ALAN FROST HEAD OF RESIDENTIAL, 151 PROPERTY

Identifying significant potential in the future of Australia’s BTR sector, Alan Frost is closely observing evolving tenant demographics and apartment rental trends across the major capital cities. As Head of Residential at 151 Property, Alan was intrinsic in the firm’s investment journey with Realm Caulfield, a BTR asset that continues to present as a market exemplar given its ideal balance of design, amenity, and locational attributes.

Alan reflects on how the BTR market will expand over the next decade, and why this will prompt a more diverse and agile BTR product offering.

ARM: What are some defining attributes of Realm Caulfield in a snapshot?

Alan Frost (AF): Realm Caulfield is a full-scale BTR with 437 apartments. It sits above a shopping centre, it’s adjacent to a train line, and it’s adjacent to a 20,000 person University site. It also has its own tram stop being built into development. When you add all that up, the project is clearly a genuine, purpose-built BTR. It’s not something that has been repurposed from another asset class like serviced apartments. The amenity level at Realm Caulfield is excellent. It’s not over the top compared to the ‘arms race’ of amenities we see in the US market. The development is a mixture of tenure, it’s a mixture of tenants, and it’s not all about millennials.

ARM: Is it accurate to say then that the level of amenity at Realm Caulfield is what differentiates it from other housing models?

AF: In terms of the built form, yes. However, there are other factors that make the BTR model unique. One of these is this idea of community, along with the provision of additional services under a new renting model. Given the tenant is the customer, the asset manager has to have performance levels on when they are going to service the apartments, attend to things that need repairing, and support tenants in the process of moving in and out with ease. We're providing a full suite of blinds and all the appliances in the building so people don't have to drag fridges up and down lifts for example. One of the things we've done in considering the customer journey is to look across all the typical pain points of normal leasing. We’re trying to make the experience as seamless as possible

ARM: What kind of tenant is Realm Caulfield attracting?

AF: All BTRs are location-specific. There’ll certainly be a large component of millennials; 25 to 40-year-olds, along with university students and overseas students too. There will also be a smattering of over 50s, empty nesters, or people who might be looking to scale down. We also expect there will be an increasing number of families with kids in the asset. This is one of the things about BTR, you can start off in a one-bed and move to a two-bed or a three-bed all in the same building as your circumstances change. One of the benefits of this model is that the landlord doesn't want to kick you out, they want you to stay. Every time a tenant renews their lease for another year, that's a benefit to the landlord.

ARM: Do you think people will make their decision to live at Realm Caulfield based on the suburb, or based on the Realm brand and all it offers?

AF: I think people want to live in a suburb, especially in light of the pandemic and the shift away from high-rise living in the CBD. I like to say a tenant is going to rent with Realm in Brisbane, Sydney, and Melbourne, but in reality, they’re going to choose to live in a location for a variety of reasons. Their decision may be financial, or due to the site’s proximity to public transport, schools, and other family-friendly and community facilities.

BTR IS A BRAND NEW THING IN AUSTRALIA, AND PEOPLE ARE STILL IN THE PROCESS OF UNDERSTANDING WHAT IT MEANS.

IF YOU GO TO BRISBANE, FOR EXAMPLE, IT’S MORE DIFFICULT TO GET PEOPLE TO UNDERSTAND WHAT BTR IS, AND WHY THEY MIGHT BE PAYING 50 DOLLARS MORE THAN MUM AND DAD ARE CHARGING DOWN THE ROAD.

There are a number of BTR impersonators out there in the market at the moment, so running a genuine BTR asset is really important in attracting tenants. It’s obvious when an operator has whacked a BTR badge on a BTS asset. The better operators will attract the tenants and keep them there in the long term, but only if the asset is in the right location.

ARM: Why would people choose to rent at Realm Caulfield over renting from Mum and Dad?

AF: BTR is a brand new thing in Australia, and people are still in the process of understanding what it means. If you go to Brisbane, for example, it’s more difficult to get people to understand what BTR is, and why they might be paying 50 dollars more than Mum and Dad are charging down the road.

However, the choice to live in a BTR is based on the experience of convenience and community people have from day one of their renting journey with us. They will be welcomed by the asset manager when they come for their one-on-one inspection, and they will be surprised by how quickly their application can be turned around. They will also have a seamless experience when moving in. However, it’s not going to be until they've lived in the asset for a period of time, and they experience that sense of community that they really understand why the BTR experience is unique. I think people are starting to understand that.

There is a rental premium in BTR versus renting from Mum and Dad. I believe this premium will only get bigger. Why? Because people want convenience. People have chosen to rent and not to buy. Maybe they don’t want to be mowing a lawn, or they don’t want the responsibility of repairing things when they break. In a BTR asset, there’s the convenience of having someone to clean your place, fix your dishwasher, and pick up your dry cleaning. Generally, BTRs are expected to run at 95 to 98 percent occupancy, and that's really based on convincing people that you're offering a service.

ARM: In terms of design, how does Realm Caulfield cater to the kind of lifestyle tenants are looking for postpandemic?

AF: It’s configured really well across a campus-style layout, as opposed to being a multi-storey development which many people don’t want to live in off the back of COVID. The overall design of the precinct has a really appealing sense of space, while still feeling like a cohesive community. Realm Caulfield has residences spread over eight separate buildings, each with a hotel-style lobby, and access to an amenities level with views back to the city. The whole amenities area functions really well. It also benefits from a neighbourhood shopping centre and a seamless retail experience integrated throughout the precinct. Then there are the community spaces like piazza and surrounding restaurants. These elements encourage that idea of connection, without feeling cramped or overwhelming.

ARM: How do you see the BTR market evolving in Australia?

AF: At the moment BTR is happening on a very small scale in Australia. We’re talking around 10,000 apartments in planning at the moment. The Australian housing industry has gone from $7 trillion to $9 trillion, with this recent upshoot in pricing. Amongst that there are about 1.5 million apartments, and everything else is houses. If you said that the BTR sector could get to 10 percent of that, we’re looking at 150,000 apartments. That’s the total number of apartments that have been under development, and at present only 50,000 are in operation in the UK after about 10 years.

THE AUSTRALIAN HOUSING INDUSTRY HAS GONE FROM $7 TRILLION TO $9 TRILLION, WITH THIS RECENT UPSHOOT IN PRICING. AMONGST THAT THERE ARE ABOUT 1.5 MILLION APARTMENTS, AND EVERYTHING ELSE IS HOUSES. IF YOU SAID THAT THE BTR SECTOR COULD GET TO 10 PERCENT OF THAT, WE’RE LOOKING AT 150,000 APARTMENTS.

I see fewer large-scale BTS developments happening in Australia for a variety of reasons, particularly if someone has to get 70 percent pre-sales to be able to start a project. As a result of this, there is a chronic supply shortage looming between now and about 2025. I think BTR fills that space, because you don't need pre-sales, and you have a ready take-out already with the asset owner.

People talk about the fact that for this industry to be a real business in Australia there has to be 20,000 apartments, which is still less than 2 percent of the total apartment market. But developing 20,000 apartments is probably going to take five years to achieve. At $12+ billion, it will still be quite a minor sector of the market. There is definitely scope to ramp up the sector a lot more.

If the state governments continue to assist with land tax, and if the federal government is prepared to revise with the MIT tax – which currently taxes residential at double the price of any other asset class- you'll find that there could be a lot more BTR assets popping up across Australia. There's a lot of overseas money willing to invest here; people like our stable residential market, and they like our laws. There is potential for the BTR sector to have a very strong future. At the current rate, however, developing 100,000 apartments could be a 20+ year program.

ARM: How do you see the BTR product evolving in the future?

AF: I think it will move further away from being about the millennial tenant, and it will open up to a range of other demographics. These assets will spread from just being in ‘trendy’ locations to other suburbs in and around Melbourne and Sydney. I also talk about this idea of ‘BTR lite’, which is a smaller offering of 150 or 200 apartments and just the right amount of amenities to attract people to that asset. This model will focus more on how well the building is run, as opposed to the inclusion of massive gyms and swimming pools which aren’t a priority for all tenants.

I do also believe the demographic will continue to change. Single people, retirees, people travelling between states for jobs; there is a whole cohort of people who will be renting for the rest of their lives. It will be interesting to see how a single development evolves to cater for all these different tenant typologies over the next five to ten years.