New Zealand is facing a housing crisis, with a shortage of rental stock having a serious impact on the price, quality and availability of rental properties.
Enter Build-to-Rent (or BTR if you’re into acronyms); the current buzz word of the property sector, ready to provide affordable, well-managed long-term rental accommodation for those have no desire or funds to own their own home. Can it be that simple?
What is it?
The BTR model is an emerging sub-market that has gained huge traction of late, particularly in the UK where the model has experienced unprecedented growth, with reports of 35,000 units either built or in construction as of September last year.
Essentially, BTR is large residential (often multi-unit high-density) developments designed specifically for renting rather than sale.
BTR properties are typically owned by institutional investors and managed by specialist operators. Generally, BTR properties are only available as long-term rentals (between three to seven years) and are purchased by investors who own shares in the development, meaning that you do not own an individual unit.
Shareholders are paid dividends based on the number of shares owned, with the units rented out to the public. Unlike a typical fixed-term tenancy, the tenant will be free to give notice when they choose. For tenants, this means they have long-term security without the fear of being ousted by the landlord.
Tenants will also have the benefit of living in tailored apartments where maintenance requests will be dealt with immediately rather than having to deal with a private landlord who doesn’t want to spend the money and often takes the least expensive option available to them. Therefore the tenants in BTR accommodation will be living in a superior product, paying a set rent that increases usually in line with inflation and they do not have to worry about dealing with landlords who refuse or who cannot afford to maintain the property.
BTR properties are also often pet-friendly and the tenants are free to make minor modifications to the dwelling.
A Gen Z solution?
With many Millennials and their younger Gen Z counterparts no longer seeing the value in home ownership, one has to wonder if the BTR model might be the perfect fit for the next generation.
In Europe, many BTR properties enjoy shared facilities such as gyms, swimming pools and shared community living spaces, with amenities such as transport hubs, schooling, childcare centres, shops and entertainment close by. Often developments offer shared spaces which included kitchens and games rooms, with the community of neighbours connecting and thriving through coffee groups, cooking classes and other community-focused activities.
Add to this the prospect of never paying rates, maintenance or insurance, nor interest on mortgage payments and it’s an attractive proposal for many who are currently struggling to break into the market.
The payoff for investors
For investors, the BTR model offers solutions to several problems such as short-term leases, with BTR homes having longer tenancy options of over three years. There has been discussion in the past that the government may even let developers use government land for projects that would encourage long-term renting, proving a security of tenure for renters and security of income for investors.
Overseas, the BTR concept is working extremely well, with investors who take a long-term approach to wealth finding it a worthwhile investment. The model has also been credited with contributing to a national construction boom in the UK.
The difference between the UK and New Zealand is that there, tax settings were changed to encourage investors to build rental properties and disincentivise buying existing stock for rental.
The benefits of this are two-fold; it encourages the building of new homes, therefore increasing supply and not forcing new home buyers who want to actually live in their home to compete with investors.
As New Zealand’s tax system is vastly different, with no stamp duty or transaction tax on housing and tight restrictions on foreign investment that mean developers are limited in their access to foreign capital, such an incentive is not possible here.
On the plus side, the extra facilities and services that come with BTR properties mean the average rent on these developments is higher than the norm. In London BTR homes cost an average 8.4% more than other rental homes.
With demand for long-term BTR residential accommodation strong in Auckland in particular, it’s hard to see a time when quality, well-managed rental properties won’t be an enticing opportunity.
In July 2019, Alan McMahon of Colliers International released a Built-to-Rent Investment Case for Auckland that does an excellent job of explaining the potential opportunity of BTR in Auckland. The report noted that;
“Barriers exist to BTR development at scale. The difficulties are GST treatment, combined with relatively low rents compared to construction and other development costs. However, if those with patient capital can ride out a few early years of low returns, then there is potential for high returns in later years, which are worth waiting for.”
Property Council’s view
Our members tell us that while BTR might not be a silver bullet, it is certainly an arrow in our armoury. The housing crisis may not be solved by one brilliant initiative, but every extra home gets us one step closer to rebalancing the housing paradigm.
Our governing board, National Council, recently signed off our advocacy priorities for the year with improving housing supply key on the list. Build-to-Rent is just one of many solutions that could see the development process streamlined to build more houses, faster.
We are calling on the Government to work with the sector to define what constitutes ‘Build-to-Rent’ for New Zealand and make the necessary legislative amendments to reduce impediments for potential BTR investors. Aligning the tax treatment of the BTR sector with similar large-scale commercial property investment assets will help to encourage investment.
To support further education on BTR, Property Council will be hosting Chris Key, Managing Director of Greystar Asia Pacific, at the Residential Development vSummit next week.