Is rent-to-own better than build-to-rent?
LOS ANGELES: Innovative property schemes now offer a new path to home ownership rather than a permanent rental lock.
Sydney architect James Alexander-Hatziplis believes Australia’s burgeoning build-to-rent sector is only going to entrench a class divide between those who can afford to buy their own home and those who cannot.
“Because renting in a build-to-rent development is so expensive, those occupiers are trapped in the rental cycle and can never build up enough equity to buy,” Alexander-Hatziplis says.
But rather than just critique the build-to-rent model, the CEO of Place Studios has set up a platform, backed by a cohort of wealthy families, that gives renters the opportunity to buy their apartment in a rent-to-own scheme.
Called Ownlea, the platform has built up a pipeline of 1500 apartments including units in new developments and unsold residual stock in completed projects. It also has plans to acquire and renovate older apartments.
The “Ownleaship Agreement” combines a residential tenancy agreement with a call-option that gives the tenant the right, but not the obligation, to buy the property over a predetermined period.
Depending on the agreement, customers can target specific equity goals that range from purely renting through to accruing the equivalent of 4 per cent equity per annum with a target of reaching 20 per cent within five years.
Rents are set at or slightly below market rates and include utilities. Any additional payments go towards building up the equity needed to buy the apartment.
Alexander-Hatziplis says total returns to investors on the Ownlea platform will be higher than those who invest in build-to-rent because of the individual sell down of units at market prices. A price discount is usually built into the sale of build-to-rent portfolios when transferred between institutional investors.
But more important than financial returns, Alexander-Hatziplis argues that his rent-to-own scheme delivers better social outcomes because it gives renters a foot on the property ladder.
“Our rents are cheaper than build-to-rent because we want our tenants to build up enough equity to swap over and become buyers,” he says.
Kriss Daff, founder of Melbourne developer Assemble, disagrees with the critique of build-to-rent made by Alexander-Hatziplis.
Assemble, which is 80 per cent owned by industry super funds AustralianSuper and HESTA, undertakes both build-to-rent projects and build-to-rent-to-own.
“There is no one golden solution to the housing crisis,” Daff says. “We need multiple solutions from participants across the continuum, from the pointy end of crisis accommodation to homeownership and everything in between.”
Assemble offers tenants the ability to secure their rental apartment for up to five years (with a standard lease that renews each year) and to lock in their purchase price at the same time (meaning they benefit from any equity gain over the period they lease). They then have the option, but not the obligation, to buy their unit when they are ready.
Assemble also includes a portion of social housing in its projects suitable for low-income earners to rent, as well as apartments with rents set at rates that are affordable for essential workers in the local area.
While there are plenty of build-to-rent developments offering hotel-like amenities and rents set well above market rates (these are typically targeted at young professionals who want to live close to the city), Daff says it is a “nuanced industry”.
“The Commonwealth and state governments are doing a good job at creating an environment to allow build-to-rent schemes to cater to a variety of income bands,” he says.
Dr Lynne Armitage, an associate professor in the Faculty of Society & Design at Bond University, also believes build-to-rent has a key role to play in solving the housing crisis, but says it needs to evolve beyond the premium-focused offering it now is.
“At present it isn’t able to be targeted at the affordable housing sector – we are getting the initial provision at the upper end of the market in inner-city locations,” she says.
But she is hopeful that build-to-rent will evolve so it can provide stable and affordable long-term rental accommodation, as it does in Europe and North America.
“In North America, build-to-rent [or multifamily housing as it known] is the second-biggest property investment class after office. Think of the scale of that,” Armitage says.
She says rent-own schemes are a “good idea” but that many fall over after a few years because most tenants can’t afford to pay rent and build up sufficient equity to eventually buy their unit.
Whether this is true, the demand is certainly there from those hoping to go from renters to owners. Alexander-Hatziplis’ Ownlea rent-to-own platform has already received more than 2000 applications. Assemble’s first two completed projects are fully allocated, while a third is 70 per cent committed.
“We’re helping younger home buyers get into the market. We’re delivering a real social good,” says Alexander-Hatziplis.
However, it will only become apparent in a few years, whether these renters have built up enough equity to purchase.