Chart of the Month - December 2023

Renters are doing it tough in Australia’s major cities, but overseas institutional investors see an opportunity in the multifamily built-to-rent space.

Our chart of the month below, shows that rental vacancy in Australia is now among the lowest in the world: 3x smaller than the UK and 8x smaller than the US. This matches anecdotal evidence, with real estate agents in Sydney and Melbourne talking about lines of potential tenants winding down the street for open houses.

A downward trend in vacancy rates

Australia’s rental vacancy rate has been low, by international standards, for a while. But it has never been this low. It has been steadily falling since 2015 (see chart below). The trend was temporarily interrupted by the pandemic but has now resumed its downward trajectory.

What are the drivers?

Immigration has been a chief plank of Australia’s post WW2 economic policy and economic success. Most of this immigration has flowed into the state capitals. Over the last 50 years, the combined populations of the state capitals have more than doubled. Both Sydney and Melbourned have increased from around 2 million people to 5.3 and 5 million respectively. This has pushed up demand for real estate.

However, in recent times, construction has struggled to keep pace with the population growth (see chart below). And in the mid-2000s, the growth in dwelling stock actually fell below population growth.

On top of this, the number of people living in each dwelling has been decreasing (see chart below), which has increased the demand for dwellings relative to the population.

Together, these factors have pushed up house prices (see chart below), which has pushed some people out of home ownership and into the rental market. More and more people have been joining those lines at rental home inspections. 

Overseas institutional investors see an opportunity.

While the low vacancy rate has made life tough for many Australians looking for somewhere affordable to rent, big overseas institutional investors are seeing an opportunity. For example, Brookfield Asset Management, with a USD 18 billion portfolio of apartments around the world, is currently building its first rent-to-build project in Australia. And Blackstone recently acquired student-housing company Student One in Brisbane. Even some of Australia’s large pension funds, such as HESTA, who have long invested in multifamily apartments in the US, have now turned their attention to the domestic multifamily market. Oxford Economics projects that construction starts for the rent-to-build market will increase from AUD 2 billion a year in 2022 to AUD 10 billion a year by 2030.

In addition to the shortfall in demand, overseas investors have also been attracted by policy changes introduced by the federal government to slowly ease the housing crisis. The government has reduced the application fees for built-to-rent projects and has announced the halving of the withholding tax for trusts used by overseas property investors.

“Up until very recently, that asset class has been not accessible by institutional investors in Australia,” Jeff Brunton, Head of portfolio management, HESTA. 

What does this mean for Private Debt in Australia?

Increased overseas interest in the Australian built-to-rent market will increase opportunities for local construction companies and property developers with flow on effects to associated sectors downstream. Many of these companies are looking to private debt for capital, which, in turn, provides opportunities for private debt funds and investors in Australia.