As Knight Frank predicted at the end of last year, there has been a further expansion of interest in Australia’s Living Sectors over 2024 to date, with the outlook for this sector looking positive.

It comes as investors seek greater exposure to alternative sectors and the relative stability of residential assets, with high demand and growing rents in Australia, amid an uncertain economic outlook.

The rise also coincides with a greater focus on the structural demand/supply imbalance in Australia’s residential market, with the living sectors playing a vital role in helping to address this by delivering more housing in the market. As such, the sector has also increasingly been supported by recent government measures.

Residential living sectors encompasses build to-rent (BTR), co-living, purpose-built student accommodation (PBSA), retirement living and land lease communities. All can cohabitate together, with each subsector having a place in the Australian market, providing more affordable and diverse housing options for a range of demographics.

In terms of investor and developer activity, within the sector so far this year we have seen a greater focus on co-living and student accommodation, which typically produce higher returns.

We expect BTR activity to continue with those investment managers already committed to the sector with a number of assets currently under construction beginning to reach practical completion and commence operations.

Activity currently concentrated in co-living and student accommodation

This year co-living and student accommodation have been some of the most sought after asset types in living sectors in Australia, mirroring the trend witnessed overseas, in markets such as the UK.

Investors are seeking the higher returns these assets typically produce, in a shorter timeframe, with these developments able to be completed much quicker than a BTR project.

In Australia, co-living is very much a developing sector - and considered an evolution of the boarding house sector - but is now expected to see a big expansion over the next five years.

It offers a product the market really hasn’t seen before, and provides greater flexibility for tenants.

Targeted at young professionals aged from around 20 to 35, co-living accommodation consists of furnished studio style self-contained apartments of between 25 sqm to 35 sqm, with communal amenities for tenants including commercial-grade kitchens, TV areas, games rooms, co-working areas and outdoor spaces.

Co-living also offers short-term leases of typically three months or greater, distinct from the general residential market that generally offers leases of six to twelve months.

The nature of co-living developments mean the sites required are smaller and there is more opportunity at the moment for developers to convert assets in really strong central city locations where BTR may not be suitable due to the need for a larger site.

Assets will typically range between 70 to 250 units located in CBD and fringe locations where supply pipeline for new rental accommodation is limited. Sydney is seeing a lot of activity in this space, but capital is also really positive about Brisbane and Melbourne.

In the student accommodation subsector we are also seeing more activity, with investors drawn to the sector largely by positive rental growth driven by a strong return in students post the pandemic.

The student accommodation sector is quite mature in Australia now, with most of the assets owned by universities or major institutional investors.

Recent announcements regarding student visas and the supply of PBSA asset is currently causing some uncertainty in this sector amongst some investors and operators, however we expect to see an increase in transaction volumes in the second half of 2024.

Land lease community developments, which offer lower cost housing to mostly seniors, have been really strong in the US and UK, with a focus on regional areas.

We are seeing more interest in this subsector in Australia, and based on the experience in other locations overseas we expect to see a continued expansion and evolution in this space.

What’s happening in Build-to-Rent?

The BTR market in Australia remains active with several new schemes coming online from established groups who have grown pipelines over the past four to five years.

However, progress over the past 12 months has been slower than expected largely due to a few challenges, including funding and construction costs, particularly given the effect interest rates have had in raising cap rates in other core markets such as US, UK and Europe.

We expect a stronger 2025 for BTR with an increase in the number of schemes commencing underpinned by sustained rental growth, an easing in the cost of debt and stabilising construction costs.

We also expect to see greater focus from both active capital and BTR developers on smaller schemes of 200 to 300 units to help with speed to market, limit construction risk, minimise leasing up risk and drive the performance of the asset.

In addition, it’s likely there will be more “mid-market” schemes delivered in Sydney, Melbourne and Brisbane with less amenity targeting higher, more secure income streams with less frequent turnover of tenants.

It’s worth noting that the Australian Government recently introduced BTR legislation into Federal Parliament as part of an omnibus legislation Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024.

The Bill will reduce the Managed Investment Trusts (MIT) withholding tax rate from 30% to 15% and increase in capital works deduction from 2.5% to 4%.

The role the Government is looking to play in the facilitation of the BTR sector is a positive one. However, based on some preliminary feedback and discussions on the proposed changes to MIT treatment, more work is required to ensure that any new legislation has a material and positive impact on closing the shortfall in housing.

The growth of the market could be accelerated by the resolution of the debate on the treatment of BTR within the MIT framework. The Housing Australia Future Funds (HAFF) scheme is expected to deliver more affordable housing in Australia, which is positive.

However, we need more clarity on how this incentive scheme will be rolled out over the coming years and which projects will be suitable and where capital will be allocated. The market is closely monitoring the progress of this legislation and hoping for a positive outcome.

For more insights into Australia’s Capital Markets, download Knight Frank’s Capital Exclusive report: Capital Exclusive 2024 (knightfrank.com.au)