The build-to-rent market has the potential to create a new institutional investment asset class that could also help to improve housing affordability in Australia, a NAB conference has heard.

The NAB First Look Conference in Sydney, which brought together issuers and investors in the US Private Placement (USPP) market, was also told that while the residential property market has moderated, there are pockets of strength in the industrial, office and retail property sectors.

“We’re a believer in the (build-to-rent) market,” said Darren Lake, Group Treasurer at Mirvac.

“Yields have compressed in other asset classes such as office, to the point where build-to-rent does meet the investment mandate for certain vehicles,” he said.

Tiernan O’Rourke, Chief Financial Officer at Stockland, said recent changes to legislation governing managed investment trusts have made build-to-rent more attractive for real estate investment trusts (REITs).

“Most REITs are going to be very interested, particularly as there continues to be strong demand for affordable rental properties. Longer term it’s a good way of incubating property that you can either put into a fund or sell,” he said.

Mirvac’s Lake said watching the rapid development of the build-to-rent sector in the United Kingdom, which grew from nothing to become a substantial sector within a decade, has given the developer confidence to test out the domestic market, although some tax challenges remain.

As an institutional asset class, the build-to-rent market has performed “extremely well” in the United States and the UK, where projects often command a rent premium.

“Renting in Australia is not a pleasant experience if you’re the tenant, so the whole idea of using professional management as we do in other asset classes is attractive,” said Lake.

While Australia has historically had high rates of home ownership, the surge in prices in capital cities over the past decade has made housing affordability a pressing issue for anyone who wasn’t already on the property ladder. Some 40% of households are now renters.

Retail sector holding up well

The property panel at the First Look conference noted the residential property market has moderated and investor activity reduced as tighter lending standards from banks have slowed the flow of credit. However, retail and industrial property has held up and office is performing well with record low vacancies.

“Australian retailers and shopping centre owners have not been standing back and waiting for Amazon to happen, there’s a lot of activity going on,” said O’Rourke.

“In our portfolio, we’ve been doing a lot of preparation for Amazon, building resilience into our retail town centres and focusing on many of the initiatives they’re already doing in the US.” This includes placing lockers in front of stores in shopping centres so that people can click and collect after hours, and building up the logistics portfolio to provide space for retailers with a growing volume of online orders.

The success that online retailers such as Amazon, eBay, and Etsy enjoy versus “bricks and mortar” stores in the US is nearly impossible to replicate in countries like Australia due to low population concentration, zoning laws and reduced transportation efficiency.

As an investor in both Australian and US shopping malls, QIC Global Real Estate Senior Manager Australian Financing & Analytics Stephen Morrow said the retail property sector in Australia benefits from high barriers to entry supported by robust town planning frameworks, with major assets tightly held by institutional owners. The retail sector is continually evolving and QIC’s long term focus is about delivering town centre assets which are the focal point for their local community.

Changes in consumer behaviour

Shopping centre owners are also repositioning their malls to capture the changes in consumer behaviour by expanding the category types that are more immune to online spending such as food, leisure and entertainment.

Other non-traditional tenants such as medical services and even car dealerships are moving from high streets into malls to benefit from the traffic flows as shoppers still enjoy the convenience of shopping centres.

“We’ve seen our shopping centres adapt to attract traffic flow,” said Lilly Cheung, Group Treasurer at GPT Group. “We’re remixing away from apparel into dining, health and beauty, as well as international mini majors.”

She added that the industrial property market is “very hot at the moment”, supported by the growth in online spending. Logistics support such as large distribution centres are keenly sought after and increasingly these need to be close to city centres rather than in outlying suburbs because consumers are expecting faster delivery times.

Phil Schretzmeyer, Head of Treasury at Charter Hall, echoed those sentiments, noting that Charter Hall was an early investor in the industrial sector and has seen strong inflows from both an equity and debt perspective.

The property sector accounts for 13% of Australia’s GDP and is one of the largest capital markets issuing sectors. Over the past decade, NAB has completed dozens of property transactions in the USPP market and has captured 57% of all property transactions over the last three years. NAB supported GPT Wholesale Office Fund in a recent USD250 million USPP issue of 13-year and 15-year tranches.