Build-to-rent momentum grows

Thursday 29 August 2019

The Government needs to better enable the growth of New Zealand’s fledgling build-to-rent sector if it wants to alleviate the country’s housing shortage.

By Miriam Bell

That’s according to the growing numbers of property and investment experts who believe build-to-rent is an alternative development model capable of producing quality affordable housing.

Build-to-rent is a stand-alone housing sector that features rental homes under the collective ownership of an investment entity.

While the build-to-rent sector has been a success story overseas – with particularly strong growth seen in the US and UK markets in recent years – it has been slow to get off the ground in New Zealand.

However, build-to-rent momentum is growing and this week alone has seen a number of events which advocated for, and educated on, the sector as an opportunity for both investors and consumers.

An event on Thursday, which was co-convened by JLL, Deloitte and Kensington Swan, culminated in a call to Government and Councils to prioritise the growth of the build-to-rent sector to effectively address the housing shortage.

JLL NZ head of research and consultancy Paul Winstanley says that while build-to-rent is not the sole solution for the housing crisis, its potential and the ability to introduce it quickly should not be underestimated.

He points to the UK as an example of what can be achieved.

“As of January this year, there were close to 140,000 build-to-rent properties either completed or in the process of being built in the UK. In 2013, the asset class didn’t even exist.”

This growth has been fuelled by changing social and economic norms and the need to address chronic housing shortages in major cities and to provide customers with a high quality and well managed rental product, he says.

“These same dynamics are in play in New Zealand, so with the added benefit of being able to learn from the UK’s experience, we should be able to act fast to introduce this new asset class as part of the solution to our housing crisis.”

Build-to-rent typically provides for long-term tenancies, high quality builds and a consistent level of service, Winstanley says.

“This changes the dynamic from one of landlord and tenant, to service provider and consumer; and one which is currently not catered for under New Zealand laws and regulations.”

That means that enabling the growth of the build-to-rent sector isn’t simply about identifying suitable greenfield sites or existing properties for conversion.

It’s also about addressing existing challenges in tax policies and relevant legislation – like the Overseas Investment Act and tenancy law – to increase the sector’s commercial viability.

Deloitte NZ tax partner Peter Felstead says that, for example, a considered taxation approach will be required to attract sufficient investment to this sector.

There’s a common perception that the inability for build-to-rent investors to recover GST on construction and other input costs is a key disadvantage impacting on returns, he says.

“This has prompted jurisdictions overseas, including the UK, to extend concessions for build-to-rent projects to mitigate the impact of irrecoverable GST.

“While there is no silver bullet likely to arise from any changes to the tax and other policy settings, any such changes could be important on the margin and, frequently it is at the margin that investment decisions are made.”

Experts at a Minter Ellison Rudd Watts build-to-rent seminar, on Tuesday, highlighted similar issues – a GST regime that favours those who build to sell, the overseas investment regime, and ill-fitting tenancy laws – to overcome to enable the development of the sector.

CBRE senior managing director Andrew Stringer says the build-to-rent model can work in New Zealand as the essentials of investment capital and rental demand are there.

“But those hurdles need to be effectively worked through. The build-to-rent model needs assistance – be it financial or at the legislative level, from central and/or local government - to unlock its potential here.”

Doing so, would help to start shifting the rental accommodation market to one with a more professional and stable framework that offers better quality and security of tenure, he says.

While the build-to-rent sector provides residential accommodation, it is considered to fit into the realm of commercial property – much as retirement villages and large-scale student accommodation do. It offers investors long-term, lower volatility and hands-off investment opportunities.

Comments from our readers

On 2 September 2019 at 10:08 pm Peter L said:
So, at a time when Governments from both sides of the political spectrum are hell-bent on vilifying, punishing taxing and making life as difficult as possible for Ma-and-Pa landlords, big business is expecting these same Governments to get " . . .assistance – be it financial or at the legislative level, from central and/or local government - to unlock its potential here.”" Spare my days. If they left kiwi landlords alone then these big boys would not be needed.

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