Don't 'miss opportunity' to scale up build-to-rent sector, government urged

Sunday, 19 November 2023

Auckland’s The Nix is a New York-styled apartment block, operated by build-to-rent specialist Resident Properties.

The new government will have to move quickly to ensure opportunities to make build-to-rent developments more viable are not missed, experts say.

New Zealand has long had a shortage of rental stock, and now strong net migration is adding to the existing pressures in the rental market.

Many in the property sector believe the build-to-rent model, which involves the development of multi-unit residential buildings for long-term rentals, rather than sales to individual owners, could be one solution.

It is a relatively new entrant to the New Zealand market, with pioneer New Ground Capital completing its first 49 home development in 2018.

Since then, the sector has grown, and there are now a total of around 2066 homes in 48 build-to-rent developments nationwide, according to new CBRE figures.

The figures also show there are currently 1076 homes across eight projects in the active pipeline. These are either under construction or have been issued a building consent, and they are all in Auckland.

CBRE associate director of research Tamba Carleton says there are no build-to-rent projects in construction outside of Auckland, although some are being planned.

Investors are interested in the build-to-rent sector in New Zealand, Buddle Findlay partner Paula Ormandy says.

Taking into account the developments with resource consent or in the design stage, the total pipeline is 5556 homes across 107 projects as of November, she says.

But there could have been more in the works.

Buddle Findlay partner Paula Ormandy says Property Council calculations suggest that if the right legislation had been in place over the previous term of government, 8000 build-to-rent homes could have been built.

Those 8000 homes could have housed around 16,000 people, and given them warm, dry, secure rentals where they could put down roots in the community, but instead 16,000 people missed out, she says.

“We don’t want another 16,000 or more people to miss out, because we haven’t sorted out the issues that are holding back investment in this sector.”

“There is some momentum with build-to-rent, but it is in spite of the regulatory issues that are holding investors in the sector back.”

The Overseas Investment Act (OIA) needs changes to give international investors greater certainty, especially around liquidity, while depreciation deductions should be allowed, and tenancy law updated, she says.

In the United Kingdom and Australia, incentives, such as tax benefits, have been introduced to boost build-to-rent, and in both, the sector is expanding rapidly.

Something similar here would be wonderful, Ormandy says. “But no one expects that - we just want to see a level playing field, and an environment which is more welcoming for overseas investors.

“Because the interest in build-to-rent is there, but if it is much easier to do business in Australia, why would they invest here? There is a window of time to attract them, and we don’t want to miss it.”

An increase in build-to-rent developments will introduce more competition into the rental market, give tenants more options and encourage existing landlords to lift their game, she says.

The Arc Onehunga build-to-rent apartment complex has been operating successfully for over two years.

Property Council advocacy consultant Denise Lee says the industry is halfway there with its goal to unlock build-to-rent, with the establishment of an asset class and the restoration of interest deductibility.

But current policy settings mean it is hamstrung by restrictive regulations on large institutional investment and is struggling with an uneven playing field in terms of tax, she says.

“Getting the settings right is critical to enabling growth, and with a few policy changes, we could see the market flourish in the coming years.”

On the campaign trail, National promised to exempt build-to-rent developments from the OIA, in the same way retirement villages and student accommodation are, and introduce depreciation for build-to-rent in its first 100 days.

The council hopes the new government will honour its commitments, as those changes will help unlock large scale projects and supercharge new housing supply, Lee says.

National Party housing spokesperson Chris Bishop promised policy setting changes for the build-to-rent sector.

“Back in 2021, our modelling suggested that with all these settings in place, our members could deliver up to 25,000 new homes over a decade, and make a meaningful difference to housing shortages.”

Policy settings could change under the new government. National and ACT agree on the need for the OIA to be amended for build-to-rent, while NZ First has not issued a policy in this space, but is opposed to foreign property buyers.

There is uncertainty around what might happen with depreciation. While National said it would be introduced for build-to-rent, it later announced it would end depreciation deductions for commercial properties to help fund its tax policy.

ACT wants depreciation to remain, and NZ Council of Trade Unions policy director Craig Renney has said NZ First wants to introduce a new depreciation rate for business equipment.

Bayleys head of insights and data Chris Farhi expects the new government to adjust policy settings, but says GST also needs to be looked at.

“At the moment, it remains a key challenge for potential build-to-rent developers, as GST treatment has a negative impact on their feasibility.”

At a wider level, higher funding costs are impacting on the property market and on developers, he says.

“Build-to-rent is not escaping this, although the impact will be partially offset by the strong rental growth we are seeing in the housing market.

“The sector here has very strong investment fundamentals. The consistently tight supply of housing and high migration gains mean that low vacancies and good rental growth are likely to continue.”

Demand from tenants for build-to-rent apartments is high, according to a recent CBRE report into the sector.

It analysed operational data and insights from nine developments that have been operational for over a year, and found low vacancy rates which showed a current excess of demand over supply.

Infometrics Gareth Kiernan says mortgage holders won't have any real relief until the end of next year, even though interest rate increases seem unlikely.

Two thirds of projects were fully occupied less than a month after completion, and eight of those surveyed had 0% vacancy, while the remaining one had five units available. The average days vacant between tenancies was 4.5 days.

Carleton says the research shows there is a growing market for the product in New Zealand, as demonstrated by the “impressive let-up statistics”.

“It is clearly a high quality renting experience, enabling people to use and share amenities they would not be able to access otherwise.”

What stood out for her was that all the developers and owners she interviewed said they would create more projects, and that tells her it is worth doing, she says.

“But in the current market, finance costs for developers are very high, and construction costs are still not at a point where it is worthwhile to proceed with projects, so many developments remain at the planning stage.”

Reintroducing depreciation would significantly incentivise property owners to purchase and develop build-to-rent homes, with all the owners surveyed agreeing it would have a positive effect, she says.

An artist's impression of a Simplicity Living build-to-rent project, planned for a parcel of Ellerslie Racecourse land.

Kent Gardner is the chief executive of Arc Onehunga, a 48 home build-to-rent block. It has been operating for two and a half years, and has been fully leased for the entire time.

He says there is huge demand for what build-to-rent, and Arc, offers, and he has been pleased to see a community develop in the building.

“We have several more developments in the pipeline, and one which has resource consent, but it is a difficult market to build in right now.

“Even though our standardised plans and vertically integrated structures make for lower costs, interest rates and construction costs are high, so we are waiting a bit before we push on with the projects.”

But the pipeline of build-to-rent projects does include some large developments.

Simplicity Living, which aims to build 10,000 affordable, long-term rentals over the next 10 years, recently completed and rented its first 159 homes in developments in Onehunga and Point England. By the end of the year, it will have a further 345 homes under construction in Auckland.

Construction on Kiwi Property’s first 295 build-to-rent apartments at Auckland’s Sylvia Park continues. They are set to open in 2024, and future developments are planned for LynnMall in west Auckland and Drury in south Auckland.

Cedar Pacific and McConnell Property have purchased the site for a new 358-apartment development in Takapuna in Auckland, and the Dilworth Trust Board is seeking resource consent to build a 191-apartment development in Epsom in Auckland.