‘Multi-family’ is a significant institutional asset class in the United States (US), Europe, and the United Kingdom (UK), where it is known as the ‘Private Rented Sector (PRS)’. Characteristics of assets include apartments / student accommodation in a single or multiple buildings (100+ units), long lease terms, homogenous layout / design, location close to public transport and a large employment base.

Since the GFC, the solid and stable risk adjusted returns have attracted investors. Between 1982 and 2013, the US NCREIF Index recorded average annual growth of 9.7% and the UK IPD Residential Index rose by 13.7%[i]. This solid returns performance is attributable to tight supply, rental growth and low vacancy, especially in the US tech and energy sector employment hubs.

Transaction volumes reached a record in 2014, largely due to portfolio sales. In the UK, a record £2.5b worth of institutional PRS transactions were transacted in 2014[ii] and the value is predicted to reach £3.5-£4b by the end of 2015. In the US, multi-family investment sales volumes hit a record US$110.1b, a 15% increase from 2013. Cap rates firmed to range between 3.5% and 7.0%, depending on market location. Global investors range from developers/owners/operators, REITS, equity and superannuation funds.

Housing market and demographic trends point to growing underlying demand for multi-family housing.

In real terms, the Sydney median house price of $750,000 in Q4/2014 grew by 5.7% per annum in the five years to Q4/2014 and the median unit price of $580,000 rose by 4.5%[iii], well above wage growth of 0.6% per annum (NSW wage price index). The main reasons have been a net housing shortage, low rental vacancy in existing stock, strong population growth and declining home mortgage interest rates. However, on a global scale, measures such as price-to-income and price-to-rent ratio indicate that affordability in Australia’s housing market is comparable to Canada and the UK[iv].

Australia’s home ownership rate declined, from 66% in 2001 to 64% in 2011. The average age of a first home buyer crept up from 31 in 2009 to 34 in 2013[v]. People are holding mortgages for longer and renting is on the rise. Almost 60% of the 1.2 million apartments in Australia were rented in 2011[vi] and rented apartment accommodation is concentrated in the major cities of Sydney, Melbourne and Brisbane.

Australia’s population is projected to increase to 28 million by 2025, up from the current 23.6 million and the annual rate of household growth will start exceeding population growth from 2017 onwards[vii]. In the next decade, population growth will be relatively high in the ‘35-44 year’ and ‘65+ years’ age groups, coinciding with the stronger projected increase in ‘couples without children’ and ‘lone person’ households.

While Australian institutions have been investing in this sector abroad, domestic activity is limited. There is an opportunity for institutions to enter this market and they are already active in the student housing and retirement markets. However, further work is needed on Federal and State planning, legal and tax policy to address the impediments faced by potential investors in the residential sector.

[i] NCREIF, IPD.
[ii] Real Capital Analytics.
[iii] CoreLogic RPData.
[iv] Scatigna M, Szemere R and Tsatsaronis K, “Residential Property Prices across the globe”, 14 September 2014.
[v] Australian Bureau of Statistics, RFi Group, April 2014.
[vi] Australian Bureau of Statistics, 2011 Census.
[vii] Australian Bureau of Statistics.

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