Property Point: A look at the build-to-rent market

Property Point is a podcast exploring all things related to property investment in Australia. 

Today we're focusing on a type of investment that's popular abroad, in the US and Europe, but much less so in Australia. But it might, if the Assemble model has anything to do with it.

The Assemble model offers an alternative pathway to home ownership, designed to bridge the gap between renting and owning a home. Assemble offers a rent-to-buy model, which is gaining more traction in Australia, especially in the political sphere ahead of the Federal Election, as Labor pledges to shake up this sector of the market. 

Under the Assemble model, tenants take a five-year lease, with the opportunity to buy their apartment at the end of the lease. The company is focused on its point of difference from traditional off-the-plan. And despite current market conditions, super funds and other institutional investors are expressing interest in the opportunity. Assemble has heavyweight financial backers and advisers. It just secured its second build-to-rent site in Kensington, Melbourne, for $17.5 million. Down the road from there, Assemble's first site cost $60 million.

Kris Daff is the Managing Director of Assemble and the Managing Director of Make Ventures, a property development and investment company. 

Kris, can you talk us through the Assemble model, where you rent a property while saving to buy?  How exactly does the rent paid over the five-year period contribute to the purchase price of the home?

Under the model, the two things are disconnected so, what we do is, in advance of even starting to construct the building in which our residents are going to live, is we commit in advance of construction starting to what the rent will be when they move in and they'll know what their rent is for every one of the five years that they're an Assemble customer.  We mark that to market rent that we can benchmark today.  The premise is that you're no worse off renting an Assemble property than you would be renting just another property of equivalent type around the corner.  So, the rent doesn't directly contribute to the purchase price, but you're not paying more rent than you would be otherwise. 

And because our buildings are very sustainable, we bulk buy a whole bunch of stuff like power, data, dry cleaning, dog-walking, apartment cleaning, then the actual cost of living in one of our apartments should be less than the equivalent apartment around the corner.  There's an additional financial benefit for the household there, which would increase their savings capacity.  But the rent does not directly contribute to the purchase price of the apartment.

Right.  How are the rental payments determined at market rate, exactly?  Like what data does Assemble depend upon to calculate it?

Yeah, so we use a team, so we've got a number of different advisers that assist with that, and basically market research consultants that look at equivalent suburbs in Melbourne.  In this example, suburbs that are compared to buildings that are in Kensington that are of a similar quality to what we're delivering, or in sort of equivalent markets with similar median house prices and median rents, and establishing basically a benchmarking tool for us to be able to determine for each different apartment type what a market rent would be for that.  There’s big pools of data available for that now and we think that an additional benefit that our customers get is because we're committing to a rent two years out from them actually having to move in, they know exactly what their cost of housing is going to be.

Why aren't we seeing more schemes like this popping up?  Do you think it's because of uncertainty around tax and urban planning and legislation in general?  Australia seems a little bit behind the curve here.  Did you copy the model from overseas?

We didn't copy the model from overseas.  There's other arrangements where you can rent a property in advance of committing to own it, and things like that overseas.  But there's elements of the Assemble model and there are other services that we provide to our residents that are a much sort of deeper offer than some of the models that we've seen overseas, which are purely based on household finance.  We've obviously got a bunch of social initiatives and other things, community building things that we think are important in these buildings and communities.  We've done a bunch of research.  I've spent a lot of time in the United States and the UK looking at different models. 

Look, I think the reason why it hasn't become more prolific as a model – because it is a very fair way for people that are having difficulty saving towards a deposit or just feel that maybe the housing market's not designed for them and their sort of socioeconomic group – is it's a much different style of investing, so it's much different, you need to be much more patient as a developer to undertake a model where you deliver investment returns over 8-10 years, rather than a traditional off-the-plan model, which has been, you know, you can get a project completed in two or three years, and get a big development profit and generate a much higher annualised return to investors. 

But you know, there's a whole bunch of issues potentially with an off-the-plan model currently.  I think, we've been working on this for four years and we started working on it when the off-the-plan market was really strong so it wasn't a sort of moving into an alternative market or alternative delivery mechanism because we were nervous about off-the-plan.  We felt that there was a huge segment of aspiring home buyers in Australia that were interested in participating in the housing market, but may be interested in doing it in a fairer way where they weren't stuck competing against mum and dad investors, Baby Boomers with huge amounts of equity in their existing properties to play with, offshore buyers.  

It's something where they could put down roots in a community over five years and work towards a fixed goal of home ownership and still founded on the basis of them not being worse off as a result of that.  If they don't make it for whatever reason, they get to keep any money that they've saved and get their bond back, as long as they've looked after the apartment, and not be worse off as a result of being a resident in an Assemble building. 

There's a whole bunch of things that drive it.  Why hasn't it become a bigger thing?  I think it will.  I think alternative pathways to home ownership are something that's really important to Australians.  I still think that a ‘generation of renters’ is something that gets spoken about a bit.  I think there's a generation of people that haven't been afforded the same opportunity to get tenure certainty in the housing market that the generation before them have, which has predominantly come from home ownership.  We're providing that with half-a-decade lease and the opportunity to buy a home for a fairer price in the future. 

I think it's going to become a big part of the housing landscape, but the markets are slow to move, particularly larger liquid markets like residential housing.

Yes.  It also seems like build-to-rent has become a big topic of conversation ahead of the Federal Election with Labor pledging to shake up the sector of the market.  Of course, we don't want to get political, but I've read that you're hoping to get super funds to invest in future projects of yours.  So, could that mean that a Labor Government does benefit your business?  Because it is a funny spot to be in as most property developers might be a bit concerned that it would detract.

From where housing policy sits from both sides of politics at the moment, there's things that the opposition government, federally, has been talking about that are definitely beneficial to our business.  Things like subsidies for delivering below-market long-term rental property, changes to the way management investment trusts work and withholding tax for offshore investors.  There's a whole bunch of things that the opposition has been talking about.  But you know, that said, the incumbent government's doing some really positive things in housing too, with their recent bond aggregator scheme that they got away with ANZ and UBS and raised a whole bunch of institutional capital to basically, as a federal-backed bond, to invest into the not-for-profit housing sector.

There's a whole bunch of things.  I think the reality is, there's no golden bullet for low- and moderate-income housing in this country.  But there is great opportunity for us to take some of the lessons from overseas, particularly North America.  The North Americans' game is like a low-income housing tax credit, which is basically like a tool to stimulate institutional investment into low- and middle-income housing.  And that currently delivers over 100,000 homes per annum in America that wouldn't otherwise get built.  I think some sort of sovereign-backed or federal government-backed housing incentive scheme to mobilise Australian pension funds into the market in a bigger way, is something that's really needed and something that we'd be very positive about. 

The Labor party's announcement around basically like an NRAS II-style incentive program is something that we think is a step in the right direction.  We are talking to some of the Australian member funds, particularly the industry funds who, many of them have got, a great proportion of their membership would be in the low- and middle-income Australia definition.  This is an important space for them to participate in and to try and find an investment pathway that delivers sufficient investment returns to justify the risk of owning assets long term, building them, being exposed to markets, and a whole bunch of things.  But also delivers a bunch of outcomes for their membership in housing that delivers social good as well.

I see that you just secured a second build-to-rent site also in Kensington in Melbourne for $17.5 million.  It probably sends a message to me of optimism that you're buying in the current market and you've bought again in the same area.  Is it just coincidence that you have bought twice in Melbourne?  Or are you specifically just looking in Melbourne?

Well, we're looking in Sydney and Brisbane also, and we'll probably be in both those locations by the end of the year with new acquisitions.  Melbourne is, I guess, my personal heritage and the group's heritage is in Melbourne, so that's an obvious market for us to enter first, because we're particularly familiar with it and moving into new geographies at an early stage in a new business can be problematic, because whilst national landscapes have got some consistencies across it, there's unique elements of planning systems and other things that exist in other locations which can be a little bit complex to navigate if you're not familiar with them.

But we're pretty committed to Melbourne.  We've demonstrated deep demand beyond Kensington number two, and we've also got a site in Brunswick and other sites in the southeast of Melbourne which we'll do under a build-to-rent model.  You know, there's that demand in Melbourne, underpinned by all the same things that have underpinned investor demand for off the plan type development, high levels of population growth, strong employment, levered off huge infrastructure investment, and the like.  So medium- to long-term, we're happy to be long on Melbourne, and we think that particularly the east coast of Australia is where we'll focus our attention and then move into other geographies selectively over time.

I'd also like to just touch on what I think is a millennial designed product you're offering.  I'm personally a millennial, and looking at it, it seems to be designed with someone like me in mind.  I've heard a little about the community-oriented approach from you guys, but I'd like to know what this really means, and what you actually offer in this respect?

Yeah, so from a design perspective, one of the interesting things about build to rent housing where if someone doesn't feel like you've delivered what you said you would off the plan, you know, they can just move out.  People aren't committed to living in an Assemble building for five years, they can move out after the first 12 months and say: "This is not for me.  I don't feel like you delivered what you said you were going to do effectively off the plan, so in advance of construction starting”. We get this is unique, which is quite lovely from a developer’s perspective, it’s very unique…

How much notice do they have to give if they want to get out after a 12-month period?

At 12 months, so it's just a normal notice period, a one-month notice period.  They would give their bond back, as long as fair wear and tear, and all the usual exceptions to the apartment.  We don't hold the bond.  The bond sits with The Residential Tenancies Bond Authority in Victoria and it just operates in the way a normal rental property does.

But our customers, what we really have generated by this model and what a lot of our customers are attracted to, in particular, is the alignment they've got as a resident of Assemble buildings with us as basically a developer and an asset owner.  We're saying to them: "This is going to be a really good quality building, it's going to be efficient to live in, you're going to have a really good quality of life in our buildings, and if you don't you can just hand the keys back, and you haven't had to commit to buying a whole apartment or whatever.  You're just there for the minimum 12-month initial period”.  So that's been quite refreshing for our future residents.

The other thing that they’re particularly interested in is, I think, and what's come out through a lot of the research that we've done in people that are interested in participating in our model is, people are interested in getting to know their neighbours, in a more meaningful way than perhaps what they do currently.  And the reality of that is, how do they do that in an Assemble building as well?  As a minimum, they know they're going to be there for up to five years, if they choose to, so their propensity to engage with the other residents in the building, to engage in community activities outside the building, to put down roots in the location, is going to be much higher, when they know that they're not exposed to a 12-month rolling rental market with a mum and dad investor owning the property that may have investment objectives change over time.

Then we've got a whole team that provides a level of engagement with the community, so we have on-site staff, which is very similar to the US-style multi-family housing type approach, where we've got people on-site who, if the tap breaks, you can get them to organise to get the tap fixed for you.  They'll be running community-based events like walking groups, we'll organise yoga, provide occasional care for stay-at-home parents so they can get a couple of hours to go and pay some bills.  There are different spaces within the building that you might not normally provide in an off-the-plan building as well.  So we've got a communal room on the top floor, which has been designed, which is suitable for yoga, you can have a dinner party in there, kids' parties, kids' play, mothers' groups, there's a kitchen in there.

We've also got a communal workshop on-site, so for bike stands and doing messy jobs that you don't want to do in your apartment, and that's just off the lobby.  The idea there is we're providing spaces in these buildings for people to have unforced social interaction with people.  The idea might be that I might be painting a chair in the workshop that I'm doing up for my apartment, and someone might walk home and see me in there doing it and pop their head in and say: "Oh, I just painted my chair a couple of weeks ago, I'll come down and give you a hand.  I've got a few tricks up my sleeve for that”. Or someone might be fixing their bike and doing the same. Just to provide the opportunity for unforced social bonds to be created within the development, and for people, on an opt-in basis, it's not compulsory to go to yoga every Tuesday morning or go in the walking group or anything like that.  But just to provide at least an infrastructure there and an opportunity for people to engage in a deeper way with their neighbours, is something that we think is really important and highly desirable from our future residents' point of view.  They've already started that, the future residents of the Macaulay Road building have got a Facebook group going.  They all welcome their dogs in their building when they move in, so they're all sharing photos of their dogs, and all these kids and all sorts of stuff.  You can see the DNA of the community starting to emerge already.  It’s terrific.

Does it come into a fee, so to speak?  Like is that factored into a body corporate cost or...

No.  There's no owner’s corporation fees or costs or anything other than just paying whatever the market rent would be for your one-, two- or three-bedroom apartment.  Assemble funds those activities out of the rent.  We don't, like a normal sort of mum and dad investor would, might be doing a bit of maintenance and other things and keeping everything else, there's obviously a cost to providing those additional services, but we've got a financial model that an investor supports on that basis.  One of the reasons that, from an investor side, why do you do all these things?  Well, there's a lot of research out of the United States that says residents will stay up to 2.5-times longer in an apartment if they make two meaningful social connections within the apartment building, so you get longer tenure out of your residents as well potentially, so there's some commercial logic to the provision of some of these services.

But we see it's like the emergence of social equity outside sort of financial equity and other things in the apartment itself, it's saying, well, the people sort of build some equity in the community and with their neighbours.  The individual apartment fellows buy their individual apartments off Assemble, at the conclusion of the five years there's no obligation to continue to have Assemble there providing services and doing yoga classes and dog-walking and whatever else, so you can revert to a more traditional owner’s corporation management model at that point, and that would be a much lesser cost than what the cost to have Assemble staff there constantly and providing a much different level of service.

And what we do, so we'll run regular meetings during the five-year rental phase with our residents group to make it function a bit like an owners corp, so they can come or not, it's up to them, where they get a much greater sense of ownership over the function of the building.  If they want to tell us, "We think the hallway should be cleaned another couple of times a week”. Or, "Someone keeps booking out the communal room every Saturday afternoon to watch Collingwood play”.  Then we'll sort of be able to do a bit of management of some of those building functions, which is a start of an engagement with a building owner in a residential context would be quite different for most renters.

Yes, for sure.  Kris, who is supporting Assemble financially?

At the moment the majority of the support comes from Make, which is our development business, which has got a large portfolio of assets all in Melbourne from large scale urban renewal projects and the like.  That's providing the majority of the financial accommodation to Assemble.  But ultimately, Assemble as a build to rent business is talking to a number of different institutional investors.  The volume of capital actually required to own those assets medium to long term is beyond the means of even the largest private development groups.  We hope to get to a conclusion with a couple of those superannuation fund style investors over the next couple of months and that will allow Assemble a line of capital to deliver its current portfolio of projects.

Wonderful.  I'm looking forward to seeing more from you guys in the future.

Yeah, cool.  Thank you.

That was Kris Daff, the Managing Director of Assemble and the Managing Director of Make Ventures.