The build-to-rent (BtR) market in Australia is steadily growing, with strong demand for rental housing driven by factors such as high property prices and shifting demographics.
BtR offers a scalable solution but unlike traditional property development models, BtR involves developers retaining ownership of the asset and operating it as a long-term income-generating rental property.
While this model presents unique investment opportunities, it also introduces a complex array of risks throughout the asset life cycle—ranging from acquisition, construction and tenancy issues to revenue stability and property damage.
As the BtR sector matures in Australia, it is crucial for investors and developers to assess the risks and insurance considerations that come with these projects.
From construction to operational risks, here’s what you need to know about protecting your investment.
Factors driving growth in the BtR sector
Steady market growth: An article from September 2024 by DWS (opens a new window) explains demand for rental properties is likely to increase due to a decline in housing affordability and that this trend may increase demand across the BtR sector.
Policy and regulatory support: According to an article by the Property Council of Australia (opens a new window), governments are encouraging BtR developments.
However, as the market matures, it’s essential for property investors to stay on top of any new regulations or policy changes that could impact profitability or project timelines.
Acquisition and planning stage
Insurance due diligence for development financing of a build-to-rent Project is imperative to ensure acquirers and investors are identifying gaps in coverage between the developer and other stakeholders such as contractors. It is important to assess risk management maturity and confirm that the target BtR asset or platform is insurable on acceptable commercial terms.
Due Diligence:
It is important to:
Review the construction contract between the developer and the builder including highlighting any deficiencies within;
Review the insurances required within the construction contract to confirm the appropriate insurances are in place;
Review the loan agreement to confirm the insurances are satisfactory with this agreement and whether any changes are required; and
Review the borrower’s insurances (i.e. their Contract Works, Professional Indemnity, Delay In Start Up (DSU), Workers Compensation and Public Liability) which will be required within the loan agreement.
Lockton’s Global Real Estate and Construction practice routinely conducts Due Diligence to help ensure the BtR Project is de-risked as much as possible.
M&A:
Beyond the due diligence phase, insurance can actively reduce or transfer key transactional and post-acquisition risks. This includes:
Warranty and Indemnity (W&I) Insurance: Provides protection against breaches of representations and warranties in the sale agreement. This can be especially useful in real estate acquisitions where sellers offer limited recourse or where competitive bidding reduces scope for negotiation. For BtR, W&I insurance can cover: title issues, environmental non-compliance, undisclosed liabilities or tenancy disputes
Development and construction risks and considerations
Construction and Development: The BtR sector is capital-intensive and construction risks are significant. Issues such as project delays, cost overruns and unforeseen site challenges can impact the timeline and budget. These risks are often intensified by multi-party contractual arrangements common in BtR developments, such as design-build-operate contracts or facilities management agreements. A detailed risk assessment should be conducted before breaking ground on any BtR development. This should include an analysis of potential construction delays, cost overruns, regulatory changes and market fluctuations. A well-structured risk management and insurance risk transfer plan will help navigate unforeseen challenges, helping to ensure a smoother development process.
Contract Works/Construction Insurance: During the construction phase, developers should secure comprehensive Construction insurance to help protect their project and interests during the construction phase. Contract works insurance is designed to cover the physical buildings, materials, equipment and structures. The policy will also include a liability section which protects against third party personal injury or property damage.
There are two types of Contract Works insurance that can be considered.
Owner Controlled Insurance Program (OCIP) / Principal Controlled Insurance
This is considered the ‘gold standard’, the Principal (Developer in this case) takes responsibility for the Contract Works insurance of the project rather than the Contractor. Some of the benefits of OCIP include:
Developer has full control over the policy the ability to tailor to suit needs to cover interests beyond the Contractors interests
Protection against contractor insolvency as insurance will cease for the project when the Contractor goes insolvent, mitigating gaps in cover
Delay In Start Up (DSU) Cover: can cover various financial losses resulting from delays following damage to the insured works. DSU coverage can encompass additional costs of debt finance or loss of expected rental revenue.
Contractor Controlled Contract works insurance:
The more common arrangement is to have contractor arrange the insurance for the project naming the Principal as an Insured to the policy
Coverage ends at practical completion in which then a Property policy and Liability policy will need to be acquired.
Operational risks and considerations:
Revenue Disruption: Post-completion, developers rely on continuous rental income to meet financial obligations and investor expectations. Events like fire, flooding, or unforeseen building issues can cause tenant displacement and lead to lost revenue.
Business interruption insurance replaces lost income and ongoing operating expenses during the period of repair or reinstatement after a loss. It is vital to ensure the correct gross rentals are declared under the Industrial Risks policy and subsequently the indemnity period should be sufficient to cover extended rectification and rebuild times, also taking into account the rising costs of construction as well as delays.
Third Party Liability: As with any large-scale development, the risk of accidents or third-party injuries is ever-present. With a large number of individual occupants, the likelihood of liability claims—ranging from injury to property damage increases. BtR investors and operators must also comply with residential tenancy legislation, adding regulatory risk to the mix.
Public liability insurance: This is essential to help protect against potential claims from accidents occurring on-site. Public liability insurance is designed to protect the owner against legal liability for injury or property damage to third parties (including tenants and visitors).
Property: Once operational, the building itself must be covered under an Industrial Special Risks (ISR) policy. This typically insures against such losses as fire, storm, water damage and malicious acts. For BtR, extended cover for shared facilities, landscaping and amenities is also important.
Building and Facilities Management: The operational model typically includes concierge services, shared amenities and maintenance operations, all of which require ongoing risk management, especially around health and safety, security and service delivery.
If Building and Facility Management is outsourced, it is important to ensure they are qualified and have experience in the space. Ensuring they have adequate Liability and Professional Indemnity insurance in the event of a loss also helps reduce the overall impacts of a loss.
Contracts: BtR developments are underpinned by multi-party contracts including building contractors, facility managers, leasing agents and investors. Clear delineation of insurance responsibilities and indemnities is vital. Insurance should be embedded into these contracts from the outset to ensure proper coverage alignment, avoid duplication and gaps, clearly assign risk allocation and responsibility
Having your insurance and risk advisor review these contracts before execution is vital to ensure risks and insurance provisions are not being misallocated.
Liability for Environmental Hazards: BtR developments must comply with environmental regulations and failure to do so can result in penalties and even prosecution, which can harm operations and reputation.
Environmental insurance can protect investors and developers against claims related to contamination, pollution, or non-compliance with environmental laws.
Key insurance markets
The Australian build-to-rent (BtR) insurance space is rapidly evolving and a variety of insurers and brokers are stepping in to fill tailored insurance requirements.
Some key Industrial Special Risks insurers have shown interest in this risk, however, it is crucial to find the right insurer partner that will understand the risk profile.
There are also specialist BtR products being released from insurers that may be suitable depending on the asset.
The future of the BtR market
As the BtR market in Australia expands, it can present significant risks and implications on insurance policies.
By being proactive with the right risk-management framework and insurance coverage, you will be better placed to protect your BtR investment.
The contents of this publication are provided for general information only. Lockton arranges the insurance and is not the insurer. While the content contributors have taken reasonable care in compiling the information presented, we do not warrant that the information is correct. The contents of this publication are not intended as a legal commentary or advice and should not be relied on in that way. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication.
