PGGM targets Australia build-to-rent in global residential push
PGGM, one of the Netherlands' largest pension fund managers, has unveiled an ambitious plan to significantly increase its exposure to Australian residential real estate, with a particular focus on the country's build-to-rent (BTR) sector.
This strategy, which aims to maintain a 30-35% portfolio allocation to residential assets, was revealed by Ronald Bausch, senior investment manager for Private Real Estate at PGGM.
The move signals a further significant potential influx of institutional capital into the Australian residential market, which is currently grappling with housing affordability and supply issues.
PGGM Investments managed a total of over €245 billion ($265 billion) in assets at the end of March, underscoring the potential impact of this strategic shift.
"Globally, we aim for and already have 30-35% of our portfolio in residential and we expect similar numbers for Australia going forward," Bausch told AsianInvestor.
“This will take a lot of time, probably over a decade or more — it is a new sector, so we will take our time."
PGGM
The Australian BTR sector has seen surging interest from institutional investors, with players such as Aware Super, APG Asset Management, Macquarie Asset Management, JLL, Scape, Ivanhoe Cambridge, and Bouwinvest joining PGGM in this space.
“We like the risk return profile, because residential is less volatile in terms of vacancy, occupancy, and income,” said Bausch.
In May, PGGM announced a partnership with Sydney-based Apt.Residential, committing to a A$1.5-billion ($1 billion) strategy to build a portfolio of rental residential properties, initially focusing on the Sydney market.
In 2022, it partnered with Sentinel to develop and manage up to A$1.5 billion ($1 billion) in BTR communities across Australia.
REGULATORY HEADWINDS
Bausch pointed to recent regulatory changes as a key driver of institutional interest in Australian BTR.
"Obviously demographics and housing shortage are driving factors," he said. "But why now? Recently, regulation changed so that BTR can fall under the same MIT (Managed Investment Trust) tax treatment as the other real estate sectors.”
This shift, enabling BTR projects to benefit from the MIT tax treatment, has levelled the playing field and made the sector more attractive to institutional investors seeking stable, long-term returns.
Also read: Ivanhoé Cambridge expects explosive growth in Australian build-to-rent housing
However, Bausch emphasised that this regulatory landscape is still relatively new.
“What we need going forward for the sector to thrive is a stable regime and policy on this topic," he said.
"In many countries, the residential sector is the most 'political' sector in real estate. This is understandable, since availability and affordability are more important in residential real estate than in any other sector."
For long-term investors like PGGM, predictability is paramount.
"In general, a government that has a good long term stable policy is what we look for, especially in combination with local governments that are aligned with those policies," Bausch added.
INVESTMENT IMPACT
PGGM's investment philosophy extends beyond pure financial returns. As a pension fund representing the healthcare sector, Bausch emphasised their commitment to impact investing.
"We look for investments that not only yield a return but also make an impact," he said. "We like residential because it allows us to create homes for people that work in the healthcare sector or in other key-worker sectors."
Also read: AustralianSuper, APG share concerns on affordable housing
This focus on providing quality, attainable housing for essential workers is central to PGGM's approach.
"We stay away from the high-end market, we aim for mid-market," Bausch explained. "In this market, we see hardly any vacancy, we sometimes even have waiting lists."
Furthermore, PGGM's long-term investment horizon allows them to prioritise tenant stability and well-being.
"From a landlord point of view, we want to be a trustworthy partner for tenants," Bausch said. "We benefit from tenants staying with us, so we will not end any lease if there is no reason. In the Netherlands, we are not even allowed to end leases and that works fine for us. This gives certainty to tenants, we are sure they will appreciate that."
SUPPLY ISSUES
The Australian BTR sector is attracting significant interest from institutional investors, driven by strong fundamentals and the opportunity to deploy capital at scale, according to James Kemp, head of Asia-Pacific Real Estate at Macquarie Asset Management.
Macquarie
Asset Management
"The living sector is a focus for institutional investors across Asia-Pacific, with most preferring exposure to the developed markets of Australia and Japan," Kemp told AsianInvestor.
"There is a structural undersupply of accommodation in Australia, with a current national vacancy rate of 1%," he said.
Also read: Canadian pensions target build-to-rent sector in Australia
This supply-demand imbalance is expected to intensify, given Australia's robust population growth outlook. The country boasts the highest 10-year population growth forecast among developed nations, at 1.3% per annum, while build-to-sell construction starts are currently 80% below the long-term average.
"These factors have supported strong rental growth over 20 years of 4.6% and 4.9% in Melbourne and Sydney, respectively," said Kemp.
Changing demographics and housing preferences are also driving the sector's growth. Australians are showing a greater willingness to rent for longer periods, influenced by affordability issues and shifting lifestyle choices.
GROWTH POTENTIAL
Looking ahead, Kemp sees significant growth potential for the BTR sector.
"There are currently only approximately 6,000 BTR units operating in Australia. Based on units under construction or in planning, this is forecast to rise to approximately 40,000 over the next 5 years," he said.
These 40,000 units represent only 0.4% of Australian housing stock, according to Kemp, who said the sector’s growth trajectory aligns closely with the development observed in the UK's BTR sector, which is about a decade ahead of Australia.
"Over 10 years, this penetration rate could grow to 1%, or 100,000 units. This compares to a penetration rate in the US of 12%, where BTR, or multifamily, is a much more mature sector," said Kemp.