In the run-up to its successful election campaign two weeks ago, housing spokesman Chris Bishop says a National-led Government will move quickly to make two legislative changes to help build-to-rent (BTR) developments get off the ground – amending the Overseas Investment Act to give greater certainty for institutional investors to invest and changing the Income Tax Act to ensure developments are eligible for depreciation deductions like other commercial buildings.
BTR developments are mainly large residential, often multi-unit high-density, developments designed specifically for renting rather than sale, with long-term up to 10-year leases, the ability for tenants to make minor changes and perhaps keep a pet.
Bishop says build-to-rent developments are an important part of housing markets in countries New Zealand likes to compare itself to, but remain rare here. “It’s nuts that retirement homes, rest homes and student accommodation have an easier ride through the Overseas Investment Act than build-to-rent developments. We will make sure they are treated the same.”
New Ground Capital co-founder and managing director Roy Thompson says the fact the Labour Government made it unattractive for foreign institutional investors to invest in the market held it back.
“From an investment perspective, if National’s changes go ahead, foreign institutional investors can tap into the largest capital market in New Zealand – well over $1 trillion in value and 10 times the size of the NZX. It’s a large and liquid market to invest in.”
He says large institutions overseas have been investing in build-to-rent housing for decades and are mature, patient and stable sources of capital.
Sought after sector
In Asia Pacific for the first time, residential is the most sought-after sector for global investors targeting the region a new Frank Knight report on the BTR sector shows.
This is emblematic of a wider shift in the global investment landscape. Across all regions, investors are seeking greater exposure to alternative sectors and the residential living sectors are at the front of the queue, led by BTR but also encompassing student accommodation and retirement living.
This was borne out in the most recent Asian Association for Investors in Non-Listed Real Estate Vehicles (ANREV) survey of global investor intentions. The shift to living sectors is part of a wider shift from major institutions globally to focus predominantly on core investment strategies in 2023 and reduce their allocation to value-add and opportunistic strategies.
The Asia Pacific BTR market, while largely driven by offshore capital, also has many local groups on board, with 65% of existing and proposed apartments owned by domestic capital and 35% by global capital either exclusively or through joint venture partnerships.
Frank Knight says investors are gravitating toward the residential sector partly because of its defensive characteristics, specifically the ability to adjust rental income streams more quickly than other sectors in response to high inflation.
Residential rents have consistently kept pace with inflation over the long term, and also exhibited a high degree of correlation with fluctuations in inflation, in contrast with other major asset classes where the rental cycle has fluctuated more widely depending on the prevailing supply-demand dynamic.
Fears foreign investors will come into the New Zealand market and develop shoddy large scale build-to-rent complexes that will become ghettoes are utterly unfounded, Thompson says. “The investors we're talking to are people who do this in a thoroughly professional way and understand communities have to be created along with attractive places to live, and they do it well. Ultimately, they build the kinds of places that 99% of people renting in New Zealand would dream about living in. And even if they wanted to do something that wasn't that good, the New Zealand planning regulations are so tight that they wouldn't be able to do it anyway.”
The Frank Knight report says as the sector matures, the focus of conversation is likely to morph away from whether BTR is viable to how to maximise substantial benefits it can bring to communities by deepening the pool of rental stock and broadening the type of supply on offer to tenants.
It says governments may be tempted to require developers to deliver affordable housing as part of BTR schemes. The report says it expects that pragmatism will prevail, and the risk of stemming the flow of supply to market more broadly will ultimately persuade governments not to implement rigid requirements for BTR to deliver a fixed proportion of affordable housing.
Instead, it is more likely to be considered on a case-by-case basis, with the potential for affordable housing to be encouraged in certain cases alongside other concessions to facilitate scheme viability
Thompson says while investors are always chasing returns, in New Zealand’s BTR market they will depend to a certain extent on the style of rental housing developers deliver. “Some investors want to deliver social outcomes through more affordable housing, others not so much. If a developer is delivering a purely commercial rental housing model, investors could expect total returns in the low teens and if more affordable housing is the aim, then investor returns will trend down from there.”
New Ground Capital and other BTR developers, such as Simplicity Living aim to increase the about 600,000 houses that sit in the country’s rental pool by thousands over the next 10-20 years for people who either can’t afford to own a house or who don’t want to.
BTR’s New Zealand expansion can be explained by a range of domestically generated forces that have resulted in very tight supply in the rental market. Vacancy rates have fallen dramatically partly because of the Labour Government’s attack on landlord’s through the extension of the Brightline test, scrapping of mortgage interest payments as a tax deduction and Residential Tenancies Act changes and partly because of recent high migration. Not only is the market undersupplied now, but it is forecast to remain in a supply deficit over the medium term. Some estimates put the housing shortage back up to 40,000 homes.
Long time for momentum
Not only is BTR an attractive proposition in New Zealand but also globally. Knight Frank’s report shows investors are seeking greater exposure to alternative sectors and the residential ‘living’ sectors are at the front of the queue, led by BTR.
Over the past decade BTR has taken a foothold in the UK and expanded rapidly to become a significant and fast-growing part of the residential market. It also makes up 80% of housing in some European markets. In Germany, for example, one company has 300,000 BTR homes in its portfolio.
Momentum took a long time to build in the UK – as it is taking in New Zealand – with the commissioning of a UK government review of the barriers to institutional investment in private rented homes in 2012 (the Montague Review), acting as a catalyst for changes in planning policy, the release of more land for development and ultimately the emergence of BTR as a distinct asset class.
Since 2015, the total stock of BTR apartments has expanded from 11,312 to 83,000 apartments, with the current development pipeline pointing to a further acceleration in development activity in 2024-25.
From a standing start, BTR supply now accounts for 1.5% of the total UK rental market, with the expectation that this proportion will continue to increase rapidly as the sector matures.
London has been a natural focal point for BTR developments, with 38,000 apartments in the capital, representing 46% of total stock, but BTR has established a foothold in all major cities including Manchester, Birmingham, Leeds, Liverpool and Bristol. BTR schemes have generally been well-received by tenants, as evidenced by low vacancy across the sector and short timeframes to fully lease new schemes. Survey evidence consistently finds that tenants rate the BTR experience more highly than the wider rental market.
New Ground Capital says it has a waiting list for apartments in its developments, which it expects to lengthen.