(Bloomberg) -- Blackstone Inc. and Brookfield Corp. are among heavyweight investors offering hope to a housing market in crisis on the other side of the world, as they pour money into the nascent multifamily apartment market in Australia, where rental vacancies linger alarmingly around 1%.

Global money managers are being lured at a time when tax policy is becoming more favorable and an already tight rental market is expected to support returns. Ontario Municipal Employees Retirement System, UBS Asset Management, PGGM and Greystar Real Estate Partners LLC are among other players in the sector, also known as build-to-rent.

Currently, there are more than A$14 billion ($9.4 billion) in institutional commitments to Australian projects across 12 partnerships, according to Oxford Economics. 

“There are a lot of factors both in terms of the broader property market, the Australian housing market and just the kind of investment trends and policy settings that are all combining to make build-to-rent a pretty interesting asset class for a lot of investors at the moment,” said Michael Dyer, an economic analyst at Oxford Economics in Sydney. It forecasts the build-to-rent sector will be the biggest property class in terms of value of construction starts by 2030 at A$10 billion each year up from A$2 billion in 2022. 

Brookfield — with about 60,000 apartments worth $18 billion under management across the world — is planning its first development in the Australian market with a A$400 million twin-tower, 23-floor project including 560 apartments, near the Brisbane city waterfront. The company’s head of real estate investing for Australia, Ruban Kaneshamoorthy, said the firm is open to further investment in the sector, though acknowledged other areas of property often offered higher returns. 

“The return threshold probably needs to be a little bit higher for it to be really attractive,” Kaneshamoorthy said.

Many of the firms bring extensive experience from investments elsewhere in the world that enjoy far bigger markets for multifamily dwellings. They comprise just 0.2% of Australia’s housing stock — about 23,000 units — compared with 12% in the US and 5.4% in the UK, according to Ernst & Young analysis for the Property Council of Australia from April.

Sentinel Real Estate Corp., which has a portfolio of about 30,000 multifamily units, predominantly in the US, is also making a push in Australia. That’s been supported by Federated Hermes Real Estate and, in 2022, it formed a partnership with the Dutch pension fund PGGM to develop about 2,500 units in the country, worth about A$1.5 billion.

Australia is one of the least affordable places in the world for housing, as strong population growth, low construction levels and a trend toward smaller households have left the country with a shortfall of more than 100,000 dwellings by 2027, according to Housing Australia. 

In a bid to improve housing supply and affordability, Australia has lowered foreign investment application fees for build-to-rent projects to make the framework “consistent and predictable,” Treasurer Jim Chalmers said in a statement in December.

The government earlier announced plans to halve the amount of withholding tax levied on the trusts used by offshore investors to 15% from July next year, and also plans to tweak depreciation rules.

One key challenge the country faces is that it remains hard for investors to underwrite risk in nascent markets where the rules aren’t yet clear, according to Sentinel president Michael Streicker. That’s despite employment, population and economic growth all being highly supportive for Australia as an investment destination.

“Until there’s actual draft legislation that can be reviewed, it’s hard for an international investor to put much stock in that,” New York-based Streicker said.

The building industry, which has suffered a wave of company collapses since the pandemic, also remains a concern, he said.

“The biggest challenge in Australia right now is construction,” Streicker said. “The implications of that on future projections I think are real.”

Competition is also coming from local property companies Lendlease Group, Qualitas Ltd. and Mirvac Group as well as large pension funds. HESTA, an Australian pension, has a pipeline of as many as five residential projects and will spend A$250 million as a founding investor in the new specialist housing fund manager, Super Housing Partnerships. HESTA began looking for domestic opportunities about three years ago after investing in the US multifamily market for over a decade, according to the firm’s head of portfolio management, Jeff Brunton.

“Up until very recently, that asset class has been not accessible by institutional investors in Australia,” he said in an interview. 

Domestic investors make up less than 20% of the capital committed due to relatively low returns, typically 8-12%, according to Christian Grahame, chief executive officer of developer Home. Home, backed by a single Asian sovereign fund, which Grahame declined to name, has build-to-rent sites with more than 3,000 apartments, operating or in development.

The impact of the emergence of multifamily developments on the country’s housing crisis remains uncertain, with low returns relative to other real estate investment classes, high land prices and construction costs, and long planning processes among hurdles facing investors. 

Australia also needs to overcome compliance issues that would make it easier for institutional money managers to benchmark their investments against and aid risk management. 

For Louise Burke, there’s the incentive to broaden real-estate portfolios into burgeoning areas like multifamily property and away from core assets like office and retail. This will help drive interest in the sector, said Burke, Cushman & Wakefield’s director of alternative capital markets for Australia and New Zealand.

“Living assets, such as build-to-rent, are expected to benefit from rising rental demand on the back of structural shifts such as urbanization, delayed household formation and higher rates of mobility,” she said.

--With assistance from Amy Bainbridge and Swati Pandey.

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