A careful approach is needed when undertaking cost planning for build-to-rent (BTR) construction projects across Australia, an industry leader says.

During a recent interview with Sourceable, Niall McAree, director of cost management and quantity surveying firm Rawlinsons Cost Management, told Sourceable that a number of design related considerations and requirements should be afforded appropriate attention when planning for costs associated with BTR developments (see below).

According to McAree, build-to-rent represents a significant mind shift in terms of Australian residential development.

“The traditional construction industry model has always been build-to-sell, in which large developers look for parcels of land, build a development on that with apartments and their intent at the end of that construction or even earlier is to sell those individual apartments to new owners,” McAree said.

“Build to rent is a bit of a flip on that. If a developer is looking at it, they need more of a long-term strategy. They’re going to buy the land and construct the project. But rather than selling them (the units) and the project is complete, they’re going to hold them and retain them as an asset. And they’re going to create a long-term income stream by renting those individual apartments separately.

“It’s very different than the usual scenario that everybody’s probably used to and accustomed to, particularly here in Australia.

“If you can imagine a build to sell, for a developer selling 100 units, they’re they’re going to get maybe $50,000 profit on each unit. They’re going to get a pretty large lump sum in a short period of time.

“In a build-to-rent, you’re looking at it very differently. You’re doing long-term financing costs, but you’re renting those apartment items for 10, 15, 20 or 40 years. It’s a very different income stream. It’s slow and steady as opposed to quick and hard.”

McAree’s comments come as Australia is experiencing significant growth in the build-to-rent sector.

As outlined above, build-to-rent projects involve developers and their financiers constructing new multi-residential buildings with the intention to hold and own the dwellings over a long period rather than selling them to owner occupiers or property investors.

Potential for growth is significant.

As at the end of 2022, an EY (Ernst & Young) report found that Australia had 23,000 build-to-rent apartments that were either completed (3,900) or under construction (more than 19,000).

At this level, build-to-rent accounts for only 0.2 percent of the nation’s housing stock.

By contrast, in the United States and United Kingdom, build-to-rent accounts for 12 percent and 5 percent of housing stock respectively.

The Commonwealth Government currently has legislation before the Parliament which is designed to incentivise investment in eligible build-to-rent projects.

If passed into law, the new legislation will increase the rate at which investors in BTR projects can deduct costs associated with capital works from 2.5 percent per annum (depreciation over 40 years) to 4.0 percent per annum (depreciation over 25 years). The legislation will also reduce the final withholding tax rate that is paid on eligible fund payments and capital gains from managed investment trusts in relation to eligible BTR developments from 30 percent to 15 percent.

Myths and Facts

According to McAree, misconceptions with regard to build-to-rent exist in two key areas.

First, there is a misconception that BTR apartments may potentially be lower quality compared with traditional build-to-sell dwellings.

In fact, McAree says that if anything, BTR developments are more likely to be high quality dwellings.

This is particularly the case as developers who are intending to be long-term owners in BTR projects will need to bear any costs that are associated with rectification of building defects as well as ongoing repairs and maintenance. This is in addition to lost rental income which BTR developers and financiers may face in cases where tenants are not able to occupy the building (or parts thereof) during work that may be required for defect rectification or other purposes.

This contrasts with build-to-sell developments in which time and costs associated with post-occupancy defect rectification or other work is generally borne by those who purchase the apartment rather than the developer.

For this reason, BTR developers have a greater incentive to engage more closely with architects to ensure that the design delivers a durable asset as well as with builders to ensure that the final as-built product delivers upon the design without corners being cut.

As outlined below, meanwhile, BTR developers who will be responsible for ongoing building operation and maintenance will also have a greater incentive to prefer durable and high-quality materials during design.

Another potential misconception is that certain BTR developments cater specifically for certain types of users. This may then be perceived to have flow-on consequences for surrounding communities as some community members may feel that BTR developments may attract high numbers of certain types of new residents to their communities.

On the contrary, McAree says that many BTR developments are mixed-use and aim to create diverse communities.  Indeed, he says that many BTR developments feature significant community spaces – arguably more so compared with what may be delivered in typical construction.

Design for Longer Term Success

From a design viewpoint, McAree says that BTR developments often involve a greater focus on minimising requirements for ongoing repairs and maintenance as well as maximising operational performance across the building’s life.

This, in turn, may impact strategies in several areas.

First, there may be greater consideration of design solutions that may require lower maintenance effort and cost.

In terms of facades, for example, there may be a greater tendency on build-to-rent projects to consider a curtain wall system that may require maintenance only every ten years as opposed to every five years. This is particularly important as maintenance on the external façade of multi-storey buildings may require cranes and hoists.

Moving indoors, solutions such as tiles may be considered in high-traffic common areas such as corridors. Although generally more expensive up-front when compared with carpets, the greater durability of tiles may make these more attractive to BTR developers over the long run.

Next, BTR design considerations may involve greater consideration of opportunities to minimise costs associated with building operation and ongoing building energy consumption.

Potentially, this could involve consideration of air-conditioning systems that deliver greater operational efficiency as well as higher capacity photovoltaic solar systems.

Next, BTR projects are more likely to include community spaces to facilitate new tenant attraction and existing tenant retention. This could be in the form of libraries, gymnasium’s/facilities, cinemas or rooftop gardens and terraces.

Finally, design considerations in BTR developments need to cater for a variety of tenants and occupants who may change over time.

For this reason, it can be advantageous to keep finishes, pallets and layouts relatively straightforward in order to cater for a variety of prospective tenants and to ensure that the building can respond to changing tenant preferences over time.

Cost Planning Considerations

In light of this, McAree says that aforementioned design considerations need to be factored into cost planning during early project stages.

In particular, it is important to make allowance for the additional up-front costs that may be associated with the more durable design solutions, more efficient operating systems and more extensive provision of community facilities that is referred to above.

“It leads on from an understanding of design requirements that I’ve just discussed (refer above),” McAree said asked about specific cost planning considerations which are important on build-to-rent projects.

“It is important to understand the impact that these will have on the costing.”

McAree also stresses the need to undertake life-cycle cost analysis. This is particularly important in terms of the operating systems referred to above.

“You (the cost planner) need to sit down and go through the detail and say, ‘okay, well, here’s my options – here’s the capital cost, here’s the cost across the duration of the project and the lifecycles across 40 years’.

“And then I (as a cost planner) can help the client to make an informed decision about what system they would like to go for.”

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