Developers and advocates of build-to-rent housing in New Zealand are hopeful the “nascent” sector will be boosted by the Government’s first steps to encourage foreign investment.
The build-to-rent model, based on multi-unit developments designed to be tenanted long-term and sometimes run by large institutional investors, has been slowly gaining traction in the country in recent years despite facing some obstacles.
The coalition has started work on addressing those hurdles, with associate finance ministers David Seymour and Chris Bishop last week issuing a formal ministerial directive letter to Land Information New Zealand (Linz), which houses the Overseas Investment Office.
The letter says overseas investment in build-to-rent developments is “a clear example of a benefit to New Zealand”, given one of the Government’s priorities is to tackle the housing crisis by boosting supply.
It instructs Linz to consider such investment – including in existing developments – as a benefit “unless there is compelling evidence to the contrary”.
Property Council New Zealand chief executive Leonie Freeman told Newsroom the letter was a positive step, and part of a journey the sector had been going through in recent years.
During the last Labour government, housing minister Phil Twyford and his successor Megan Woods publicly shared their support for build-to-rent developments.
Under Woods, the government carved new build-to-rent projects out of its decision to end interest deductibility for investor rentals, and Linz issued a guidance note intended to make clear that such developments were not subject to the Labour-led coalition’s ‘foreign buyers ban’.
However, New Ground Capital co-founder and managing director Roy Thompson, who has worked on a number of build-to-rent developments since his company launched in 2014, told Newsroom those changes had been of little help to the sector given continued uncertainty about the applicability of overseas investment restrictions.
“If you’re a large institutional fund manager, you’re sitting in Sydney or you’re in Singapore or Hong Kong … and you’ve got a world of choice in front of you, and then it comes to New Zealand [with] a relatively small market, small population, and a nascent build-to-rent sector, any hurdle, any uncertainty, any additional risk has an outsized impact on your decision-making process, because as soon as it just seems a little bit too hard, you say, ‘All right, well, I’ll just refocus my attention on the bigger, more liquid markets’.”
Thompson said the most helpful change would be to improve timeframes for processing overseas investment applications, as lengthy delays made it difficult to secure contracts for land.
That is what the Government intends to do, with Bishop announcing in March that Cabinet had agreed to amend the Overseas Investment Act “to create a new streamlined consent pathway” for new or existing build-to-rent developments.
With the timeline and specifics of those changes still uncertain, economist and rental housing advocate Shamubeel Eaqub told Newsroom the Government should create a dedicated build-to-rent asset class – similar to the treatment given to retirement villages and student accommodation – to provide a “clear line of sight” for prospective foreign investors.
Eaqub said build-to-rent developments offered particular value in New Zealand given most new houses were sold to owner-occupiers, while the rental market was not growing fast enough relative to demand.
They also offered greater security of tenure and predictability when it came to rent increases and the quality of accommodation – characteristics that were hard to find in the current market.
“It’s a hell of a lot better than the current rental market. Is it as good as ownership? No. But is it somewhere in between? Absolutely.”
Eaqub said there were some caveats, with the high costs associated with new builds meaning build-to-rent developments were targeted at the upper end of the market, rather than the middle or bottom.
However, the sector’s long-term tenancies could create affordability over time, with an inflation-linked rent contract swiftly becoming cheaper than the market rate.
While the sector has been waiting for additional clarity from politicians, developers have been getting on with their projects regardless.
The Property Council launched a build-to-rent tracker last month, showing that more than 1300 units had been completed, with at least 4000 more under construction or in the pipeline.
Almost 95 percent of those were in Auckland, something Freeman attributed to residents’ comfort with high-density spaces and the city’s status as a testing ground.
“It will progress … when we look at, say, England, a lot of [developments] started in London, then it became quite common in other cities and towns … it’s got to become accepted and understood.”
Exactly how large the build-to-rent sector could become is hard to say, although a 2021 survey of Property Council members led the organisation to conclude up to 25,000 new homes could be built within a decade if the right levers were pulled.
“The rental market is so huge and those of us who are operating in the build-to-rent space are just fiddling at the margins at the moment – it’ll be a long time before we ever get close to soaking up capacity,” Thompson said.
