Build-to-rent surge in capital cities
Melbourne has been at the forefront of the build-to-rent (BTR) investment market in 2024, with Sydney close behind and poised to take the lion’s share in 2025.
A new report by Knight Frank’s Australia found that in 2024, Melbourne, Brisbane and Sydney were the main cities for BTR investors.
The report Build to Rent Market Update Q4 2024 showed that 8,900 dedicated BTR apartments are currently under construction nationwide, and 20,000 more units have been approved for development over the next five years.
Since BTR was initiated in 2018, a total of 19,308 BTR units have been delivered or are under construction across the country, with an additional 40,191 units planned or not yet approved.
Victoria took the lead in the BTR sector, with 11,098 BTR units either completed or under construction, with an additional 14,440 BTR units in the pipeline, forecasting 25,538 units.
Queensland followed suit, with 4,157 units completed or under construction and another 10,233 awaiting approval or the start of construction, bringing the total of BTR units to 14,390.
Although only 3,584 BTR units have been completed or are under construction, NSW forecasts another 11,505 units will be completed, overtaking Queensland in the total construction pipeline with 15,089 units.
Knight Frank partner, Living Sectors, Valuation and Advisory, John-Paul Stichbury, said Sydney is poised to be in the spotlight in 2025 as Melbourne’s BTR investors will look to expand their presence across the eastern seaboard.
“Sydney has been slower out of the starting blocks compared to its Victorian counterpart, but BTR development activity is now accelerating as investors look to gain a foothold in the city,” Stichbury said.
“Development challenges are most acute in Brisbane and we therefore expect new-build supply in this market to lag Melbourne and Sydney in the short term, despite also facing a chronic lack of rental accommodation.”
Stichbury said while investors will look to diversify their portfolio to other cities across the country over the long run, the “big three” cities will remain the center of the BTR market for the time being.
Across the other capital cities, the ACT leads with 1,723 BTR units that are either completed, under construction or planned, while Western Australia counted 1,568 and South Australia 1,191.
Knight Frank partner, head of alternatives, Australia, Tim Holtsbaum, said committed and planned BTR developments in Australia are growing rapidly, and more investors are set to join the market.
“The investment case for BTR has arguably never been stronger and this year activity will accelerate as we enter a rate-cutting cycle,” Holtsbaum said.
“In recent investor surveys, ‘beds’ are often vying with ‘sheds’ for the top spot in preferred sector rankings.”
Investors are gravitating towards living sectors partly because of its defensive characteristics – specifically the ability to adjust rental income streams more quickly than other sectors in response to high inflation.
While the BTR sector is growing, Holtsbaum said challenges persist, such as the current macroeconomic environment, uncertainty around government policy, challenging development market and build cost inflation.
“Despite these headwinds, there have been some good wins for the sector recently,” Holtsbaum said.
In November 2024, the Parliament passed the Build-to-Rent Bill, which aims to deliver 80,000 rental homes over the next decade.
The bill introduces extended tenancies, strengthened tenant protections, stricter affordable housing requirements, and more incentives for foreign investors.
The new bill reduced the withholding tax rate for foreign investors in residential BTR developments from 30 per cent to 15 per cent, aligning it with commercial and industrial properties.
It also increased the BTR capital works tax deduction from 2.5 per cent to 4 per cent, allowing depreciation over 25 years instead of 40 years, boosting project viability.
“This signals to foreign investors that the Australian government supports and recognises BTR as an important component of future housing supply,” Holtsbaum said.
“A more favourable policy/investment setting will help to accelerate inwards investment from established global investors.
“This is important as domestic funds continue to largely sit on the fence when it comes to BTR,” he remarked.
Holtsbaum said while the scarcity of the sector and investors’ appetite for income-producing assets will drive the Australian BTR sector, fixing the construction sector will be key to successful projects.
“On the development side, stabilising construction costs will help feasibilities and perception around development risk,” he concluded.