Do new living models offer a solution to Australia’s housing woes?

As any high school student will tell you, the most fundamental human needs are physiological –shelter and sustenance (Figure 1). In real estate this means housing. It is a non-negotiable basic necessity which must be satisfied before anything else like a job, relationships or leisure activities become relevant. Housing availability, quality and affordability is a fundamental factor in individual quality of life.

Figure 1: A fundamental requirement: Maslow’s hierarchy of needs

Don't dreams it's over

Australian housing has become increasingly unaffordable. Prices are up 26% since 2019 alone and have doubled since 2009, growth rates which far exceed wage rises. This has resulted from limited new supply and sizeable demographic-driven demand due to high immigration levels, falling household sizes and an ageing population. In response, the market is delivering new living models to bridge the supply gap and provide much needed, modern and fit-for-purpose accommodation.

The living universe is vast and at various maturity stages (Figure 2). In this article we consider three of the most dynamic models set to shake up the Australian residential sector: later living, Built to Rent and co-living. In this article we don’t distinguish pricing structure – rental models could be subject to market or subsidised pricing structures.

Figure 2: New models: sector size and development stage (AUD)

Later living: Tailored demographic product

Later or retirement living is rental housing for retirees which they occupy through choice, as opposed to aged care in which those with acute medical requirements reside through necessity. It is typically supported by a strong amenity offer ranging from restaurants and cinemas to gyms, swimming pools and golf-courses. It is usually supported by age-appropriate medical services or is situated close to major health infrastructure.

Later living currently dwarfs all other models because Australia was early to develop the concept. It is a global later living leader and is widely being imitated in other countries. As Australia has an ageing population, with the number of people aged over 65 projected to rise by 54%, or 2.45 million, by 2041, this suggests substantial growth in later living demand should be expected. This explains the involvement of major institutional players like Lend Lease and Stockland.

Build to Rent (BtR): A mass market solution

Build to Rent (BtR), or multi-family housing as it is called in the United States, comprises housing that is purpose-built to rent rather than sell. It is professionally managed – meaning that residents get far more attentive service than with private landlords. The product is specifically designed with renters in mind creating efficiencies of operation. Lease lengths are typically longer, the leasing process is easier and if appliances break or there are issues with the property these can be fixed more quickly as spare parts and handymen can be permanently employed by the manager.

BtR represents a small part of Australia’s living sector but is not without its challenges. It is but a burgeoning asset class in Australia due to various factors including the cost of land and our tax structure. By owning BtR assets – commonly large unit blocks in cities – investors can access non-cyclical income streams and a high number of tenants which diversifies risk. Like all types of living it is operational rather than passive, meaning they must either partner which a company that can actively manage the asset on their behalf or develop their own operational business to do so.

Co-living: A nascent sector

Co-living is the newest living kid on the residential block. The model involves small private rooms (a minimum of six is standard) which have access to shared communal facilities like a kitchen and lounge. It is professionally managed. It is similar in style to student accommodation but targeted at a young professional profile who are prepared to trade private space for cheaper rent, shared facilities, a strong sense of community and a central location. Co-living tends to be situated in vibrant city locations which would otherwise be unaffordable to residents through the private rental market.

Co-living is at a nascent stage. It is not for everyone and caters to only a small part of the rental market meaning it will only ever be a niche part of the market. However it could still play an important role in serving young people and in bringing more residents into our cities, thereby injecting much needed dynamism the support a 24/7 economy. In November 2021 NSW become the first state to define co-living legislatively in the 2021 Housing State Environmental Planning Policy (Housing SEPP), paving the way for wider adoption of the model.

A sector set to make a meaningful impact

Living is a rapidly evolving space subject to powerful demographic and affordability driven demand. It provides a genuine solution to housing supply challenges which are driving up rents and pricing more households out of suitable accommodation. It delivers modern stock designed for its occupants who get a more professional rental experience in better quality homes. It offers investors stable, secure and resilient income as well as the ability to positively impact people’s lives. It offers councils a means to ensure more residents can access the housing they need at a price they can afford to pay.

Everyone can be a winner.