American build-to-rent giant Sentinel Real Estate Corporation has declared Sydney too expensive to undertake projects and has instead turned its focus to Melbourne, after securing a $200 million commitment from a European pension fund to grow its fledgling Australian business.
Sentinel, which has most of its $10 billion real estate portfolio in build-to-rent properties – or "multifamily'' assets as they are known overseas – is pioneering one of the first such projects in Subiaco, Perth, with the first $75 million stage comprising 175 apartments due to take its first tenants in April next year.
The New York-based, privately-owned company has owned and managed more than146,000 build-to-rent units across America since being founded in 1969 and has identified Australia as a key market for international expansion.
Speaking to The Australian Financial Review on a visit to Australia, executive vice-president Michael Streicker said Sentinel was "almost predominantly focused on Melbourne" partly due to the pricing of land in the Sydney market, which made getting an appropriate return difficult.
Sentinel will target a 5 per cent net yield on cost for its Australia Multifamily Hold Trust, which will build, own and manage "Class-A rental apartment communities throughout Australia" and that now has $200 million to invest courtesy of the unnamed European pension fund.
"We like the positive fundamentals of Melbourne's economic and demographic growth," Mr Streicker said.
More broadly, he said Australia had "fantastic demographics" for build-to-rent given its strong population growth and high proportion of renters among the key demographic of those aged 25 to 44.
"Among 25 to 35-year-old Australians, 55 per cent of them rent. That number would be surprising to many people," he said.
While Mr Streicker said Sentinel would be "pleased to find something in Sydney" that stacked up, it saw better opportunities in Perth, Melbourne, Brisbane and the Gold Coast.
"We've been actively looking for sites in Melbourne for 15 months and are close to securing a few parcels. Our goal is to acquire a site three to eight kilometres from the city – not in the CBD given what is typically built there is 30 to 40 storey buildings," he said.
With its success in Perth, which was Sentinel's "beta test" of its model in Australia, Mr Streicker said it could now demonstrate to domestic investors that the build-to-rent concept does work in Australia.
"So far it's been great. The project has come in on budget and on time. It's been a really positive experience."
Sentinel prefers developments of between 250 and 300 units – the Perth project will have 360 apartments when all stages are completed – to justify its overhead costs of managing and maintaining the building.
Its build-to-rent project in Perth will be one of the pioneers in the emerging sector, with the stage one of the development – Element 27 – to begin leasing in January. Sentinel acquired the three sites in the Australian Fine China precinct of Subiaco in 2015.
Residents will be offered leases of up to two years in pet-friendly apartments and will have access to amenities such as pet washing stations, a pool and fitness centre.
Others showing interest in the sector include Mirvac, which formed a $1 billion investment club to undertake build-to-rent projects and will complete its first development at Sydney's Olympic Park in 2021, as well as Brookfield, Lendlease, Greystar, Aqualand, Grocon and Salta Properties.
Recently it was reported that Meriton's Harry Triguboff was being approached by US build-to-rent groups hoping to break into the Australian market.
Holding back a bigger push into the sector by institutional investors and A-REITS has been the lower returns relative to other asset classes – though these are looking more attractive as commercial yields tighten and house prices fall – as well as the current tax regime, which does not provide any incentives for developers.