About 35% of New Zealand households live in rented housing. The numbers are expected to double in the next few years as unaffordable homes put buying out of the reach of many people who will be forced to rent, possibly for the rest of their lives.

For those who don’t qualify for social housing, New Zealand’s private rental market has been the only option and it has relied on mum and dad landlords owning standalone dwellings. But it is now being disrupted and reinvented by build to rent (BTR) schemes – a relatively new property phenomenon in New Zealand.

For renters, BTR ensures certainty of tenure with a long-term landlord and a quality and functional place to live. For investors, it offers a long-term, stabilised income stream in a needsbased asset class.

New Zealand’s taxation system has incentivised individuals to invest in residential property in recent years, but this has resulted in an inconsistent rental sector. BTR offers a more professional model.

Unlike New Zealand, BTR homes are common and popular internationally. From a 2011 start, the UK now has nearly 50,000 BTR homes, accounting for less than 1% of the 4.5 million households in the private rented sector.

In Australia from a 2019 start, there are 15,000 under construction or completed and in the next eight years the country is heading for between 30,000-45,000 homes. If New Zealand follows a similar trajectory over the next decade, the country should have 5,000-15,000 BTR apartments. Potential growth is huge.

Development Capital

Until now, New Zealand BTR developers have chased institutional capital for their projects. New Ground Capital, one of the country’s first BTR developers, is about to change this. Small investors will be able to subscribe for units in a fund delayed from May but to be launched once the Government clarifies the tax deductibility rules this month.

Being an individual landlord today is becoming less and less attractive, says New Ground Capital co-founder and managing director Roy Thompson. “We have had small investors contacting us, who have sold up, are cashed up, are keen to stay in the residential rental market and want to invest in a professionally managed model, so we see the value of opening up what we do to individual wholesale investors.

“It enables them to be involved in the rental market without having to be a private landlord. Investors will be able to participate in building development margins, receive a decent rental yield and collect any long-term capital gain,” says Thompson. Recent returns to investors have been in the 5-6% range, helped by strong residential rental growth.

So far, 92% of BTR development has been focused on Auckland suburbs where the housing need is the most acute; renter population growth the strongest; and rents the highest. BTR complexes are generally about 35-100 units, with some clever ways of achieving that scale. One complex incorporates 55 terraced homes accompanied by a 32-unit apartment building – all in the same ownership and with consistent, professional management.

Market Challenges

However, there are also challenges specific to these areas, particularly high land values; lack of suitable sites;alternate uses; and strong competition among developers for prime sites, CBRE’s recent report BTR in the Regions says.

CBRE says Auckland’s suburbs are a comfortable middle ground for property investors and developers that reduces land cost without compromising on the size of the demand base or potential achievable rents. Data on established BTR markets internationally shows that while the largest volume of stock is in core urban centres, demand also exists in more regional locations, which when combined are a significant component of the total potential tenancy market.

CBRE’s report says even though BTR pricing in the regions is likely to be cheaper than in the main centres, it will be more expensive than existing rental stock. This means that most renting households will require two or more incomes to afford the rent.

Popular With Renters

New Ground Capital hasn’t had any trouble with tenants being able to afford its rents. It has initiated 635 houses over the past six years; 235 are built, 234 are at the planning stage and the rest are under construction.

The developer’s first project of 208 apartments and terraced houses at Hobsonville caused a bit of nervousness initially for investors, so three quarters of the homes were sold on the open market and a quarter were retained as rentals peppered throughout development. The company has also developed Toru, a Queenstown development where 80 apartments are rented, and at Whenuapai 40 terraced apartments have been leased to the New Zealand Defence Force for 15 years.

Occupancy at New Ground Capital’s one and two-bedroom BTR homes of between 40m2 and 70m2 runs at 100%. Tenants are given a seven-year lease and New Ground Capital mostly says “yes” to requests for minor alterations and redecorating, keeping pets and allowing early termination of a lease.

Despite some of the frustrations of bringing together sites, densities, locations, acquiring land, building and renting at the right price, build-to-rent developers also need a platform to run developments efficiently and that is where it is quite challenging in New Zealand, says Thompson.

“A developer can’t just throw up an apartment tower and think it will be a good living environment. Building attractive homes in places where people want to live, don’t need cars and managing the property carefully to provide good investor returns is essential.”

Thompson says the trick for BTR developers is to build something that can be easily rented and easily sold. “We have got to be able to justify valuations to set management fees.”

Over the past six years New Ground Capital’s BTR complexes have been popular, which has led to 800 households on a waiting list, showing the dire straits the housing market is in and lack of private rental houses.

The latest MBIE statistics show the vast majority of residential landlords own just one rental property each and the number of bonds lodged by landlords at the beginning of February for a single property was 93,706.

There has been a drop of nearly 2% in investors who own a single rental, compared to the same data in 2015. The data also revealed the total number of landlords has dropped by more than 10,000 since 2015. Most landlords throughout the country are small operators with the majority of their life savings tied up in their rental properties.

New Ground Capital’s BTR model operates on sourcing investors as well as investing its own capital, acquiring the land, overseeing the development and using its own property management arm to administer the leases and to look after the houses and maintenance.

“BTR must have an impact because it must raise the bar for those landlords today who are offering substandard housing or poor terms or both,” says Thompson. “It provides not only good returns for investors but a good set of outcomes for tenants who are valued as customers. Treating tenants as customers is a big part missing from the market.”

There are other developers in the BTR market. McConnell Dowell is building 250 apartments, with a rollout of four to five buildings on Auckland’s fringe CBD planned.

Kiwi Property has just been given the green light for a $221 million BTR development of a 295-apartment complex at Auckland’s Sylvia Park, the country’s biggest shopping centre. The company has also applied for resource consent for 245 apartments to be built at LynnMall in a 25-storey building. Enabling works are already underway at the Sylvia Park site, with construction set to start late this year and renting to begin in early 2024.

Up to 1,200 BTR apartments could be built at Sylvia Park and 600 at LynnMall in the long term on what is now flat asphalted car parking or older housing sites in both suburbs.

The Sylvia Park complex will have studio, one, two and three-bedroom apartments, and will offer residents the security of long-term tenure, coupled with quality amenities, resident services and events, says Clive Mackenzie Kiwi Property’s chief executive. It will be managing and leasing the apartments and dealing with residents as it does with its shopping centre tenants.

On a smaller scale, arc has a $40 million, 48-dwelling project in Onehunga. Apartments became available to tenants last month.

Ultimate Handbrake

The biggest challenge now for BTR is the Government’s plans to phase out tax deductibility. This has put many BTR planned projects on hold. One developer says if the tax is applied to BTR properties it will be “a death curse”. “It is the ultimate handbrake, it’s just not going to make BTR viable in big numbers,” says Property Council advocacy head Denise Lee.

The council has been actively lobbying the Government to carve out BTR as a new asset class. Lee says the council is asking for similar treatment to that which student accommodation and retirement villages enjoy.

She says the reason for a clear BTR asset class, and soon, is the country needs more homes. “Plain and simple. The private sector – with the right enabling settings – can launch huge numbers of BTR homes in a short space of time.

Lee says the proposed rule changes for tax deductibility effectively kill largescale BTR in New Zealand. “It appears the Government is on track for releasing draft legislation in October which will have a retrospective effective date of October 1."

Both Lee and Thompson say BTR has way too many handbrakes on it.

“There are plenty of opportunities for keen investors if the Government does the right thing with its interest deductibility proposals, if the Overseas Investment Act is tweaked to allow capital to be brought into New Zealand from international investors experienced in BTR or multi-family projects, and if commercial building depreciation is also extended to BTR. These changes could unlock the supply of BTR we have," says Lee.

Thompson goes further, saying there needs to also be changes in BTR developers having to fund GST all the way through a project without being able to claim any inputs.

“If the tax deductibility rules do apply to the BTR sector combined with the inability to claim depreciation, it will have a massive drag on returns for investors and kill a sector that can provide plenty of new homes," Thompson says.

“I am constantly frustrated the Government will not take a partnership approach to BTR. Officials like the ideas and pump us for information, but rather than partner with us, they take the ideas away and try and do it themselves and inevitably it takes too long or costs too much."

The advent BTR doesn’t mean the end for the small-scale investor with one or two properties. Nor does it mean small-scale landlords don’t offer longterm tenure and quick turnaround on maintenance. “There is space for both models in the market.”