Australian institutional investors are becoming increasingly open to the build-to-rent sector despite its low returns as they focus on the sector’s ability to provide income stream diversification and a new asset class to absorb an unabated pool of capital, investment data provider MSCI says.
The improving attitude towards build-to-rent – or multifamily in the US – was an outcome of an unsatisfied investor demand for more property asset classes to park their funds as yields remained tight in a low interest rate environment, MSCI added.
So much so, MSCI is seeing more of its Australian clients increasing their cross-border asset allocations, going overseas for more investments.
“What I do see is Australian cross-border needs for diversification are increasing,” MSCI’s global head of real estate Jay McNamara said.
“We are being told by our clients that allocation of capital to real estate and other private assets is only going to increase.”
“The capital pool is getting larger … what we are seeing is core real estate allocation is in a really robust position. We are [also] seeing an expansion of investments up the risk curve.”
MSCI Australian vice-president research Bryan Reid said: “The competition for high-quality assets is pretty intense right now. Australian investors are looking harder at the opportunity sets … that means alternative markets to bring in more diversification.”
In looking at the alternative asset classes away from offices or retail, Mr Reid said investors were considering the “points of difference” that build-to-rent could bring, in particular its ability to diversify cashflows. Traditionally, the sector – institutionally held mass-rental units – offered a low return of no more than 4 or 5 per cent, which was unviable for many investors.
“There is [now] a realisation that it’s not having one to three key tenants in one building but looking at a broader set of tenants … but it depends on the investor,” Mr Reid said.
“Having more tenants will have less concentration risk.”
But on the flipside, some investors were daunted by reputational risks in build-to-rent.
“For example, if an elderly tenant stops paying rent, it could be reputational risk to have to evict them.”
Industrial assets were also becoming an “alternative asset” sub-class on its own.
“Industrial has definitely transformed,” Mr Reid said.
“The e-commerce revolution means warehouses and distribution centres are now being looked at with incredible detail – how close are they to main roads, what’s the supply time from A to B, does the floor plan allow installations of the kinds of machinery required to operate a leading technology centre?”
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