Using local & US statistics, the CBRE research on build-to-rent development shows it can stack up on vacancy, diversification, cashflow, rental growth, yield & total returns.
Diversification: International investors seeking to diversify & get risk-adjusted performance have been attracted to the sector. 29% of all institutional investment into property from 2010-16 went into US multifamily, 30% into office, retail 17%, industrial 12%. That high institutional investment also brought a shift from suburban lowrise to high quality cbd highrises, which fitted portfolio requirements better.
Cashflow: CBRE said the large number of sources for cashflow generated in a build-to-rent development meant the departure of a single tenant had little impact on overall income. Relatively higher levels of churn meant letting rates could be constantly updated to market, whereas other types of commercial property relied more on rental increase terms set at the start of the lease.
Rental growth: When the global financial crisis hit in 2008, office & industrial rents fell sharply and took 4 years to recover, while retail centre rents held steady – but residential rents took off, in line with historical experience. The CBRE report concluded: “This stability of income during weaker economic times makes build-to-rent attractive to investors who are seeking portfolio diversification benefits, higher capital return & favourable risk-adjusted returns.”
Yield: Residential has historically been characterised as a low income yield investment. According to the CBRE report, this remains true: “However, given the more significant yield compression evident in the commercial/industrial sectors in the last few years, residential income returns have become more competitive relative to other investment classes.
“Auckland residential yields, and by extension build-to-rent yields, are likely to be around 4%. This is a slight improvement on income yields a couple of years ago, as asset prices have stabilised while rents continued to increase, although they remain 100-300 basis points below commercial/industrial income yields.”
Total returns: The CBRE report said total returns provided a better comparison than yield to assess build-to-rent relative to other asset classes: “In the US, over the long term (25 years, 1992-2017), multifamily delivered higher total return at lower volatility than other asset classes.
“The US market experience is also consistent with New Zealand with regard to build-to-rent’s counter-cyclical investment benefits. During the global financial crisis, many Americans moved out of ownership property and into rental accommodation. This resulted in rising rents & falling vacancy from 2010 onward. Strong occupier demand meant that multifamily total returns did not decline as much as some of the other sectors and that the bounced back the highest by far.”
CBRE, February 2019: Prospects for build-to-rent in NZ
Build-to-rent seen as a developing asset market
US multifamilies long-established with better investor support
Support structures the big question for multifamily growth in NZ
How does this sector stack up?
Attribution: CBRE report & releases.