Industry Interrupted: Build-to-Rent. Embracing Market Disruptions.

The future is near and architects need to assist the construction industry and regulators to overcome their resistance to change so that innovative housing models, such as build-to-rent and co-living, can succeed in Australia.

While successful build-to-rent projects have been happening in the USA for more than 30 years, their arrival in Australia has raised eyebrows among the local construction industry and regulatory bodies, which are not known for their propensity to innovate.

According to a recently published construction industry productivity report by the McKinsey Global Institute, the global construction industry barely increased productivity during the past 50 years, compared to the agriculture, manufacturing and retail sectors which recorded up to 1,500 per cent growth in productivity for the same period.

McKinsey valued that lack of opportunity for change within the construction industry at about US$1.6 trillion, which is a massive pent-up opportunity for industry disruption.

Build-to rent, whereby developers and investors build housing with the intent of retaining the asset long-term and renting it out to semi-permanent residents, can be part of that disruption. It is relevant to our industry because it is new in Australia, it is gaining momentum, it will require adjustment and its implications on design are far reaching. Not to mention that it can be a far better solution for tenants and landlords than the traditional rental model that provides very little security for either party.

Solid understanding of the forces that make such models appealing is critical to the success of any designer attempting to facilitate change and broker non-standard design solutions with authorities.

The maturation of the social generation and subsequent normalisation of the sharing economy (via enterprises such as Uber and AirBnB), housing affordability issues, and widespread adoption of automation are the primary drivers making build-to-rent an appropriate solution for now.

When thinking about the social generation, millennials are really the first demographic to have emerged with social media as the norm. Relationships on social media tend to be stylised and based outside reality. Surely there is a link between the experience of those who’ve been raised on relationships-lite and their desire to live in a more integrated way.

What they seek, perhaps more so than any previous generation, is authenticity and connection in the way they live and this has contributed to the rise of a sharing economy in which co-living and build-to-rent belong.  Unlike the baby boomers, community integration and social connectivity appear to be far more important than privacy and security to this generation.

However, of the aforementioned forces, affordability is perhaps the most critical. That said, on its own, it has not been enough to force the change.  It is the combined amplification of these forces that has led to industry heavyweights pushing hard to make build-to-rent a mainstream offering.

Historically, residential property has produced net yields of around three per cent, which has been too low to attract institutional investment. However, with the weight of capital now causing yield compression on traditional investment grade assets to the point where shopping centres and office buildings return between five and seven per cent, the delta between residential and commercial is slimmer than it has ever been.

Add to that the propensity to quickly create large-scale build-to-rent portfolios as well as the universally accepted belief that residential property is lower risk than commercial, and the appeal of build-to-rent as a potential destination for a modest percentage of institutional investment becomes apparent.

If allowed to flourish, the impact of market disruptors such as build-to-rent and co-living on the construction industry will be felt as profoundly as automation’s impact on the motor vehicle industry. The transformation of personalised transport can be seen as a barometer for the rate of change upon us in modern western society. With some 35 separate manufacturers already advanced enough to have public road access for automated vehicle testing in the US state of California alone, it is clear that we are in the middle of a significant period of change, not at the beginning. Some say we may be even experiencing the change of an era, not just an era of change.

But it’s not all rainbows and butterflies, as numerous barriers stand in the way. Tax structures (particularly land tax, which paints an ugly picture for intuitional investors) and restrictive superannuation industry laws are two examples. Resistance will also come from financial institutions and town planning authorities, who coincidentally are some of the more conservative members of our business community.

Regardless of resistance, consumers are asking for new and innovative housing solutions and consumers generally win in the end. The challenge for our industry is to find a way to make new business models so attractive that they can overcome these impediments. It takes courage to depart from the status quo. To do so, we must carry a belief that there is a better way that will reveal itself if we are smart enough and we look hard enough.

The cornerstone of all this change, including expected disruption to our local construction industry, is timing. The alignment of so many powerful social and economic forces at the same time might be the tipping point that gives birth to build-to-rent. Many household names in the Australian property industry are seriously invested in creating next-generation residential solutions and if we embrace the change now, we could go a long way to solving affordability issues within the next decade.

Private developer-investors building 50 apartments at a time will not be enough to propel the build-to-rent offering into the mainstream. Without scale it will never be a legitimate alternative to the old, dysfunctional rental model. If it does emerge, it could provide consumers with a solution that is better than the existing rental model and not as stressful or costly as taking on a mortgage.

Architects have a vital role to play in ensuring that future generations can live collectively and affordably in Australian cities. By harnessing their understanding of the confluence of driving forces that have led to the rise of build-to-rent and co-living models, architects can work creatively to broker innovative non-standard design solutions with authorities and encourage change.

For some time now, Rothelowman has been presenting progressive yet considered solutions to authorities and it is important that architecture and design practices such as our own continue to lead the way by encouraging the broader industry to participate and enjoy the ride.