AVARI Backs Land Leases For Above-CPI Income

AVARI Capital’s CIO, Ben Coughlin, says the land lease sector offers a strong risk-reward opportunity. Coughlin highlights its high yield, stable income, and potential for growth. When AVARI Capital took stock of the best risk-reward opportunities in markets last year, Coughlin emphasized that the land lease sector stood out as one of the strongest, with advantages likely to persist for several years.

Land lease involves owning land beneath residents’ homes, collecting rent from those who place homes on it. AVARI sees this model as providing diversified and stable income, particularly in Australia’s housing market. Coughlin explained to Investor Daily that the model’s unique mechanics ensure income is both diversified and resilient, especially in the face of Australia’s housing undersupply, population growth, and shifting demographics.

Aging population drives demand

The target demographic for land lease communities includes downsizers, empty nesters, and retirees. Australia’s aging population is expected to nearly double by 2042, according to the Australian Bureau of Statistics. ABS data shows that the number of people aged 65 and over is projected to grow from 3.8 million in 2017 to between 6.4 million and 6.7 million by 2042, showing the structural demand for such housing solutions.

This demographic shift supports a strong supply-demand dynamic, which Coughlin believes will remain intact over the next five years. AVARI’s Alternative Accommodation Fund has acquired properties in regions like Busselton, Western Australia, where demand for affordable housing is high. Coughlin noted that residents’ decisions to move into these communities are well-considered, reflecting a long-term commitment to affordable, lifestyle-focused living.

Each resident’s decision in these communities represents a small percentage of the overall park income, providing built-in diversification. The last park AVARI bought in Busselton has more than 100 homes, so each individual decision in Busselton is less than 1% of the park income. This diversification minimizes risk, as no single resident’s decision significantly impacts the park’s overall financial health.

Inflation-linked returns and income growth

AVARI sees land lease as offering defensive, inflation-linked returns. Rental agreements allow for rents to be indexed to inflation, creating a direct link to the consumer price index (CPI). This is particularly relevant as Australia faces ongoing inflation concerns, with recent data showing persistent underlying price pressures. Coughlin emphasized that this inflation linkage provides a clear nexus to CPI, offering protection against rising costs.

Investors can also benefit from market rent increases and adding homes to underutilized land. Coughlin stated that each time a new home is added to a park, there’s less common area to maintain, so the actual income impact is to the bottom line. He explained that one home might increase the top line by 1%, while the bottom line will increase by 2% due to the margin and operating leverage within the park.

The land lease model’s ability to generate income growth sets it apart from traditional fixed-income investments. AVARI positions land lease as a hybrid between property and bonds, offering both downside protection and capital value preservation. Coughlin stressed that while it provides the stability of real estate, it also delivers growth over time, unlike traditional fixed-income assets.

Attractive yields and portfolio allocation

Land lease delivers a 7 to 8% initial yield on purchase price, compared with 5 to 6% for industrial, 4 to 5% for build-to-rent, and 6 to 7% for retail and office. This makes it an attractive option for investors seeking income generation. Coughlin highlighted that these yields are particularly compelling given the sector’s risk-adjusted returns and growth potential.

AVARI’s fund offers wholesale investors access to this asset class, targeting mid-market opportunities with less competition and higher yields. The strategy focuses on enhancing existing assets rather than capital-intensive development. Coughlin noted that the mid-market segment, such as the Busselton acquisition, often goes unnoticed by larger institutions, allowing AVARI to secure attractive yields and better risk-adjusted returns.

While land lease carries risks, Coughlin notes that housing is an essential need, setting it apart from more volatile sectors. The strategy has been well-received, and AVARI believes it will become a more significant part of investor portfolios as understanding of the sector grows. Since its launch, the strategy has garnered positive feedback, with Coughlin confident that its straightforward merits will make it a staple in portfolios over time.

The firm is currently focused on consolidating its leadership in the wholesale segment, passionate about the opportunity for investors to deploy capital in this space. Coughlin expressed enthusiasm for leading the charge in the wholesale market, emphasizing the sector’s potential for capital deployment.