Building homes for long-term rental went out of favour decades ago, aside from stop-start Housing NZ programmes. Now it’s back in New Zealand, but in its infancy, while overseas it’s become a recognised asset class for portfolio trading.
In Europe those portfolios can be huge, and cross-border trade in them has been rising over the last 5 years.
In New Zealand, the rise in apartment construction has relied on initial off-the-plan buyers, many from overseas, and many of them will sell on completion. That development & temporary ownership phase has been followed by investment, one apartment at a time, by small investors.
Auckland’s many new apartment blocks erected over the last 20 years are owned primarily by hundreds of those small investors, and they are primarily rentals – but not with long-term tenancy agreements.
In the new era of build-to-rent, the developer keeps ownership or sells to a single buyer.
One other difference for New Zealand is that construction is aimed at multi-family occupation, requiring larger units.
CBRE NZ head of research Zoltan Moricz issued a research paper on build-to-rent prospects a fortnight ago, and CBRE’s specialist residential property market analyst, Tamba Carleton, followed up with a paper outlining constraints & analysing opportunities.
2 of those constraints are the absence of a preferential mortgage market for lending on apartments, and no explicit local or central government support. But, if those constraints are resolved, they say the emerging build-to-rent trend is set to bloom.
Gaining traction in UK since 2012 Olympics
Mr Moricz said over 30 million build-to-rent units had been created worldwide, headed by conversion of 2 sports venues, the 2012 Olympic village in London’s East End, and the 2018 Commonwealth Games village on Queensland’s Gold Coast.
“It involves designing & building multi-unit residential developments specifically to provide long-term rental housing, and enables growth in housing stock to accommodate a growing number of people who are unable to purchase residential property.
“Long an established asset class in the US, build-to-rent has gained significant traction in recent years in the UK, with more than 110,000 units in the pipeline. Interest has also increased in Australia as house price increases have caused home ownership rates to drop.
“Although build-to-rent projects are mostly in Sydney & Melbourne, the largest is the $A550 million conversion of the Commonwealth Games athletes’ village on the Gold Coast, known as the Smith Collective.”
NZ home ownership declining
Mr Moricz said the trend was now seen in New Zealand as having growth potential as an alternative asset class: “This local market, which is still in its infancy with a handful of build-to-rent developments planned, underway or recently completed, is being triggered by demographic, socio-economic & lifestyle demands.
“One of the major drivers of demand for build-to-rent is the growing number of renter households due to population growth, a declining home ownership rate, and smaller household sizes. While some of these trends are cyclical & related to economic conditions (eg, the net migration component of population growth), others are structural & reflective of the changing demographic makeup.
Home ownership rates in New Zealand grew through much of the last century. However, over the past 20 years this trend has reversed. As at the 2013 Census, the rate of homeownership was 64.8%. Home ownership peaked in 1991 at 73.8% following state intervention, which included access to low-interest state mortgages & family benefit payments, which ceased from 1991.
“Home ownership rates have been declining since the 1990s and are currently the lowest they have been in more than 60 years.”
Mr Moricz said New Zealand’s proportion of renters, at 31.2% in 2013, was 4-5% lower than in the UK & US, but had grown faster in this decade, increasing the potential for build-to-rent to emerge.
For the investor, Mr Moricz said: “Although on face value build-to-rent may offer relatively low initial income yields compared to commercial & industrial property, the rationale rises when a number of other areas come into focus.
“Firstly, residential vacancy rates are lower than in commercial property. Auckland rental vacancy is close to 1.5%, indicating occupier demand for purpose-built rental accommodation. Secondly, investors seeking diversification & risk-adjusted performance are attracted to the sector, and from a cashflow diversification perspective build-to-rent has advantages over other commercial property types.
“Further, Auckland residential rents have experienced growth compared to prime commercial property, with considerably less volatility. Historically, when New Zealand has experienced economic downturns and all commercial property sectors have had rental declines, residential rents have continued to increase. This stability of income during weaker economic times makes build-to-rent attractive to investors who are seeking portfolio diversification benefits & risk-adjusted returns.
“Also, although build-to-rent has historically been characterised as a low yield investment, it is becoming increasingly attractive relative to other investment classes as commercial property & government bond yields remain consistently lower for longer. Although residential yields are low, their position relative to other asset classes has boosted the profile of build-to-rent as a potential alternative.”
Loan, tax & regulatory constraints
However, residential property market analyst Tamba Carleton said that, unlike in the US & UK, the potential of the New Zealand market is constrained by a number of factors: “Unlike the US, there is no preferential mortgage market for lending on apartments in New Zealand. And unlike the UK, there has been no explicit local or central government support. The UK build-to-rent market has grown exponentially off a supportive regulatory framework actively created by the government, and the absence of government support for build-to-rent dampens its growth potential in New Zealand.
“Also, although the volume of Australian build-to-rent stock & pipeline size is growing, its speed of growth has been restrained by a disadvantageous tax status. There are similar tax-related issues here in New Zealand, as 15% gst is added to almost all purchases, which can put build-to-rent developers at a tax disadvantage compared to build-to-sell developers.
“Then there is finance, which is one of the major challenges for build-to-rent in the NZ market. In the US, preferential mortgage markets exist, where higher loan:valuation & lower interest rate pricing is available. New Zealand banks are aware that build-to-rent is emerging, but caution prevails and is preventing the favourable lending terms that exist in proven markets.
“That said, the emergence of dedicated build-to-rent fund managers has accelerated the stock & supply pipeline. There is a handful of active build-to-rent investors here, with more looking to enter the market. These institutional investors range from offshore high-net-worths with overseas build-to-rent experience & personal ties to New Zealand, to corporates looking to diversify a purely commercial portfolio & pension funds.
“Given the factors underpinning occupier demand and what from some aspects is a compelling investment rationale, we do expect build-to-rent to become a growth sector in New Zealand. However, it is clear that there are multiple issues that need to be resolved for it to flourish.”
CBRE, February 2019: Prospects for build-to-rent in NZ
Build-to-rent seen as a developing asset market
US multifamilies long-established with better investor support
Support structures the big question for multifamily growth in NZ
How does this sector stack up?
Attribution: CBRE report & releases.