Build To Rent wins big from low vacancy rates

It’s official.  The national vacancy rate in Australia is now below 1%.  That makes a 16 year
low according to SQM Research.

Now, we all know what happens when supply falls.  Prices Rise.  And that’s just what has
happened, with rents in Sydney increasing by more than 20% in the past year.  And with
such low vacancy rates, we could see rents increase further, especially with the borders re-
opening.  This will result in more immigration and will put further pressure on rents.

Some commentators have been calling for rents to be frozen.  That is, suppose you started a
new lease on a rental property 12 months ago, paying market rent of $800 per week.  In the
meantime, the market rent has increased to $1000 per week.  If rents were frozen, you
would have the option of renewing your lease for $800 per week, and if you moved out the
landlord could rent the same property to a new tenant for $1000 per week.

As we know, interfering with markets creates perverse and undesirable outcomes.  So here
are some implications:

  1. Tenants would stay in properties that no longer suited them, just so they could
    continue paying below-market rent.  Those properties wouldn’t be available for new
    tenants to rent.  For example, empty nesters would continue to live in large homes,
    and those homes wouldn’t be available for young families
  2. Landlords would find spurious reasons to evict tenants so they could find new
    tenants at higher prices
  3. Landlords would want to charge higher initial rents knowing they couldn’t increase
    rents in future.  Ironically, this would make rent less affordable, which is the
    opposite of the intended outcome
  4. Landlords would be less likely to buy investment properties, so there would be less
    properties available for rent.  Once again, this would increase rents.
  5. Landlords who already own investment properties would find other uses for them,
    such as renting them on Air BNB to short term travellers.  This would further reduce
    supply and further increase rents.
  6. Property Developers would be less likely to build new houses knowing that landlords
    wouldn’t want to buy them.  Over time, rents would increase even further.

So, it looks like tenants will just need to live with paying higher rents for the time being.
Landlords are the obvious winners. But who are biggest winners of all?

Answer: Build To Rent (aka BTR) Landlords. These are typically property developers who
own an entire building, and have built that building with the intention of renting the units.
The best Build To Rent operators use advanced technology, such as Price Wizard’s Dynamic
software, to optimise their rents. This software collects millions of data points and
then uses that data to calculate the price which market is prepared to pay for each unit.
These rent calculations are highly accurate, and using them can add hundreds of thousands
of dollars to the bottom line each year.

On the other hand – when you just own 1 unit, calculating rent tends to be a bit of an
educated guess.