Build-to-Rent may bring relief to NZ rental market
The Build-to-Rent (BTR) sector in New Zealand is expanding, which is welcome news for renters seeking more accommodation options in an evercrowded market, according to JLL.
Housing Minister Megan Woods recently announced a plan to support BTR through interest deductibility in perpetuity for qualifying developments. This paves the way for the BTR asset class to be formalised, something Woods hinted would be defined in upcoming legislation.
Build-to-rent properties are medium-tolarge scale, multi-unit housing developments built to provide long-term rental accommodation. They are generally developed and professionally managed by institutional investors, developers or community housing providers. Long-term rentals, with leases of several years, are intended to give tenants more security and stability.
JLL senior director of alternative investments David Hill sees early movers across Australia and New Zealand being rewarded as they open their first purposebuilt assets and capitalise on strong rental growth opportunities in the current market, while new entrants continue to seek and secure their first projects.
“The strong demand fundamentals and pressures on housing supply support investment in the emerging BTR sector,” says Hill.
“There are already a number of capital raisings under way with dedicated BTR funds typically seeded by a handful of development projects to demonstrate pipeline and scalability. Once additional funds are committed, we expect to see the geographical and product diversity broaden.
“New Zealand is well positioned to capitalise on this growth given the similarities to the Australian market and comparable key market drivers.”
Hill says there was an uptick in investment interest in Australia when tax benefits were announced in Victoria and New South Wales with a 50 per cent reduction in annual land tax for up to 30 years and an Absentee Owner Surcharge exemption.
“There was already interest prior to these announcements with some projects under way. However the market has grown exponentially since. The New Zealand BTR market is probably one to two years behind the Australian market.
“We are starting to see the trends from Australia emerging in New Zealand and expect the New Zealand market to kick off. This policy announcement is very aligned to the path the Australian market has taken.”
“As we have seen in Australia, BTR developments provide residents with options along a spectrum of affordable through to premium offerings,” Hill says.
Scale is a key factor driving expansion interest in New Zealand. Most institutional groups target platforms of 5000 apartments or more.
More mature BTR markets across the globe highlight government intervention as critical in supporting the emergence of a new real estate asset class.
Many existing policy and tax frameworks were initially created for ‘mum and dad’ investors and do not appropriately address nor fairly treat the emerging BTR sector, which requires large-scale investment.
The first round of major investment will shape the future of BTR in New Zealand. It is a property asset class that is designed, constructed, and ultimately operated with the intention of being a long-term rental product, and therefore must address the needs of future residents and evolving demands from the rental market.
“Sustainability considerations are at the forefront of this emerging sector, not just in New Zealand but around the world,” Hill says. “The modern resident increasingly wants to live in a building in which corporate ESG (environmental, social and governance) responsibilities have been embedded into the design, construction, and operating processes.”
Incorporating sustainable building and operating practices is key to unlocking the full potential of a BTR property. New buildings that do not capitalise on the opportunity to be future-fit from the outset will not see associated returns in the future.
Beyond the sustainability factor, operational costs are front-of-mind for building operators. Where sustainable functions have not been built into a property, operating costs have the potential to dramatically increase over time. Institutions that operate BTR assets must consider how sustainability will impact operations and the asset’s end-value, to future-proof the lifespan of a property.
While BTR is in its infancy in New Zealand, strong ties to global investors and experienced developers indicate the country is not far from defining an asset class that will address rental market supply, Hill says.
Institutions must take a future-centric approach to projects and ensure the needs of the ‘renters of tomorrow’ are carefully considered in the building and long-term operation of any new BTR assets. With proposed legislative changes in the pipeline, the quality of stock in the BTR sector indicates a bright future for New Zealand’s rental market.