Charter Keck Cramer and Precisely Property podcast respectfully acknowledge the traditional custodians of country throughout Australia. We pay our respects to their elders past, present and emerging.
Richard: Hello, and welcome to another episode of Precisely Property. I’m your host, Richard Temlett, and I’m excited to have you with us today. If you’re here for the first time, thank you for joining us. I encourage you to listen to our previous episodes where we discuss all things property, with a focus on dynamic discussions with industry leaders. In this episode, we’re speaking with David Woodward of Global Apartment Advisors. So sit back, relax, and let’s get started.
In this episode, I’ll be speaking with David Woodward of Global Apartment Advisors. David is the Chief Executive Officer of Global Apartment Advisors, a London-based advisory firm focused on residential real estate. David brings more than 30 years of leadership experience to this role with expertise in real estate investment, asset management, property management, developments, and construction for some of the world’s premier public and privately held real estate companies. Notable roles include Global Head of Multifamily for Brookfield US and CEO at Fortress Investment Group, where he was responsible for the turnaround of Stuyvesant Town in New York City, the largest rental apartment community in The United States, totaling 11,232 units and 25,000 residents of Manhattan. This culminated in a sale to Blackstone for $5.4 Billion, the largest single asset transaction in US real estate history. Welcome David. That’s an incredible bio.
David: Thank you, Richard. Appreciate it. Glad to be here with you.
Richard: David, I’ve been talking to you in the background for a while now about coming on the show. And before we get into it, just a couple of housekeeping issues that I wanted to bring our audience up to speed on. The first one is how we’ve crossed paths. And when I was coming into the office today, I reflected back, and it was 2018 where I came across some of the research and slides that GAA or Global Apartment Advisors had prepared looking at both the US and the UK market and how it could apply to Australia. And it was one of the best written reports, certainly, that I’ve come across. And I reached out to you and I was very grateful you responded. Not everyone that I reach out to responds, but you responded. And we set up a bit of a relationship where we started sharing ideas. And when I moved back to Charter Keck Cramer, that started to grow even more. And I’m very grateful for the relationship, particularly because you are one of the few people that I know that has significant on the ground experience. And I can’t wait to unpack and get some of that experience just based on what’s happened overseas, but also how we might be able to apply it to the Australian apartment market. I have a number of clients in the last couple of weeks, I’ve inspected their developments. I’m not sure, David, if you’re aware, but a bunch of them, especially in Melbourne, have recently been completed. I’ve had the privilege of advising, and I work with them, and I’ve walked through them. And it’s absolutely fascinating and fantastic to see how these things are coming onto the market. And no doubt I’ll have some questions that we’ll talk about, and then there’ll be learnings for the clients that are starting to lease these assets up.
In terms of today’s agenda, again, I would like to please get a little bit more of your background. Quite simply because in Australia, there’s such a thirst for knowledge. But my view of a lot of it is still that it is quite academic. I’m keen to get people that have on the ground experience. And I think two minutes of listening, the audience will realise the significant experience and practical experience that you have both in The US, The UK, and around Europe. So, getting that background and then also a bit of background on Global Apartment Advisors and then also Compass Rock. I’m keen to hear what those entities are. We’ll then cover the emergence of Build-to-Rent overseas, the fundamentals of Build-to-Rent, and then the lessons for BTR in Australia. It’s the first of a masterclass series that myself and you are going to collaborate on and certainly some of your team that I’ve slowly started to meet. I can’t wait to get them on the show to talk about various aspects of BTR. So, with that in mind, could you please tell us a little bit more about who you are and who Global Apartment Advisors are and then Compass Rock?
David: Great. Yes. Thank you. Well, let’s see. I’m from the US originally, and I’ve been in the apartment sector for about 30 years now. My career kind of tracks the trajectory of the rise of Multifamily, as it’s called in the US. When I first started out of university and found myself in the Multifamily industry, it was a relatively small industry in the US, and it was not particularly, institutionally oriented. So, the big institutional investors, the pension funds, the insurance companies, and whatnot, primarily and when it came to property, they were investing in office buildings and retail properties and the like. And residential was seen as an asset class that was too granular, too management challenging, and it was mostly handled by small partnerships and joint ventures, local developers, and whatnot.
But through the span of my career, just by coincidence, it really grew and evolved and, particularly in the 1990s when the apartment REITs in the US really came into their own due to some tax law changes in the US, when apartments became much more, professionalised and became much larger. And this was the time when several of the big US apartment REITs some of you have heard of, like Equity Residential or Avalon Bay, really came into being. And I was with one of those REITs, which was called Archstone in its day, which was really a leader in this space. And, just as a side note, Archstone was a sister company to Prologis. Many of you will know Prologis on the industrial side, which is, now I think, the largest industrial company globally. But Archstone was a sister company to Prologis, and both were started effectively in the very early 1990s. Archstone later got acquired by Equity Residential in Avalon Bay. So, Archstone doesn’t exist anymore, but it was a real leader in its time.
So, I joined the industry at that time and really saw the rise of professionalism, the use of technology, use of systems, and the growth of some of these portfolios to be 50,000 or 100,000 units in the US, which really hadn’t happened before. So, from Archstone, I was there about 10 years. From Archstone, I went to a private company called Larimar, and Larimar was a company that focused on buying older apartments and fixing them up. To give you some frame of reference on size of these portfolios, Archstone was about 80,000 units. Larimar was about 40,000 units. In the US, when you talk about these apartment companies, oftentimes they’re at pretty big scale. I was at Larimar for about 10 years, and then I set up a business, with Fortress called Compass Rock. And this was around the GFC period, post GFC period. And Fortress is mostly a lending platform. And so, in the post GFC period, there was quite a bit of loans that were going bad and needed to be worked out and managed. And so, in partnership with Fortress, we set up a business, the original Compass Rock business in the US. And that platform also got to about 40,000 units, but it was primarily focused on loan workouts, stabilising assets, repositioning them and then getting them sold. Fortress wasn’t looking to own these assets long term. These were loans that had gotten bad. And as you mentioned, in that portfolio, is a very iconic property in the US called Stuyvesant Town. Stuyvesant Town, or they call it StuyTown for short, is in New York City in Manhattan on the Lower East Side. And it’s the largest Multifamily property in the US.
I assume, by extension, it’s the largest Multifamily property in the world. It’s 11,000 units, residents of about 25,000 people, and it’s been around since the 1940s. So it’s very well known in real estate circles in the US. And if you talk to anyone who’s lived in New York City, they either have lived there or have a friend who’s lived there or a relative who’s lived there. Everyone knows StuyTown in New York City. It’s a very well-known property. It had been purchased and then subsequently lost in the GFC, and it was a Fortress affiliate that had control of the asset. So, we Compass Rock, because we were affiliated with Fortress, we came in to manage the turnaround, repositioning and the eventual sale. As you mentioned, we sold it to Blackstone. And so, most of the original US Compass Rock team, is with Blackstone today, in New York.
When that happened, I got recruited to Brookfield, and I became the Global Head of Multifamily for Brookfield. And that’s when my career took an international turn. Up to that point, it had been all US domestic. But at Brookfield, being a big global company, I was being sent around the world anywhere where there was something going on in the living sector, in particular in London where Brookfield has a controlling interest in Canary Wharf Group, which is a huge estate and section of London. This is going back about 10 years ago now.
They were saying, well we’re thinking about doing Multifamily in London. No one’s quite sure if it’s going to work well or not. Can you spend some time over there and basically help educate them on how the US Multifamily sector works and how it might work in a UK context? But not just in London, really across Europe, across Asia. I was coming to Australia. Brookfield owns Multiplex, which is a company most of your listeners will know. And, so I was traveling all over, and I found myself as kind of the Multifamily Pied Piper telling the world about how it works in the US, how it has worked. And out of that came an idea, which was maybe there’s a business to help educate and work with investors and developers, on a global basis.
So, that eventually led to my leaving Brookfield setting up GAA, which is Global Apartment Advisors, which we do exactly what the name says. And basically, we work with groups all over the world. We’ve worked in 16 countries now and we do everything from help underwrite and do market research and to do design review onto operations, asset management, property management, what software to use, any of the details related to the living sector. So that’s the business. And then I picked up and moved to London with my family about eight years ago, and now London is home for us.
Richard: Absolutely fantastic. Even when you talk of the scale of the portfolios, it’s still at another level compared to what Australia right now is looking to achieve. But no doubt, in a decade or two decades’ time, hopefully it’ll get to that level of dwellings in some of these funds. Let’s jump into the actual, I suppose, meats and potatoes of the actual podcast. The first one is I’m keen, I’ve been doing a lot of research of overseas markets. They are typically more mature housing markets, apartment markets, as well as also Build to Rent (BTR) markets. And we can learn a huge amount in Australia as to what’s happened with Multifamily in the USA and the UK. I know that the emergence of BTR here or the development of it will be different because Australians do have slightly different preferences or lifestyles compared to US or UK. However, there’s still fundamental similarities. And I’m keen as the first part of discussion to talk a little bit more about how and why it emerged both in the USA 30 years ago and in the UK, out of the GFC, if I’ve understood that correctly.
David: Sure. So, in the US, it’s interesting. And the US is still kind of the common reference point for Build to Rent, Multifamily. It’s not necessarily that someone in the US said, we should create this sector. I think, like anything, it was a series of events that happened over time. As I mentioned before, some of this was tax and policy related. The very kind of short version is that, as I mentioned, Multifamily was kind of a small local investor. Some would call it a mum and pop type business. And in fact, it was not unusual for a husband wife team to be the management on a small Multifamily property of 50 or 100units. The wife might be the manager. The husband might be the maintenance guy. And I remember early in my career properties that Archstone acquired where that was very much the case. It was a husband and wife team managing the property. So you think about that versus how professionalised it’s become today.
But in the ‘80s in the US, there were some tax laws that encouraged real estate investment. There’s quite a bit of that investment that went into the development of apartments. It was a bit of a building glut that happened in the US in the ’80s. There’s a lot of extra supply. And then into the ’90s, and I’m kind of simplifying here, but in the ’90s, I mentioned there was some other tax law changes which made REITs much more streamlined and much easier to be self-managed. So that combination of an oversupply of real estate and REITs being more easy to set up created the environment for the US publicly traded REITs to really grow dramatically.
And it wasn’t just apartments. This was happening for office, industrial, all the other real estate product types. So, as a result, the US has had an institutional and professional Multifamily industry for a good 30 years. The other thing that’s happened during that time span is that institutional investors have realised that the returns from Multifamily have been very strong, very steady and it’s slowly become the preferred asset class. And if you look at there’s some good research that shows the percentage of institutional investment that goes into apartments versus other real estate product types. And in the ‘90s that was low single digit, so 3% or 4% of institutional investment that went into property would go into Multifamily in the US. Today, that number is well into the 30% range. So more than a third back from 30 years ago where it was 2% or 3% or 4%. Now more than a third of all investment from institutionals goes into the living sector.
And that just shows you that’s 30 years of very smart people on the investment side seeing the benefits of the stability of the cash flow, the downside protection. When things are good, they’re very good. When things are bad, they’re not so bad when it comes to Multifamily. When you contrast that to an office building where you might lose an anchor tenant or a retail centre, that can have a devastating impact on cash flow evaluations, etcetera. That tends to not happen on the Multifamily side.
So this combination of professionalism, growth of the industry, institutional capital coming in, all of those have joined together to make the industry what it is today. And that’s the context. And like I said, Richard, when I was with Brookfield and started coming over to the UK, but also internationally, this was 10 years ago, some of those same things were starting to be talked about, but it was still very early days. And I remember sitting in sessions in London and people saying, well, do you think it’ll work here in the UK or not? Do you think that Multifamily idea will get traction in the UK? And I remember thinking, well you’ve got a lot of renters in London and throughout the UK. You’ve got a shortage of housing. The housing stock there’s a lot of older housing stock that some of which is not particularly well maintained. The renter’s experience is not all that good generally because you’ve got a lot of private landlords. And so private landlords are fine, but they’re not professional landlords.
So your landlord might live in London. Your landlord might live in Hong Kong or New York or somewhere else. So, what kind of experience you get as a tenant, it was very mixed. And so 10 years ago, I remember saying to several people, yeah, I think it will work. There’s all the dynamics are there to have a really healthy Multifamily sector.
And, Richard, I think some of the things I just mentioned about the UK probably apply to Australia as well.
Richard: David, to be perfectly honest with you, whilst the audience obviously can’t see you or I, I’m almost jumping off my chair because what you have just described, I have pretty much daily conversations about whether it will work, how big the sector is going to get. The question I had for you before, because I know there’s quite a bit we’re going to get through today, that growth, was it linear? Or how has it got to, for example, in the US to 30%? Because, especially the financiers, I’ve learned quite quickly a lot of this is a financial equation. The financiers are trying to price the risk. They’re looking at the risk versus the reward. They’re trying to quantify how big the sector might get. And even with myself, trying to project it, so in 10, 15, 20 years’ time, but based on the growth or the trajectory overseas, how big it could potentially get. And I’m interested… I’m assuming it wasn’t linear, and I know we’ve spoken about those tax store changes, which I’m reasonably familiar with because I’ve done a heck of a lot of research. But I’m interested to know how it’s grown.
David: Well, I think, like a lot of things, it had its periods of time where there was rapid growth and slower periods. The ’90s were really the formative years for the US apartment REITs, but the other product types as well. And then there was recession in the early 2000s and things slowed down, etcetera, and then bit of growth and then GFC hit (at heights in late 2008). So, you have this kind of starts and stops.
But I think the important thing to say is there’s never been any retrenchment that’s always been a continuous climb from and I honestly, I’d have to get what that stat is today, but it wouldn’t surprise me at all if it’s 35% or 38% of institutional capital that goes into property that goes specifically into the living sector. We’ll have to pull that stat, Richard, and update the audience. But it’s well into the 30s. But the other thing to think about when we try to reflect on how is this going to play out in, either the UK or in Australia or in other markets is there was no template for the US to follow. The US was a bit of a leader here for various reasons, I mentioned. But it’s not as if it was looking at another country that had already done this. Now, other countries around the world can benefit from looking at what the US went through. But the main thing from the capital perspective, it’s the, and I’m an apartment guy, so take it for what it’s worth. But it is as an investment, my view is – it is so downside protected that there are risks, there are always risks with investment. But we have a housing shortage here in the UK. You have a housing shortage there in Australia. Even America has a housing shortage, even with all the development that happens in Multifamily. So, we need more housing.
This whole concern about supply and demand, will it work, will it not work? It’s really more about the delivery of those units, the operation, which is a whole other topic we should talk about, of those units. But all this can be done. And there’s not a situation where there’s not a need for this additional housing. Now at what rent we can charge and what the operating costs are and etcetera, that all can be researched and refined. But if you were an institutional investor and you’re looking at across the landscape of various things you can invest in, the living sector in general to me is so incredibly downside protected because as I said earlier, when things are good, they’re very good. When things are bad, meaning like a GFC type situation, people unfortunately lost homes. But guess what? They ended up renting. During the pandemic, people may have moved around a bit, but guess what? They still had to rent. One of the things we learned through the pandemic is you can office from home. That’s fine. You can shop from home, but you need a home, and you need to be able to have a place to call your own. So, again, like I said, I think it’s a bit of a no brainer. You have to do your proper due diligence and be smart about picking your partners and all the other things. But this is the reason why those percentages have grown so much. And I guess one thing to think about, if the US went from, let’s just call it 3-33% because that’s kind of catchy, 3-33% of institutional investment, the UK today, the UK is in that 3%, 4% range. It’s kind of where the US was 30 years ago. And there’s been a lot of chat about in the UK, it doesn’t have to go to 33%, but what if it went to 23%, for example? And you can do the maths. It’s a tremendous amount of investment to happen. And, frankly, the UK needs that housing. And I would say to you in Australia, imagine the same. Imagine whatever the institutional investment is in the property in Australia, what if, pick a number, 20% of that went into the living sector. How many dollars would that be in AUS and start doing the maths around that? So, you can see, hopefully, your listeners are also jumping out of their chairs because they should be thinking, wow, I’m in the right sector at the right time, to be in this business.
Richard: Well, look, David, I certainly agree with you. What I’m seeing on the ground, I do have the privilege to act for and advise a lot of the overseas financiers. So really, what’s happening in Australia is finance is still coming from overseas. It often understands BTR overseas. It’s looking to partner up with local developers or platforms that have sites on the ground. There’s a sticking point with the finance, and the finance is going, how do we price the risk? And there’s an ongoing debate here, Build to Sell apartments, which are trying to get 20% return. It’s in and out. You develop, you take on the risk, you get out. And I’m trying to educate the industry, and I sometimes get traction, I sometimes do not, about what an appropriate return would be, a risk adjusted return for BTR. I suppose, do you have any tips or advice for the financiers who perhaps in the UK or in the US even earlier, perhaps at the same point going, this might work, but we’re not sure. How do we price the risk? Who’s going to be the first mover? What are your thoughts on that?
David: Yeah. So, a couple of things to unpack there. One is what type of capital comes into these markets at what stage. And if we use the UK as a bit of a proxy maybe for Australia, it was international capital that came first. It was not local UK capital. And it’s interesting, you know sometimes it takes an outsider to see the opportunity. Sometimes we’re too close. And this is true everywhere around the world. Sometimes it takes an outsider. It was a lot of international capital that came in and said, yeah, this makes sense. Maybe I’ve invested in this sector in the US, and it’s worked well. And I see that the dynamics are there. And then the local UK capital came after that. So that’s one thing to think about. It’s not surprising. I know there’s been talk about, why aren’t the Australian superannuation funds getting more involved in property? And I know it’s complicated, and there’s tax issues and all the rest. Maybe they’re too close to it in a way, in AUS. And maybe it will take some international capital to come. And I know that’s happened. There are international investors that have come to AUS already in the Build to Rent sector. So that may be the tip of the spear to get the industry moving in the right direction. So, no surprise in that, I suppose.
But the other thing to say is, what capital, what return as you asked. There’s different cost of capital and different pots of capital that can play different roles. We have an affiliated business called Compass Rock, which you mentioned at the top, which is separate from GAA but closely related to. And it’s an investment platform, here in the UK. And we own and operate a portfolio of Build to Rent assets. We have a joint venture with Oaktree, and Oaktree is a typical private equity investor. They like high returns and relatively short holds. The private equity investors can play an important role and will be playing an important role in Australia to basically get the industry moving to the next level. They will typically come in, take a little more risk, look for a little more return, get properties up and running and stabilised, and then look to sell those assets on to a longer-term investor. Whereas private equity might be looking for, depends on their cost of capital, but mid teen, high teen IRR returns, maybe a 20. The old rule of private equity is two and 20, so a two times equity multiple and a 20 IRR. I’m telling you those deals don’t happen very often, two and 20. But that’s the old rule of thumb. But if the private equity, and the higher cost of capital money can kind of get some of these things going, some of these projects going and off the ground, then the, what I would call, more institutional kind of core, core plus investors. These could be the insurance companies, pension funds, etcetera. And those type of investors usually have a longer-term hold horizon. That could be 10 years plus. And their returns could be high single digit, low double digit, something like that. One thing, sorry, Richard. You just get me going on these topics, and I can’t stop myself.
Richard: Just keep going.
David: There’s a lot to share. One of the other reasons why Multifamily is particularly well matched to institutional investment is if you think about an insurance company as an example, pension fund would be the same way. An insurance company is trying to match their long-term liabilities to their cash flows. Right? They’ve got to pay out when there’s claims and whatnot. And so that’s what they’re always trying to do is match those things up. And the better they can match those things up, the better they can run their business. Well, I’ve said several times now how stable Multifamily can be. And so that’s one of the benefits is when they look at their long-term projections and they look at how much cash flow will this 300-unit apartment community generate each year based on reasonable assumptions of rent growth and expenses and whatnot. They can put that into their models and say, alright, if I invest this many million dollars, I can expect this kind of return over a 10 or 15 or even a 20 year period. That’s very, very helpful to these kinds of companies to match up their long-term cost, their long-term liabilities because they do, obviously, actuarial tables on when they’re going to have to pay out and how much. And I would contrast that, sorry to pick on people in the office sector, but that’s, that’s an easy target. Apologies. But if you have a big office building with a big anchor tenant and they go bad for some reason, and all of a sudden, you’re scrambling and trying to backfill that space, it can be a real challenge. And so, you think of that same x number of millions that were invested into an office building versus Multifamily, it’s not as predictable. It’s not as stable. This is why it’s gone, we’ll use 3-33 as our catchphrase here. But this is the reason for it, is those institutional investors just seeing through year in and year out of performance and economic cycles what the stability looks like for the sector.
Richard: David, I’m convinced your points about outside thinking, I think, is so well made because what I’m hearing from you, I’m learning such a tremendous amount about the investable universal, the opportunity for BTR in Australia. Let’s jump into the fundamentals of BTR. And the first thing, again, we’re really on an education masterclass, as the session is called. What we’ve started to try and do is we’ve looked at different asset classes and we’re trying to triangulate how the model works, how the returns work, benchmarking it against, for example, student accommodation, hotels, office. Where, I suppose, on the risk reward spectrum and on the financial models, in terms of cash flows and things like that, does BTR sit compared to some of these much more mature, well-understood asset classes? I’m interested in your thoughts on that?
David: Yeah. So, if you look at any of the big agents do reports and charts on the different asset classes and what the 3, 5, 10 plus year, returns are, etcetera. And Multifamily / BTR tends to be near the top, not necessarily always at the top. Industrial often is at the top. Sometimes self-storage is at the top. But what isn’t at the top, unfortunately, is office and retail and some of these other sectors. But many of your listeners know the term sheds and beds. So that’s something that a lot of institutional investors are really focused on, which is industrial being sheds and beds being anything in the living sector. And those sectors tend to perform the best. But if you think about, obviously, industrial, what’s driving that is, all the online shopping and the changing nature of retail, data centers, obviously, another big area of growth. Anything that any of those sectors where it’s more predictable, it’s more stable. If you look at self-storage, self-storage is basically kind of like Multifamily in a way. You’ve got a lot of little units, a lot of tenants. Your occupancy probably runs in the 90 something plus percent range. And if you lose a few tenants, you can backfill with a few others. It kind of has a lot of the similar dynamics to Multifamily.
But within, if I may, within the living sector, there’s some definite differences. And I guess the living sector, we at GAA, we focus on the entire spectrum of the living sector. So, for us, that’s everything from student to senior, but only rental. But not hotels, but student to senior. Student housing, there’s been a huge growth in student housing and again this is new construction, professionally managed, large scale, institutionally owned. And I know that’s happened in Australia as well. It’s also happened in the UK. It’s happening across Europe. I think an interesting point here is that way back when I was at Brookfield and it was going back and forth between New York and London, and they were asking, will Multifamily work or not, it was student housing that was really the first mover. And it was companies that are coming into the student housing and professionalising the student housing sector. And that’s happened in Australia, as you know as well, Richard. It’s really led by student housing. So there is just like with Multifamily, there’s a lot of need for student housing. There’s a lot of demand for it. Most of the existing stock was historically not that good. The renter experience was not that good. A lot of house shares and all that comes with that. But across Europe, leading with student housing. And then BTR kind of came after that. It’s an interesting chronology that led with student. The thing I often think about with the PBSA market is that the quality of the PBSA, and this is purpose-built student accommodation for your listeners, PBSA. The quality of the PBSA is certainly not what it was when I went to uni. It’s very, very nice, this new stock and with the amenities and the shared living spaces and communal spaces and the gym and the lounge and all this other stuff. It’s very, very nice. But I think what’s happening is these uni students that live in that manner are getting trained up for proper BTR because they’re basically living in a version of BTR. It’s basically a training ground for proper BTR tenants, so we like that.
But from a risk standpoint, an investor standpoint, student housing is a little bit more risky for a few reasons. First of all, what happened post pandemic? Students didn’t show up. They stayed home. A student can be impacted by those types of things whereas traditional BTR is less so. Also, student housing from an operational standpoint, it’s more dynamic because you have basically an entire lease up every year. And if you don’t hit that window properly during the summer months going into the autumn term, you’re kind of stuck. You can’t recover very quickly. Whereas BTR, if you hit a slow patch, you can always recover. As a result, student housing, PBSA, at least in the UK, tends to trade at a higher cap rate, about 50 basis points higher than BTR would. And I think that’s right. That’s probably where it should sit.
Another permutation of the living sector, which is relatively new, is co living. What is co living? Co living is somewhere between student and BTR. It’s basically smaller units meant for, maybe uni grads or people who are on a budget or maybe people who just need an extra apartment as a pied-a-terre or they come and go into a city often and they need a place to stay. But this is generally falling into 20-30 square metres studio design but with a proper bathroom and a kitchenette. It’s self-contained, very small units, but with lots of communal space and amenity space so that you don’t feel stuck in your small apartment. That sector is really growing in the UK. It’s growing across Europe. I think there’s definitely scope for it in the right locations and in the right markets. I think it will be very popular in Australia as well. You think about Sydney or Melbourne and being able to have a nice 25 or 30 square metre new construction flat that’s at a relatively affordable level, I have to imagine, Richard, there’d be a ton of demand for something like that. So, a prediction, and maybe it’s happening already, you tell me, but I I’m sure co-living will find a place in Australia.
Richard: It’s already emerging. It’s actually quite freaky listening to you. I feel like I’m really looking into the future as to what’s coming. Just about everything you’ve said with the emergence of student accommodation, all the doubts and the questions and the querying about where the returns ought to be, whether Multifamily or BTR will or can emerge, these are the debates that we’re having. And I must admit, I’m not that surprised because when I’ve done the research overseas, I’ve seen that the UK is 10-12 years ahead, one to two market cycles, and the US that much more ahead. And there’s certainly a lot that we can learn.
Let’s shift gears, if we could jump into some of the basics of BTR. I know we’re going to do a couple of other sessions down the line in a bit more detail, but I’m interested, with the industry asking things like, who are the target markets? Can we get rental premiums? Are there rules of thumb with mixers and amenity and things like that? It’s all well and good for me to go and read various academic articles on what may or may not happen. I’m interested to know in your decades of experience, what are you seeing? Are there typical rules of thumb? I appreciate it might be submarket and location specific, but I’m still convinced that there’s a lot in BTR that your experience can start to be unpacked.
David: Yeah. I think that a good starting point is that many markets that are new to BTR and again, GAA does this type of advisory work all around the world. We’re doing quite a bit of work in Europe, so Spain.
Richard: Denmark, didn’t you?
David: Yeah. It’s up in Denmark. We actually have a new client in Cyprus.
Richard: Okay.
David: And we’re doing quite a bit in Italy. So, this growth of the living sector is really a global phenomenon, and it’s interesting to track. And oftentimes, GAA is maybe a bit of a leading indicator because when we get hired by a few clients, that could mean that that market is starting to pick up and really look seriously at Build to Rent, or student or co-living for that matter.
But the reference point is oftentimes the build for sale market because historically, and this is true in the UK as well, and it would it would be true in Australia, the market has mostly been made up of build for sale where you have private landlords that will buy a few units as their private investment, and they become a landlord. And I mentioned some of the pitfalls of having private landlords who are not professional landlords. Or you’ve got developers who build out a for-sale product and weren’t able to sell all the units and they’re left with 10% or 20% and then they say, well, we’ll just put it into the rental pool and see what happens. But regardless the stock is designed up as a for-sale product. And that has several implications. So one is, generally speaking, a for-sale development will be more skewed towards larger floor plan types. So, two bedrooms and three bedrooms. The finishes, the developer usually doesn’t focus so much on, what the durability is of various finishes because they sell the unit and they move on to their next development. They’re not living with that building for years and years.
And I mentioned our business Compass Rock where we invest in Build to Rent in the UK. The properties we have acquired were all designed as build for sale. None of them were designed, purpose built as Build to Rent. And so we run into a few challenges like the unit mix, for example. In a rental environment, you’ve got a lot of singles and a lot of couples, and therefore one bedrooms are kind of the power the power unit, if you will. And you want to have some two bedrooms as well and you want to have some studios as well for various reasons. But the majority of the unit mix should be a one bedroom. That is not true in a build for sale structure because most people really don’t want to buy a one bedroom. If they can afford to stretch and buy a two bedroom, they will. And they’d buy one bedroom if they really have to because of pricing, and a limited budget. So right off the bat, there’s this difference between Build to Sell and Build to Rent. And it’s interesting as we go into new markets, we’ll talk to a developer, and they’ll say, oh, well, you know, the two bedroom is the main floor plan type in this market or this country. Well, yes. Of course, it is because that’s all that people have built because it’s all been for sale product. There’s a bit of trying to shift the mindset into a rental mindset in environments where people just haven’t had it before. One of the things we look at is unit mix and floor plans and what rent per square foot can be charged. And that’s the other reason why having the unit mix correct allows you to charge potentially a higher rent per square foot because the rent per square foot is generally higher on the smaller floor plan types. So we’re always looking at that.
Proximity to jobs is one of the key metrics to look at. You know, where do people work? Why would they live here? That’s another big difference between Build to Rell and Build to Rent. Build to Sell environment, people will sometimes commute a bit further to be able to afford. So, hopefully, your listeners will appreciate this. You probably all have friends that well, they bought a little further out, but it was a lot more affordable. And so, they could buy a nice two-bedroom flat or a three-bedroom flat, and the growth of the city will come in time. That’s fine if you’re buying to live in this apartment and be there for five or ten years or longer. If you’re renting, you don’t really want to make that compromise. You want to be as close in as you can because you might only live there for a year or two and then you move on to the next one. So, the locations of schemes come into play quite a bit. So being the obvious things that everyone talks about. Close to jobs, close to transport, all these things are very important.
The other thing, kind of flipping this on its head a bit, Build to Rent can play a really interesting role in helping to develop new areas, which on the flip side, people might not want to own in because they’re not quite sure if it’s an emerging area. But they might be willing to take a chance and rent for a year because it’s much less risky. So, you often see this in the US where the edgy part of town that was the industrial area or there was the funky area with the funky after hours nightclubs or whatever it might be is a great area for a Build to Rent. Because people and not for everyone, but for some people, it’s a cool area. It’s something new and different, and the land prices can be that much less, and there will be demand for it. And, oftentimes, gentrification then happens over time. And then next thing you know, the Build to Sell guys are in there building condos and doing it up for sale. So, Build to Rent can kind of be this tip of the spear in helping to develop emerging areas. That’s another way to kind of think about it.
Richard: No, that was absolutely fantastic in terms of the urban renewal opportunities. I was going to jump in there and go, does there have to be a rental premium? What are your views on that? There’s still that debate about is Build to Rent, is there a premium for Build to Rent versus Build to Sell? Why is there a premium? Does there need to be a premium? Again, I can tell you the academic view of things. What, and I can start to see the practical reality of how it’s occurring in Australia. But 30 years in the industry, what are you seeing? Is there an automatic premium? Is it bedroom specific? What are your thoughts?
David: Yeah. So, Richard, I was hoping to be a bit controversial with you on this podcast. So here we go. Let’s be controversial.
Richard: Good.
David: I really don’t like the term premium, and we hear it here in the UK all the time, so it’s nothing new. But to me, premium is implying that this is some kind of a high end product. This is only for upper income brackets and whatnot, but it does get applied. To me, it’s not so much a premium. This is a different offering. So, what happens here in the UK, and I’ll give you an example. What happens here in the UK is a Build to Rent scheme gets planning, which, by the way, is takes forever, which I’m sure it does in Australia as well. It’s very challenging.
Richard: Yes. It does.
David: The biggest challenge. The biggest challenge is planning. We haven’t touched on this one yet, but the biggest challenge is planning. But anyway, planning miraculously occurs on 200 units, in a market that needs more housing, etcetera, etcetera. And it’s 200 units, and it’s nicely appointed, and it’s got amenities, and it’s got professional management and the rest. And the rents are 10% or 20% or even 25% higher than the best stock in that local market. So, then everyone says, oh, that’s the Build to Rent premium, which I get it. I mean, it is a fair way to describe it. To me, it’s a different offering. It’s something different because the best stock in that local market, first of all, is five years old, ten years old. It was a build for sale product, which means no amenities. Right? There’s no professional management. You go and tour, you look it up online, you go on online listing sites, and you see pictures of that product and, boy, it looks nice. Guess what? Those photos were taken when the property was brand new. And we send our GAA mystery shoppers out to go pretend to be renters. That’s one of the services we offer. And they go out and pretend to be renters. And sorry, but it looks like crap. It doesn’t look anything like the photos. There’s no amenities. There’s no service. It’s probably through a private landlord, which another issue, which doesn’t get talked about enough, is certainty of tenure. The idea that that owner says, oh, I’m moving back to London, or my nephew’s now going to uni in London. I want my flat back, blah blah blah. I don’t know if this happens in Australia, but this happens very frequently in the UK. And people who are good renters, who like their flats, who are very happy, are being forced to move. And think about the cost and the hassle factor of all that. Well, in a Build to Rent format, that doesn’t happen. There is no issue of certainty of tenure. Now that I’m saying it out loud, I feel like we need to be making more of this certainty of tenure thing when we’re marketing our flats. My point in all this, Richard, is even the certainty of tenure, just take that one little bit. Forget about the amenities and quality of the product and the service, and you can actually get your refrigerator fixed when it breaks, and you have to wait a month or two and all these other things. What’s that worth? Is that worth 5% more, 10% more, 50%? There’s value in all these things. So, this is why I’m kind of picking at the premium thing.. It is to me, it is a different offering. It’s not a premium offering. But everyone’s going to call it the premium. That’s okay. But that’s a reason why there is a different price point. And, what we’re finding is when tenants have the experience, you know, as long as it’s a good Build to Rent experience of the amenities and then meeting other neighbors because management is doing a good job of creating community and holding events, doing other things like this. And knowing if they have a problem, there’s a professional company that is right there. There might be on-site staff to help them as needed. It’s very hard for those tenants to go back into a PRS, private rental sector, private landlord environment. So, it’s a little bit like you asked earlier about the growth of the institutional investment over 30 years. I think it’s a bit like this too from the demand side, from the tenant side. I think once people have lived in this type of environment with the service and whatnot, it will be hard for them to go back into private landlords.
The other thing that’s happening, you got me on a roll here, Richard. But the other thing that’s happening in the UK, and I don’t know if this will happen or is happening in Australia, but a lot of those private landlords, those guys who own a flat or two or three as an investment, are getting out of that business. They’ve realised that it’s a pain, that it’s a high headache. In the UK, they’ve taken away some of the tax benefits around private landlords. So, we actually have a, believe it or not, we have a shrinking supply here in the UK of rental apartments. We already have a housing shortage, and now we have a shrinking supply of rental housing because those private landlords are just saying, enough, I’ll put my investment somewhere else. Too much hassle. I don’t get the tax write off that I used to. And then it’s owner occupiers who are mostly buying those flats. We actually have more pressure on housing, not less pressure.
Richard: I’m smiling, David. I know, obviously, the listeners can’t see myself smiling. It’s just in Victoria, a very similar thing is occurring right now. The rental pool is shrinking. It’s also happening in other states where the rental pool is shrinking. Look, I know we’re going to be doing other sessions, so I’m keen to give the audience a bit more of a teaser, and we can unpack it down the line. I had a debate this week with some of the financiers about projects that have just opened. They’re starting to stabilise. And we haven’t had any assets fully traded, there’s been one that I believe that has traded up in Brisbane and Australia. We were at that early phase. But before even getting to the trading of the assets, I’m interested to know, in terms of the operation of the buildings, I’m concerned that the industry, they’ve been so focused lately on the development risk and building these projects out, but I’m not sure if they’ve really fully thought through and because it’s emerging, fully thought through how to run, operate, maintain these things to maximise revenue. I can see you smiling, and I don’t know.
We probably have to do another session on this, but I’m trying to also be ahead of the market in terms of identifying risks for the listeners. And it’s almost like they’ve gone; how do we get the rents that we’re looking? How do we get this built out especially come out of the pandemic? And now they’ve gone, okay, we’ve got this beautiful building that looks fantastic. It seems to be nicely furnished. How’s it going to wear? How are we going to maximise revenue? What are your views and what tips do you have in that regard?
David: Yeah. Well, Richard, I’m laughing because the parallels, I think, between AUS and UK just go on and on. But I guess it’s a natural progression. You know? You’ve got to get belief around the investment opportunity. You’ve got to get planning, like I said, which is a whole other session. A boring session, but another session for us to do. You’ve got to raise capital around it. I mean, there’s so much that goes into this, and then it takes two or three years to get the project built, blah blah blah. But developers, and you’ve got to love developers because they’re eternally optimistic. When you ask your typical developer or investor about operations, they will usually just say, oh, yeah, we’ll deal with that when the time comes, or we’ll hire the local agent, or we’ll hire whomever, or the other thing that’s happened here in the UK is probably happening there. Oh, we’re going to build our own Opco. Yeah, we’re going to build an operating company, Opco. We’ll build our own, we’ll hire a few people, and we’ll get some software, and we’ll figure it out. Most have dramatically underestimated how difficult the operations bit is. And I know earlier on the podcast, I said it’s so stable, and it’s so predictable, and it’s so great. And all those things are true. But the operations bit is very challenging. It can be done. It can be done well, but it’s not easy. And it requires, trained people. You think about it, it’s more like a hotel in a way. Now it doesn’t have people staying a night or two. It has people staying a year or two. But it’s more like a hotel in terms of this constant move ins and move outs and customer service issues, etcetera.
But the way I think about it is it’s more intense than a hotel in a way because it’s people’s homes. So, a hotel, if someone comes and has a bad experience and stays for a night or two, they just never come back. In BTR, someone moves in and is having a bad experience, you’ll never hear the end of it. They’re down in the management office every day. They’re on social media talking about it. So it is actually more intense in a way, than hotel management just because of how personal it is, and it’s someone’s home. And I think you have to treat our customers, in the US they call them residents and they call them tenants. You treat them with a lot of respect, and you have to always, I think, remember that the rent they pay is their biggest payment they make every month. It’s their personal home. And I think it’s easy for us to all think about these as investments and the growth of the sector and all the rest. We’re building homes for people, and it really is that personal. But the operations bid, Richard, I guess, for another session, it’s very difficult. It’s very challenging. It can be done. It can be done well. I would say the UK has been on the Build to Rent journey now for10, 12, 13 years, something like that. And we’re not there yet in terms of operators. We’ve got some that are doing okay, but there’s still a lot of room for improvement. And I would say in AUS, it could take a decade before you see 3 or 4 or 5 really, really outstanding operators. Maybe it’ll move faster there. I don’t know. But it’s hard work.
Richard: David look, I know we’re short of time today, so I’m going to close off now. However, as we’ve discussed, we will have separate sessions. I will let our listeners know too. I’ve seen some of the YouTube videos that you’ve been on. They’re very short clips. I absolutely love them where you talk, and you have little tips and ideas for BTR.
What I’ll do to close the session out is the three learnings from me today. It’s been, even though I have spoken to you a lot David about similarities and differences, there were still an enormous number of things that I learned today. The first one is you convinced me within the first 10-15 minutes that, probably to crack the nuts of BTR in Australia is going to be that outside thinking. I’m convinced right now that the industry is too close to see the significant opportunity that is that is here, in particular, the financiers. I think they are, it’s no disrespect to them, I understand that they’ve got duties and obligations. But I think that when you step back, just like you’ve articulated, there’s a significant opportunity in Australia, and it’s going to take some outside of the box thinking and outside capital to come in. And it’s quite scary to see that almost everything you’ve described in the UK is playing out on a day-to-day basis right now.
The second one was your idea of urban renewal opportunities. I have the privilege of doing a lot of work for the state government, and that’s something that they could consider because I do know, in the past, typically, renters because it’s almost lower risk of being a renter rather than a buyer, and there have been more opportunistic developers that have developed in the lower amenity or the gentrifying areas. The renters come in first when there’s growth and there’s demand and the buyers come in after that. There could be opportunities, especially that the state government, and the federal and state governments are freaking out right now in Australia because there’s a shortage of dwellings. And one of the ways, perhaps that the politicians listening to the show need to consider is that BTR could actually do a lot of the heavy lifting, in some of these urban renewal areas, which I’d certainly not considered, but there’s a lot of them around all the Australian cities that could be renewed, and the government could be a first mover in the space and help to derisk the asset classes.
Also the final point I’ll make is I’ve not really considered the asset class of self-storage as being so similar to BTR. That’s really fascinating. But as you were talking about it, that’s an emerging asset class here. It’s certainly also one of the darling asset classes right now. And for some reason, there doesn’t seem to be the resistance to self-storage as there is to BTR, and I’m not quite sure why that is given that there are a lot of those similarities, and perhaps it’s because I’m not close enough to the self-storage to really know that. But I’m sure we can start unpacking that in the subsequent sessions to come. David, did you have any final words just before we end today’s show?
David: No, Richard. I just want to thank you for having me. It’s been a real pleasure. As you can tell, I can talk on and on about this sector. I’m passionate about it. I believe in it. And it can be such a solution for the housing challenges that we have. I think just like you said, maybe taking a step back and taking a bit more of the long view, it’s not particularly risky as long as you do your proper underwriting and proper diligence, and we need to deliver more housing. It’s a need, on a global basis.
Richard: Great. Well, look, certainly we’ll be having the next session very soon, and I am very much hoping. I’ll put all the links in the show notes that people start reaching out to you, and they can have separate private chats again to educate themselves a little bit more, on this very important and very exciting asset class. I’ll say goodbye to everyone today, and thank you very much for listening.
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