Chanticleer
RBA’s housing pain drives PEP’s and Mirvac’s $1b bet
The RBA is growing increasingly worried that the housing crisis will last years. Mirvac and Pacific Equity Partners are betting it will.
It’s no coincidence that as governor Michele Bullock was explaining the Reserve Bank of Australia’s concern about the resilience of the housing market in the face of surging interest rates, Mirvac CEO Campbell Hanan used the same theme to explain the $1 billion bet on residential property he’s made alongside private equity giant Pacific Equity Partners.
The RBA has two, long-held concerns about the strength of the housing market, which is essentially down to a surge in demand caused by immigration-led population growth and a lack of new supply, with new housing starts at decade lows.
House prices are back on the mind of the RBA. David Rowe
The first is surging rents, which are adding to the inflationary pressures the RBA has been fighting for the best part of two years. The second is the potential for rising house prices to create a wealth effect that also stokes inflation by lifting consumption.
Bullock acknowledged on Wednesday at the Australian Financial Security Authority summit her surprise by housing’s strength; this was borne out on Tuesday with the RBA’s October board meeting minutes, which said board members wondered whether resurgent house prices “could also be a signal that the current policy stance was not as restrictive as had been assumed”.
The RBA is rightly concerned there are no quick fixes to this mess – and that’s certainly the bet Mirvac and PEP has made in buying property developer Serenitas, which specialises in a new residential asset class called land lease communities.
Land lease is essentially an affordable seniors’ housing model, in which residents over 55 purchase a modular or manufactured home, lease the underlying land for a long period (typically 90 years), and gain access to community facilities such as shopping centres and medical clinics.
Baby Boomer buyers pay no stamp duty, no exit or entry fees and can tap government rent assistance in some cases. On the other side of the transaction, Mirvac and PEP get three bites of the return cherry: developer margins; rental income; and a fee when properties are resold.
The model is big in the US but is in its infancy here. Serenitas has 27 communities across Western Australia, Queensland, NSW and Victoria, with 4200 homes occupied and generating income, and another 2000 on the way.
Mirvac and PEP effectively get to ride two megatrends: the ageing population, which will take the number of those over 55, now 7.5 million, to rise to 14 million by 2063, and the housing shortage, which Mirvac’s Hanan says is a collision of forces: population growth; low levels of rental stock; and the pressure on construction resources caused by huge infrastructure projects.
In bad news for the RBA, Mirvac’s investment thesis is that this shortage lasts for decades, not years. Hanan argues that buying Serenitas allows Mirvac to offer customers another way into that tight, residential market alongside house-and-land packages, terraces, apartments and build-to-rent projects.
“We see this as a really interesting opportunity to play across a large spectrum of housing typology in Australia, where the underlying fundamentals of under supply and growing population need to be met.”
At face value, the deal structure looks convoluted: Mirvac and PEP will own 47.5 per cent each, with the remaining stake held by the current owner of the business, private equity firm Tasman Capital Partners.
But Hanan sees that as a virtue. Mirvac has learnt from its pioneering expansion into the build-to-rent sector that scaling up in new residential subsectors can be slow. And while this was PEP’s exclusive deal to start with, Mirvac knows the private equity firm will eventually exit, giving it a path to full ownership.
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