Multifamily housing:
will you seize
the first mover
advantage?
Multifamily housing: will you seize the rst mover advantage? | 2
Introduction
Attitudes towards home
ownership in Australia
are changing.
According to the most recent
national census, nearly one third
of Australians (30.9%) now rent.
1
And this gure is on the rise,
as Millennials and Generation
Z – who make up 48% of our
population – choose lifestyle and
location over home ownership.
At the same time, Australia’s
private rental market – which
has historically supplied most
of our nation’s private rental
accommodation – is changing
due to increased pressure on
negative gearing.
Recent government
interventions to address
housing affordability, coupled
with uncertainty around future
taxation policies, are disrupting
investor activity.
The question is clear: who will
supply the stock for Australia’s
private rental market in
the future?
Multifamily housing – a sub-
sector of the emerging build-
to-rent asset class – has the
potential to stimulate large-
scale new residential property
supply, moderate Australia’s
housing affordability crisis,
while providing alternate
opportunities for residential
developers and stable long-
term income for institutional
investors. If managed correctly,
multifamily housing will
encourage institutional investors
to enter the Australian housing
sector to ll the gap left by
retail/individual investors.
The time is right for the market
to move on multifamily housing.
Born between 1982 and 2009, Australia’s 11.76
million Millennials and Generation Z are reshaping
attitudes to housing.
2
These Australians are tech-savvy, globally
and digitally connected, more formally
educated and more mobile than any
generation before them. This mobility –
when it comes to jobs, careers, cities and
even countries – means they are more
likely to prioritise lifestyle and location
over home ownership.
Fully-edged members of the sharing
economy, these Australians understand
why borrowing a bike or ballgown makes
sense, and so are prepared to trade off
personal space for communal amenity that
brings people together on their own terms.
These trends point to the potential for a
rental product where people are the priority
and high levels of service are the standard.
New kids on the block
GRAPH 1: Australia’s generational composition
Source: IBIS World, The Millennials are where the action is, August 2017
Generation Z <16
Millenials 16-35
Generation X 36-51
Baby boomers 52-74
Silents 75-92
Federation 93+
20.1%
27.9%
21.3%
24.1%
6.3%
3%
1. Australian Bureau of Statistics (Census 2016).
2. Apportioned over an assumed population of 24.5 million as at August 2017.
3. Source: HILDA Survey, 2017
3 | Multifamily housing: will you seize the rst mover advantage?
The rise of long-term renting
Renting is the most common form of housing tenure
for Millennials, Australia’s so-called ‘Generation rent’.
Just 20.3% of Australia’s 6.79 million Millennials
owned their own home in 2014, well below the national
average of 69.3%.
3
GRAPH 2: Renters moving to home ownership
2001-04 2005-08 2009-12 2013-16
Average
16.00%
14.00%
12.00%
10.00%
8.00%
% of renters moving into
home ownership (all ages)
Source: Australian Bureau of Statistics, 2018 (Census Data 2016)
Generation Z, scarred by the global nancial crisis, shy away from
large debt and are more comfortable with fractional ownership
and sharing. Importantly, as home ownership becomes less
accessible, this generation increasingly sees housing as a service.
GRAPH 3: National tenure as % of dwellings
Source: HILDA Survey, 2016.
Owner occupied
(outright) 31.0%
Owner occupied
(mortgage) 34.5%
Rented 30.9%
Other tenure
type 3.7%
This decision to rent is
driven by a range of factors
from affordability to
convenience.
Low-cost: renting is often a
more affordable option than
a mortgage.
Flexibility: a nite lease
means more options
for overseas travel, new
relationships, study or
career opportunities.
Feeling rich: extra
discretionary spending on
lifestyle fosters non-nancial
wealth.
Maintenance: building
management obligations
and expenses are passed on
to landlords.
Location: desirable inner-
city locations that would
otherwise be unaffordable
are within rental reach.
Liquidity: capital is not
tied up in a primary place
of residence.
4 | Multifamily housing: will you seize the rst mover advantage?
Traditional private rental
in transition
The private rental market has supplied rental
housing for generations of Australians.
According to the Australian Housing and Urban
Research Institute, the private rental market
grew by 38 per cent between 2006 and 2016
– making it the fastest growing segment in our
nation’s property market.
4
Since the 1980s, negative gearing provisions
have enabled investors to deduct any losses
from residential investment properties
from their personal income. This policy
has delivered broader market benets by
increasing supply, maintaining affordable
rental prices while driving property
price growth.
In response to sustained political, public and
media pressure, unprecedented state and
federal government policy and regulatory
intervention has aimed take the ‘heat’ out
of the residential property market.
4. Source 'Private rental in transition: institutional change, technology and innovation in Australia' Source: Australian Housing and Urban Research Institute.
FIGURE 1: Timeline of policy and regulatory events affecting the
delivery of new housing
MAY 16: Big four
banks cease to
facilitate foreign
lending
JUL 15: Increase
stamp-duty
liability for foreign
purchasers in
Victoria (+3%)
JUL 16: Increase
stamp-duty
liability for foreign
purchasers in
Victoria (+7%)
JUN 16: Introduction
of foreign purchaser
surcharge duty in
NSW (+4%)
OCT 16:
Introduction
of foreign
purchaser
surcharge duty
in QLD (+3%)
SEP 16:
Bank’s
internal
policy
changes
DEC 16: Removal of
12 month deferral for
stamp duty payments
for OTP foreign
purchasers in NSW
JAN 17: Introduction of
absentee owner surcharge
of +1.5% over the land tax
general rate in Victoria
MAR 17:
Tightening
of interest-
only lending
restrictions
MAY 17:
Introduction
of the annual
vacancy fee for
foreign investors
(federal)
MAY 17:
Limitations to
foreign investor
purchases in new
developments
JUL 17: Removal
of 12 month
deferral for stamp
duty payments
for OTP investor
purchasers in NSW
JUL 17:
Increase in land
tax surcharge
on foreign home
owners in NSW
(+2%)
JUL 17: Increase in
BASEL Tier 1 capital
requirements
JUL 17: Removal
of stamp duty
concessions for ‘Off-
the-plan’ investments
in Victoria
JUL 17: Increase of
foreign purchaser
surcharge duty in
NSW (+8%)
JUL 17: Tightening
of allowable
depreciation
deductions for
investors (federal)
JAN 18: Introduction
of foreign purchaser
surcharge duty in SA (+7%)
JUL 18: Increase of foreign
purchaser surcharge duty
in QLD (+7%)
JUL 18: Discontinued
lending products
for self managed
superannuation funds
JUL 18:
Banking Royal
Commission
leads to credit
squeeze
JUL 18:
Introduction of
foreign purchaser
surcharge duty in
TAS (+3%)
JUL 18: Increase
in land tax
surcharge on
foreign home
owners in ACT
(+2%)
JAN 19: Introduction
of foreign purchaser
surcharge duty in WA
(+7%)
5 | Multifamily housing: will you seize the rst mover advantage?
Over the past two years, changes to policy – state, federal,
scal and lending – has led to the ‘cool-down’ of the private
investor market. As a consequence, the off-the-plan apartment
market has pulled back from providing rental supply.
All these interventions have disrupted investor activity and eroded the value of
Australia’s housing market – equating to a combined $13 billion erosion in value in the
three months to July 2018.
5
Investors – both foreign and local – have been discouraged from investing in residential
housing, which is reected in the declining investment approvals over the last 24 months.
140
120
100
80
60
40
20
0
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Financial Year
Total real estate investment approvals (No.)
Total real estate investment approvals ($bn)
Real Estate Residential
Real Estate Commercial
Total Approved
GRAPH 4: Foreign Investment Review Board real
estate investment applications
Source: Foreign Investment Review Board, 2017
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$-
Nov 16
Jan 17
Mar 17
May 17
Jul 17
Sep 17
Nov 17
Jan 18
Mar 18
May 18
Value of investment loan approvals (000’s)
GRAPH 5: Value of investment loan approvals nationally
Source: Australian Bureau of Statistics, 2018
As a ow-on effect, we are seeing a signicant slowdown in the construction of new
residential stock. With less investors in the market, developers are struggling to reach
the pre-sales hurdle – typically 80% – required by banks to obtain construction nance.
This may take years to rectify and could stimulate house price growth due to
compounding housing shortages.
Some analysts predict rental vacancy rates will also tighten to around 1% in some
cities, placing upward pressure on rents.
5. Source: Australian Bureau of Statistics property price index to July 2018.
6 | Multifamily housing: will you seize the rst mover advantage?
Can institutional multifamily
housing turn the tide?
Multifamily housing (MFH) is a sub-sector of the build-to-rent asset class,
which includes social and affordable housing, purpose-built student
accommodation, co-living and retirement villages.
What makes multifamily housing special?
• A distinct demographic target: By designing a development
around a specic target market or family cohort, facilities
and services appeal to that audience. One demographic may
want onsite day care and dry cleaning, another pet minding
and a tness centre, and a third rooftop gardens and
concierge services.
• Importance of a good brief: The design of build-to-sell
projects in Australia are typically led by the architect, with
input from the developer. In this model, the construction
company is generally the last stakeholder to provide input.
However, multifamily housing design demands closer
collaboration between the construction company and
the developer, which is generally also the manager. While
architects play an important role, they do not typically lead
the design discussion.
• A new business model: The multifamily housing business
model moves away from one-off development prot and
towards annuity-style income. The high levels of customer
service – with professional onsite management and a variety
of resident amenities – drives both premium gross revenue
and increased resident retention on lease expiry.
• Housing at scale: Multifamily housing requires signicant
equity investment, which is the domain of institutional
investors like superannuation and pension funds. Operating
on extremely tight margins, these investments require scale
– which is why the minimum size for a standard multifamily
project is around 300 to 350 apartments. As such,
activation of large-scale investment is likely to originate from
overseas funds.
• Low and stable returns: Gross yields in Australia are around
6.5% and allowing for operational expenses of approximately
30%. The result is net yields of 4.0-4.5% and equity internal
rates of return of between 8.5% and 10.50%. With yields
this tight, the taxation impost on multifamily structure
could be the difference between an undersupply of rental
accommodation and a billion-dollar asset class in Australia.
• Lower risk and longer investment horizon: Current
institutional investors are increasingly favouring the risk
prole of multifamily investment that diversies long-term
risk and maturity matching, allowing investors to service their
longer-duration liabilities and achieve longer-term objectives.
7 | Multifamily housing: will you seize the rst mover advantage?
Bringing build-to-rent
to Australia
Multifamily housing has succeeded
in markets where government
incentives – including those
for affordable housing – have
encouraged its establishment
and growth.
Currently, Australian tax legislation
does not encourage this new
asset class.
Initial capital required to invest in
multifamily housing is expected
to come primarily from offshore
institutional investors, where the
asset class is well-established and
well-understood.
But current legislation before
Australia’s Parliament will see
Managed Investment Trust
withholding tax on rental income
and capital gains from multifamily
housing assets increase from 15%
to 30%.
Land tax, GST and other indirect
tax costs in the construction and
the operation phases can also
diminish the economic return of
multifamily projects.
What’s more, in addition to stamp
duty payable on the acquisition of
land, a foreign purchaser surcharge
of up to 8% may be paid, depending
on the state or territory where
the property is located and on the
percentage of foreign ownership.
While there are certain concessions
and exemptions, these are granted
at the discretion of the relevant
state’s tax commissioner.
Without appropriate taxation
reform that treats multifamily
housing assets like other core assets
such as commercial or industrial
developments, global capital may
look elsewhere.
Can institutional
multifamily housing
turn the tide?
(cont)
Multifamily housing is designed specically for
renting rather than for sale, is owned and managed
by institutional investors (such as superannuation or
sovereign wealth funds) and delivers high levels of
service to tenants.
Target market capacity to pay
MFH
Market rents
(private residential)
Historic market share
Rental income $
Existing investor grade
Off-the-plan investor grade
Existing owner occupier grade
Off-the-plan owner occupier grade
Lower-end multifamily
High-end multifamily
Multifamily housing will not replace build-to-sell product, nor will it be the single
solution to social and affordable housing shortfalls. However, as institutional
investment is injected into the sector, governments may be able to circumvent the
looming housing shortage to encourage large-scale housing development, including
affordable housing, to be delivered in a relatively shorter period.
The time is right for Australia to establish
a multifamily asset class.
Multifamily housing appeals to institutional investors as it
provides high-quality, risk-adjusted returns and adds diversity
to portfolios.
1. It’s not a matter of if, but when MFH takes hold here
in Australia. With the BTS product slowing there is an
opportunity for good quality developers to adapt their
business model to suit MFH. Understand the differences
and be ready for change.
2. As we have seen in the UK and the US, institutional capital
investors tend to partner with a development company
to deliver MFH product. It is critical to understand the
difference in BTS to BTR, understand the design required to
deliver successful MFH product and know your sector and be
prepared for change. Be willing to learn and listen to others.
3. Collaboration is the key to a successful design. Establish
a design standard brief clearly articulating your values,
design principles etc. A successful project requires
early collaboration between the construction company,
management/developer and the design team to ensure a
product is suitable for the market it will operate in.
4. Know your product. MFH is about delivering the right
product in the right location for the right price. Look at
your portfolio of property and choose the development
site which will provide the returns sought by institutional
investors. Institutional investors are looking for ‘easy wins’
for their rst investment into MFH in Australia.
5. Understand your development feasibility and benchmark
the types and scale of fees you are able to charge to an
institutional investor including Development Management,
Construction & Design Management etc. A detailed
understanding and a clear articulation of the achievable
rents is key to a feasibility that is protable.
6. Understand your stabilised cash ows to ensure they
are both believable and achievable. Don’t underestimate
your operational expenses, if you’re not providing the
services you will not achieve the premium rents, rental
retentions and rental growth.
7. Management is key. MFH will require a total change to
the way residential property is managed in Australia.
Property managers are no longer managing buildings but
managing people. This requires a different skill set with
managers coming from outside the property industry
including retail and hospitality.
8. Affordable housing needs to form part of the product being
offered in a MFH project. Understanding how the product
will form part of the offering and the cohort targeted is
essential to understanding their ability to pay the rents
being asked.
9. In every jurisdiction globally, MFH has only succeeded
on scale where governments have provided incentives
to both developers and investors. This incentive
comes with the caveat of supplying a component of
affordable housing. Governments have a chance now
to put in place suitable incentives to ensure our private
rental housing stock can meet the demands of the
near future.
10. Understand your operational model which may
include the developer leaving their development
prot in the ownership vehicle and the establishment
of both a property management and asset
management operation.
While the sector will require billions of dollars in capital
and supportive government policy, we are already seeing
evidence that experienced global institutions are committing
hundreds of millions of dollars to Australia to capture the rst
mover advantage.
Will your company be one of them?
Make your move on multifamily
8 | Multifamily housing: will you seize the rst mover advantage?
9 | Multifamily housing: will you seize the rst mover advantage?
EY contacts
To nd out how EY can help you make a move on
multifamily housing, contact:
Marco Maldonado
Partner
Real Estate Advisory Services
Ernst & Young, Australia
+61 420 949 264
marc[email protected]y.com
Paul Tuckey
Director
Real Estate Advisory Services – Brisbane
Ernst & Young, Australia
+61 429 986 532
paul.tuckey@au.ey.com
Luke Mackintosh
Partner
Real Estate Advisory Services – Melbourne
Ernst & Young, Australia
+61 438 719 944
luke.mackintosh@au.ey.com
George Stamoulos
Partner
Transaction Tax
Ernst & Young, Australia
+61 421 051 017
george.stamoulos@au.ey.com
Ryan Costin
Associate Director
Real Estate Advisory Services – Melbourne
Ernst & Young, Australia
+61 448 086 811
ryan.c[email protected]y.com
Selina Short
EY Oceania Real Estate &
Construction Managing Partner
Ernst & Young, Australia
+61 2 8295 6880
[email protected]y.com
James Choi
Director
Indirect Tax
Ernst & Young, Australia
+61 402 781 043
james.[email protected].com
Daryl Choo
Partner
Transaction Tax
Ernst & Young, Australia
+61 404 035 825
daryl.choo@au.ey.com
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