Building long-term rentals in New Zealand faced big challenges, a new report says

Thursday, 28 February 2019

Successful developments of large scale rental housing needs investors happy with lower but stable returns, real estate experts say.

Tackling our housing shortage by building housing developments for renting rather than for sale faces big challenges.

To be successful they needed to be large scale and funded by investors satisfied with steady but lower returns, real estate experts say.

A new report Prospects for Build to Rent in New Zealand by real estate specialist CBRE said the trend for 'build to rent' was in its infancy in New Zealand but well-established in the United States and had taken off in the United Kingdom with government support.

So far only 96 apartments and units have been built to rent and they were in Auckland compared with 20 million in the US, almost 30,000 in the UK and 217 in Australia.

Auckland has the most pressing need for more long-term rental housing.

*More than 170 apartments developed for long-term Auckland renters

*New renting model replaces 'tenants' with 'customers'**

They could flourish if a number of factors limiting their development were tackled, CBRE said.

Pioneering build to rent developer New Ground Capital has built the Hobsonville development 'Kerepeti' which includes 47 long-term rental apartments.

Cautious banks were a key barrier. For them long-term rental developments were an untested investment in New Zealand.

In the United States multi-unit apartment development was well supported by a preferential mortgage market where developers were offered lower interest rates and higher loan to value ratios.

Major investors there included big names such as Goldman Sachs, Morgan Stanley, JP Morgan, Metlife, Blackstone and Deutsche Bank, to name a few.

Zoltan Moricz, head of research for CBRE in New Zealand, said the factors that supported long-term rental developments here were the declining number or home owners, the growing number of renter households and the shrinking size of households.

Only about 64 per cent of households now owned their homes, down from the almost 74 per cent in 1991.

The 2013 Census showed almost a third of households - 31. 2 per cent - rented and the rate was growing faster here than in the UK and the US.

Outspoken economist Shamubeel Eaqub has warned a sustainable rental sector will need overseas money to develop.

Although investment in long-term rental development offered relatively low initial income compared to commercial and industrial property, other factors supported the investment.

Those were the growth in residential rents and the stability of income.

Residential rent growth in Auckland had been much less volatile than commercial property rent growth.

'Historically, when New Zealand has experienced economic downturns and all commercial property sectors have had rental declines, residential rents have continued to increase.'

An illustration of New Ground Living's Toru Apartments in Remarkables Park, Queenstown. Of the 230 apartments, 80 will be available or long term rent.

The stability of income during weaker economic times made build to rent attractive to investors who were seeking diversification, Moricz said.

However New Zealand did not have a mortgage market supporting long-term rental developments like the US nor did it have government support like the UK.

Pioneering build to rent in New Zealand is New Ground Capital now planning a 178-apartment development for Tamaki, east Auckland, to be available on three to seven year leases.

It has completed 49 terraced houses and walk-up units leased for 10 years to the New Zealand Defence Force at Whenuapai, and has 47 long-term rentals in the Kerepeti development in Hobsonville.

It is also developing 80 apartments for rent as part of the 230 Toru Apartments development at Remarkables Park in Queenstown

Last year high-profile economist Shamubeel Eaqub warned that the greater restrictions on overseas investment in New Zealand residential property through the amendments to the Overseas Investment Act would shut out foreign money needed for large-scale rental development.

In Australia, most long-term rental development projects were happening in Sydney and Melbourne though the biggest was the $550 million conversion of the commonwealth Games Athletes Village on the Gold Coast, CBRE said.

Build to rent was seen there as one way to tackle housing shortages and had gained traction over the past couple of years.

But like New Zealand there was no government legislation or banking sector policy to drive its growth.

Investors in multi-unit rental development in Australia were local Australian institutional investors such as Salta Properties, UBS/Grocon, Mirvac and Gurner.

Progress was being slowed by disadvantageous taxes such as land tax, GST and withholding tax set at the company rate for non-resident investors. So far no overseas investor had a build to rent project in Australia.

CBRE said New Zealand had similar tax-related issues like 15 percent GST, added to almost all purchases, which could disadvantage build to rent developers compared to build to sell developers.