pandemic continues to blur our sense of new normality at work and at home, an unrelenting work from home trend and a shift to sea change and tree change housing options has had a longer-than-anticipated impact on the market.

Rental vacancies up and yields are down, down, down

According to Domain, one of Australia’s biggest real estate sites, in November 2020 rental vacancies were at their highest in the apartment-heavy major CBDs. This was in stark contrast to the situation in holiday hot spots and smaller cities such as Hobart and Canberra where potential tenants are struggling to find homes.

Melbourne’s overall vacancy rate rose to 4.8 per cent in November from 4.7 per cent a month earlier, Domain rental vacancy rate data revealed. It was the highest in the country and comes after months of lockdown to stop the spread of COVID-19.

Sydney’s vacancy rate rose to 3.4 per cent in November, from 3.3 per cent the month before, while Brisbane had a slight fall in vacancies to 1.9 per cent down from 2 per cent in October.

Rental returns are down, and a far cry from the up-to- 4.8% yields enjoyed by many house and unit property investors in Sydney during the 2012-2107 property boom[1].

Compounding the trend to BTR investment is the vacancy rates in office towers across the cities. Commercial real estate is also having to do a full reconsideration of the business model with offices now longer an essential provision for many companies in 2021 and beyond[2].

Forever flexible work and a BTR opportunity combine forces

The volatile needs of a more flexible workforce in a post COVID-19 landscape means that investors and landlords are assessing their options for many of these shiny new towers that have been largely empty for much of the last 10 months since the first widespread lockdowns hit the nation. There has been discussion about whether these office spaces can be repurposed for residential use – and allow a BTR model to step in and steady the waters. With centralised management, corporatised systems, and less tenant fluctuation in the BTR sector generally, it makes sense.

The time to rethink existing models of property investing is ripe. Longer term, the rental market will rebound but the way investors, landlords and tenants operate has been up-ended due to the pandemic, and social, economic, and environmental forces that have followed. Only time will tell if that means more widespread investor confidence in the BTR market.

[1] Source: https://sqmresearch.com.au/property-rental-yield.php?region=nsw%3A%3ASydney&type=c&t=1%20

[2] Source: https://www.afr.com/wealth/personal-finance/the-outlook-for-landlords-20200924-p55yt9