Australia’s surging population growth has sparked a new interest among Japanese investors and real estate companies to back the nascent build-to-rent housing sector, giving a further boost to a growing wave of investment in Australian real estate.
Herbert Smith Freehills partner Michael Back said that in 14 of his 17 scheduled meetings with builders, developers, investors and trading houses in Tokyo last week – his first visit to Japan since the pandemic started – BTR was the hot topic.
Drawing interest: Japanese funding is going into BTR developments led by Mirvac, Lendlease and Tetris Capital. 
From his last trip in 2019, when interest in Australian real estate was limited to making small disbursements – worth between $10 million and $15 million – into wholesale unlisted commercial funds the change of focus was remarkable, said Mr Back, the firm’s co-head of Asia real estate practice.
“The difference between then and now was like chalk and cheese,” he told The Australian Financial Review. “They’re all new discussions. What they really, really love is the population growth story – that really is the driver for BTR.”
Commercially operated rental housing that can be developed without a lengthy presales period attracts developers, too. It is well understood overseas – including in Japan – but still minor in this country.
Mirvac told investors this week that BTR made up just 0.4 per cent of Australia’s completed housing stock, compared with 5.4 per cent in the UK and 12 per cent in the US. Even at just 3 per cent, the pipeline of 47,000 units currently worth $35 billion could soar to 350,000 units worth $290 billion.
The Australian developer is also tapping Japanese interest in BTR. The Financial Review has established Mitsubishi Estate is the unidentified third investor alongside the Clean Energy Finance Corporation in Mirvac’s five-asset, $1.8 billion BTR fund.
Finding a new Japanese interest in BTR: Herbert Smith Freehills partner Michael Back. Dan Peled
Mirvac declined to comment.
Japanese real estate investment in Australia is picking up. Analysis by HSF for the Financial Review shows 10 deals to date this year, more than the seven transactions the firm identified last year in its Japan-Australia Investment Report 2022.
The investment – returning after the debt-fuelled bubble era of the 1980s that ended with crashing asset prices – has to date focused on detached home-building, with Sekisui House, Sumitomo Forestry, Daiwa House and Asahi Kasei Homes taking whole or partial stakes in local builders.
Construction and building materials have also drawn investment, as transactions such as Nippon Paint’s 2019 acquisition of Dulux for $3.8 billion and Bunka Shutter’s three acquisitions – most recently in July last year – of commercial and industrial door businesses.
The scope has widened to big-ticket institutional investment, such as Lendlease’s $800 million deal with Mitsubishi Estate to redevelop the former Goldfields House site in Sydney’s Circular Quay and Mitsui Fudosan’s undisclosed investment into Frasers Property Australia’s $232 million MAC Residences project in Sydney last year.
But this year has seen a clutch of deals in Australia’s newest institutional housing type. In July Lendlease agreed with Daiwa House to jointly develop a 45-level BTR tower, the final piece of its Melbourne Quarter project.
Earlier this week, the Financial Review reported that lender Sumitomo Mitsubishi Banking Corporation was part-funding Victoria’s Tetris Capital-led 1400-home ground-lease public housing renewal project.
Looking ‘very carefully’ at BTR: Mitsubishi Estate non-executive director Melanie Brock.  Elke Meitzel
Lendlease’s planned 560-unit BTR and affordable housing tower at its $1.7 billion Queen Victoria Market redevelopment site in Melbourne is drawing interest from potential Japanese investment partners, sources said. Lendlease declined to comment.
“Given the importance and relevance of BTR in the Australian market and given our appetite and proven track record of investment in Australia, it is most definitely something that we’re looking at very carefully,” Mitsubishi Estate non-executive director – and Financial Review columnist – Melanie Brock said on Wednesday.
“We’re looking forward to collaborating with key partners who are well-established in that sector.”
She declined to discuss the Mirvac BTR fund.
Japan, where an ageing population is cutting 675,000 people from the workforce each year, is aware of the growth Australia’s immigration-fuelled expansion offers, a Japanese banker pointed out at this week’s 60th Australia-Japan Business Co-operation Committee conference in Melbourne.
“Among the developed countries it’s a very unique country,” he said.
Daiwa House CEO Keiichi Yoshii told the Financial Review in August Australia’s growing population made it an attractive investment.
The domestic and global slowdown in real estate investment was also creating a window for Japanese investors, bound by lengthy approval processes that slowed them and meant they often lost out to faster movers in a hot market, Mr Back said.
“This is their time in the sun,” he said. “They have probably the lowest cost of capital in the region, the returns in Japan are lower than they what they can obtain in Australia… and the time they have to operate due diligence and get approvals is much more generous from vendors than in the past.”
The window would only likely stay open for another 18 months before competition picked up, he said.
However, HSF senior adviser, former Wallaby and Kobe Steel rugby player and the chairman of home builder NXT Building Group Ian Williams, said that after completing due diligence and getting comfortable about a first deal, Japanese companies often moved quickly on subsequent deals.
“The initial negotiation with a Japanese counterparty is like pushing an elephant up the hill,” Mr Williams said.
“It’s long and difficult but once you get to the top of the hill, it’s hard to stop the momentum.”
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