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BTR to outperform buy-and-hold this decade

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BTR to outperform buy-and-hold this decade.

The build-to-rent sector (BTR) is set to outperform traditional buy-and-hold commercial investments, according to asset manager DWS.

DWS said the strong rental growth we’ve seen over the past few years – on the back of a limited supply of rental property – could mean demand for BTR housing will keep expanding for the foreseeable future.

“Combining our house view rental growth and yield forecasts over a 10-year time horizon from 2024, we believe that the residential sector will be among the top performers, with high, unlevered property-level total returns expectations over the next few years,” DWS said.

DWS said there is still only a very small BTR presence in the residential sector. “The BTR housing model has, in recent years, gained traction among institutional investors looking for first-mover opportunities,” they said. “The fundamental drivers for rental housing remain intact.”

DWS said an issue in the current investment landscape is that standard buy-and-hold core strategies may not meet the steeper returns hurdle that institutional investors are demanding. “Faced with higher financing costs and risk-free rates, we have seen investors turn towards to value-added deals offering at least double-digit returns,” they said.

Across the Asia Pacific, DWS said high interest rates have been putting downward pressure on asset prices. “We expect the price correction trend to continue, with cap rates hitting a peak this year before easing in 2025 as monetary conditions ease,” they said.

Following the sharp increase in interest rates since 2022, traditional lenders have been under pressure to tighten lending conditions, DWS said. They said that this also means there is now more room for alternative lenders to enter the debt markets.

In the Australian office market, DWS said vacancy rates remained high at between 12 to 14 per cent, although incentives appeared to be near a peak. At the same time, prime logistics assets have benefited from a strong rental performance in Australia, where there is tight supply and a lack of warehouse space.

Meanwhile, rising e-commerce trends remain intact, with occupier demand from third-party logistics providers and retailers supporting take-up and occupancy levels. DWS said for the retail sector, weak discretionary spending continued to weigh on leasing with incentives remaining at record-high levels.

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