How Easy Is It for Property Developers To Shift into Build-To-Rent Projects?

How Easy Is It for Property Developers To Shift into Build-To-Rent Projects?

The property market continues to be significantly disrupted by inflation and high-interest rates.

Buyers are increasingly considering whether they should defer the purchase of their home and accept that they will be renting for longer.

Rental returns are improving for property owners due to the shortage of housing and an increasing population, driven predominantly by higher migration and returning students.

Given the above, many developers may be considering a move from the build-to-sell (BTS) model to the build-to-rent (BTR) model.  The question is whether this is a realistic strategy.

While the concept sounds simple, the reality is very different.

FUNDING ISSUES TO CONSIDER

One of the major impediments for developers, (other than tier-one companies such as Mirvac and Lendlease), to shift into BTR is that its funding has some fundamentally different characteristics relative to traditional BTS construction funding.

The developer will need to have access to significant equity to service debt throughout the project and repay the debt on completion. This is not required in BTS projects where interest is capitalised and repayment is funded from sales.

OTHER ISSUES

The number of counterparties involved in a successful BTR project is greater than in a BTS project. An experienced operator of BTR projects will need to be involved and will likely have significant input in the project design.

If equity investors are bought into the transaction to assist in the funding, the developer’s control of the project is likely to be further diluted.

For these reasons, developers will need to think carefully about whether BTR is really for them.

Feel free to contact me by email if you would like to discuss.

Peter Faludi
Director
Peter Faludi Consulting
peter@peterfaludiconsulting.com.au
https://lnkd.in/gwZ6Utu

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