A “structural shift” towards sustainable residential development is underway, and build-to-rent is a big driver, says Sentinel’s managing director in Australia, Keith Lucas.
Last month Sentinel’s first Australian BTR project, Element 27 in the Perth suburb of Subiaco, became the first apartment building certified under the Australian Government’s Climate Active Carbon Neutral Standard for Buildings.
The milestone marks a turning point for sustainability in a sector responsible for around half of Australia’s built environment emissions.
“It’s a huge win,” says Lucas. “It speaks specifically to the sustainability opportunities that build-to-rent provides.”
Australia’s pipeline of BTR assets, or multifamily as it is known in the United States, grew by 68 per cent last year alone, according to CBRE. Forty projects across 15,000 units are underway, with Mirvac, Blackstone and Greystar all pushing the BTR barrow.
Sentinel has $10 billion of assets under management including 26,000 rental apartments; more than 1,000 of those BTR units are either complete or under construction in Australia.
Lucas, a trained architect, has spent many years designing sustainable buildings and is passionate about Element 27’s role as a residential sustainability showcase.
There are the stock-in-trade sustainability features, like solar panels, LED lighting, rainwater recycling and double glazing.
But Element 27 also boasts electric car charging stations, occupancy sensors, an embedded metering network and has access to a centralised geothermal system. Less than five per cent of Australia’s residential stock can lay claim to an 8-star NatHERS rating, and Element 27 is one of them.
Sentinel’s ongoing role as the building’s owner and manager makes it possible to assess, benchmark and then elevate the building’s residential environmental performance, Lucas notes.
“The asset class is built to be a sustainability leader, largely because a single owner can drive better outcomes. We look at the lifecycle of the building and operational costs are at the forefront of our budgeting – we are not just looking to develop and sell.
“For example, we know that the refrigerator we specify – one with high energy performance – will be the one that goes into the apartment on completion. We can control that, as well as its replacement over time. In the build-to-sell world there’s no ongoing control. This is how build-to-rent will lead.”
Sustainability under scrutiny
Ambitious climate targets and social justice reforms have changed the way investors assess their risk. Environmental, social and corporate governance – or ESG – is now a key driver of portfolio management decisions.
Lucas says Sentinel’s investors are undoubtedly scrutinising the sustainability of their assets in preparation for a net zero world, but tenants themselves are also demanding more sustainable homes.
Four in five apartment residents in the United States, for instance, believe that living in a ‘green’ multifamily community is good for their health, according to Apartmentdata.com, and 61 per cent are willing to pay more for the privilege.
The 2020 National Multifamily Housing Council resident preference survey, which captured 373,000 resident responses, found that sustainability was a new amenities race. Renters younger than 25 indicated strong interest in sustainable features like on-site renewable energy, composting, recycling and high-efficiency appliances.
“We create community to maintain occupancy. That’s a key concept of build-to-rent. We create interactions and social outcomes that people typically don’t get as renters, and sustainability is a big part of that engagement,” he says.
Element 27’s building management staff are rolling out education sessions on topics from recycling practices to electric car charging. Social activities create awareness of the community’s sustainable attributes and aspirations, Lucas adds.
Sentinel has a 50-year history with multifamily housing in the US, where it constitutes around 20 per cent of the rental stock.
“We have been resolving the challenges of build-to-rent for decades,” Lucas says. That challenge looms large in Australia, where a third of our residents are renters, and where, in the words of Mirvac’s chief Susan Lloyd-Hurwitz, renting is “generally a miserable customer experience”.
“That’s what attracted us,” Lucas reveals. “We looked at the process of what it’s like to rent in Australia and thought ‘wow’. So many of our processes are familiar. There’s no language barrier to cross. We have a similar understanding of concepts of law. But we thought ‘We’ve got to be able to improve this,’ and we have a successful model to draw from.”
Element 27’s second phase is set to commence pre-leasing and its third and final phase will soon be underway, while a new project, just 200 metres from Scarborough Beach, will soon break ground. Sentinel’s first east coast project in West Melbourne has also been approved and will soon begin construction.
BTR’s biggest opportunity is to “tap into the changing lifestyle and priorities of Australians,” Lucas adds. “There is a perception in Australia that renting is a backup plan, but a lot of people would be surprised at who rents our units.
“There is a shifting generational mindset happening across the world. People who have lived through the GFC and now through COVID have a different perspective on how their money is tied up. They want flexibility.”
Obstacles and opportunities
What are the biggest obstacles? Lucas has a fairly long list: “It’s land tax, foreign investment surcharges, issues around GST and local planning controls. Until Australians get confidence in this asset class, it will be foreign investors driving it because they are already comfortable.”
Sentinel is watching government policies “very closely,” Lucas adds. The NSW and Victorian governments’ decision to slash land tax for BTR projects in 2020 was “welcome”. Most recently, the South Australian Government has halved land tax for eligible BTR projects, a move that has Sentinel “turning our attention to Adelaide”. Lucas says his team is looking to Melbourne “with vigour” and has Brisbane “on the radar” with the Olympics set for 2032, and “also from what we see coming from Brisbane City Council on sustainability”.
“Planning issues can make it very difficult for a speculative investor like us. We go in with funded opportunities and are looking for a level of certainty to put that money to work in the local economy.
“The big message is to dispel the myth that build-to-rent is contrary to Australian dream of home ownership. It’s another tool in the housing strategy. Build-to-rent isn’t against home ownership. It’s an ‘and, not an ‘or’,” he says.
BTR can, Lucas adds, lead to home ownership. “Most people don’t rent for life – they want to test the market.” A lot of Sentinel’s customers move on to their own properties, while others move in after downsizing while they consider their options.
“This is an established asset class in the United States, but here in Australia the opportunities are seemingly endless. Whether it’s improving sustainability, affordability, construction practices, the legal framework around renting at scale or the tenant experience – there are just so many opportunities. It’s a truly exciting asset class here in Australia amongst the confluence of social and environmental issues playing out on the global stage.”