Rental revolution

Build-to-rent is New Zealand’s latest emerging property asset class designed to service a new generation of New Zealanders who can’t - or don’t want to - own their own home.

Development sector insiders believe build-to-rent (BTR) has huge potential to address New Zealand’s housing supply and affordability issues, but it requires legislative support from the government for the sector to fully realise that potential.

The lay of the land

The BTR model sees specialist development companies build large residential developments designed specifically for renting, rather than individual sale. The developments are typically multi-unit, high-density living spaces that can include community or co-working spaces, as well as leased commercial spaces.

Resident leases are often longer term than standard residential rental tenancies, and the ownership company remains responsible for all building maintenance and management.

The developments are generally funded via institutional investors who own shares in a development, rather than becoming the landlords of individual units.

Though the BTR model is common overseas, it is a relatively new asset class in New Zealand, and a new style of living for Kiwi tenants.

Bayleys head of insights and data Chris Farhi says the rise of BTR in New Zealand fits well with the wider transition to more intensive housing, particularly in the main centres, driven by rising house prices, less availability of greenfield land, and social change. Building consent data shows consents for apartments and townhouses have increased significantly in the past 10 years.

To date, investment in the BTR sector in New Zealand has been hampered to a degree by the government’s 2021 decision to remove interest deductibility on tax for residential investors, and a lack of clarity around how the Overseas Investment Act (OIA) applies to BTR.

In August, Minister of Housing Megan Woods, announced new legislation that will exempt new and existing build-to-rent developments from the interest limitation rules in perpetuity.

The change means owners of build-to-rent assets can claim interest costs relating to these assets for as long as the asset is held and operated as a build-to-rent development.

Woods says the changes give certainty to developers and have the potential to significantly increase the supply of quality rental housing at pace and scale, while giving tenants long-term security allowing them to settle into local communities and schools.

“Everybody knows that there has just not been enough new housing built in New Zealand. While the focus is often on home ownership, the fact is there’s a really big gap in availability of rental properties,” she says.

“We recognise the enormous role that build-to-rent can play in meeting the significant gaps in Aotearoa New Zealand’s rental market. We’ve seen in Auckland and Canterbury, where there has been significant new supply, that the rate of rent increases has been consistently lower than in other parts of the country.”

To be exempt from the tax deductibility rules BTR developments must comprise at least 20 dwellings belonging to a single owner.

When it comes to overseas investment, Woods says the government has looked closely at the rules and how they apply to the sector. “In March this year, the Overseas Investment Office issued guidance regarding the application of the Overseas Investment Act for build-to-rent developments. We expect this can provide the clarity and confidence needed to encourage the institutional investment needed for build-to-rent.”

The drive for change

BTR industry experts say while any legislative support to free up investment and growth in the sector is welcome, the recent tax announcements don’t go far enough.

The Property Council New Zealand has long been a vocal proponent of BTR as a simple, effective solution to alleviate the country’s housing shortage, by offering secure, long-term homes for renters.

Property Council CEO Leonie Freeman says the tax deductibility change makes the numbers more viable for potential investors and encourages the building of new housing stock for rental.

“Only interest deductibility in perpetuity would enable investment returns that make sense as BTR relies on long-term patient capital gain,” Freeman says.

The next step, she adds, must be clarity in applying the Overseas Investment Act for BTR so it is a clear asset class similar to student accommodation or retirement villages, despite the government issuing a “guidance note” on the issue earlier in 2022.

“The fact a guidance note was even issued is evidence that a problem exists. Our members are quite clear, a ‘guidance’ note is not legally binding.

“We’ve checked recently and no one has confirmed large foreign institutional investors sitting at the gate waiting to get behind New Zealand build-to-rent - and they are - have changed their mind. The ‘wait and see’ game continues,” Freeman says.

“We’d like to see tangible changes to the Overseas Investment Act that eliminates the current uncertainty. This will unlock much bigger pools of investment.

The Property Council also wants access to depreciation for BTR. “It should be simple to link OIA elements into the asset class, along with the introduction of depreciation. BTR is like a ‘commercial’ type of living and commercial assets already enjoy depreciation benefits so why not BTR too?”

The council’s position is backed by those who have committed their businesses to major BTR developments.

Resident Properties specialises in smaller-scale BTR projects in Auckland’s inner suburbs where many have been priced out of the housing market.

Managing director Greg Reidy says though the sector is new to New Zealand, BTR is one of the more developed property sectors in the world. Overseas investors understand its potential and allowing them to invest in New Zealand’s BTR is essential.

“Build-to-rent businesses are, by nature, large and as a result global. Without opening it up to the rest of the world, BTR may flounder here,” he says. “It needs to be easy for overseas inventors to get involved in New Zealand. We’re a small market so it’s not necessarily going to be attractive to overseas investors unless it’s easy.”

While the recent tax announcements are good news, particularly in a climate of rising construction costs and interest, Reidy says, it’s important to put the announcements in the context of gaining back a tax position recently lost, rather than adding something new.

“At the moment we are an outlier. Our tax position is tougher compared to the rest of the world. We didn’t have interest deductibility and we still don’t get depreciation tax deductions.”

Kiwi Property is on track to open its first build-to-rent (BTR) apartments at Sylvia Park in Auckland, in 2024. Future BTR developments are planned by Kiwi Property at LynnMall in west Auckland and Drury, south of Auckland.

Kiwi Property head of communications and investor relations Campbell Hodgetts says Kiwi Property’s strategic vision is to create thriving mixed-use communities.

Most of Kiwi Property’s assets already have a strong retail component. With Sylvia Park they are moving forward with their plans to evolve it from a retail-centric destination into an urban village where Kiwis want to live, work, shop and play.

“We are doing this by bringing together the best of retail, office and residential – all in one place!”

Currently at Sylvia Park, construction of the second office block - 3 Te Kehu Way is well underway and expected to open mid-2023, signalling the next step in creating a thriving commercial hub and continued evolution of Sylvia Park into a world-class mixed-use asset.

“What’s most exciting in the evolution though is the addition of residential in the form of BTR apartments.”

Hodgetts agrees the government’s recent tax announcements have lent weight to the idea that BTR has a key role to play in addressing New Zealand’s housing crisis.

“Designed specifically for long-term tenancy, BTR offers residents convenience, flexibility and access to outstanding facilities. With home ownership becoming increasingly unaffordable for many in New Zealand and renting on the rise, we believe BTR has the potential to help ease the housing shortage.”

“But we do think there is an opportunity to go further,” Hodgetts says. “A more favourable treatment of depreciation, for example, would stimulate greater investment in BTR and help accelerate its growth.”

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