Over the past decade declining home ownership rates have resulted in an increase of households renting, often into people’s forties. This has elevated the need for a greater variety of products and a more sophisticated rental sector to provide affordable alternatives to ownership.
One emerging solution is build-to-rent, which provides a significant opportunity to both investors and developers, as well as filling the critical need for an increase in rental housing within our main cities.
Tamba Carleton, Senior Research Analyst at CBRE New Zealand says, “The number of renter households is growing faster than the rate of overall population growth. In just the past ten years, owner occupier households have grown by 40,000 compared with the growth of renter households by 120,000.
“The main driver for this dramatic difference is the choices people make within their financial constraints and the high barriers to home ownership, especially for single person households. For many people, the only alternative left outside of ownership is to rent.”
What is build-to-rent?
Build-to-rent is purpose built, multi-unit residential rental housing designed for, and intended to be owned by, a single long-term investor and utilised for long-term rentals rather than being sold off individually. In return, these investors should expect stable rental returns with longer term income growth.
For tenants, build-to-rent units are more likely to be managed in a tenant-friendly environment, generally offering longer and more flexible term leases than the current short lease tenure that is common within New Zealand. Additionally, build-to-rent opportunities can offer market rental rates without the worry of unexpected rent rises, fixed monthly utility charges and be delivered as unfurnished/part-furnished or fully-furnished options.
Build-to-rent is not to be confused with build-to-sell which reflects many of the apartment and terraced housing developments that we’ve seen in the latest building cycle and are targeted at individual owner occupiers and investors.
Carleton says that the factors that influence a build-to-rent development include a focus on operation and maintenance costs. “At a fundamental level, the unit layouts are a symmetrical and standardised design, with bedrooms that are the exact same mirror images of each other to enable the same rent to be charged on each bedroom. This makes them very different to build-to-sell apartment units aimed at owner occupiers, as these will commonly feature a larger master bedroom with walk in wardrobe and ensuite bathroom. Additionally, within build-to-rent developments the fixtures and finishes of units are chosen for their functionality and endurability rather than their aesthetic appeal.”
She adds that although the New Zealand residential sector has had a decade of great returns for residential property investment, the next decade is likely to not be as good. “Increasing housing supply, lower net migration, record low interest rates and affordability constraints all limit potential future price growth. Additionally, compliance costs are increasing with the likes of Healthy Homes legislation, ringfencing of rental losses, and 40% LVR rules combining to reduce the attractiveness of residential property investment. The structural, cyclical, societal and political changes mean that the rental stock is at risk of declining when it is most needed. Build-to-rent offers a sensible and sustainable alternative with advantages for both the owner and the tenant”
Hobsonville a leading light
The first multi-unit developments specifically intended to provide long-term rental housing are now emerging in New Zealand.
The small existing stock of two developments offering 96 units in total at Uku Apartments in Hobsonville Point, and NZ Defence Force Housing at Whenuapai, represents the front end of a growth pipeline of 543 units in 12 developments, and significant future potential. “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,” says Carleton.
The recently completed Uku development within Hobsonville consisted of mixed typology housing with a total of 208 terrace and apartment units, of which 47 were offered as build-to-rent units. These range from one to three-bedroom units, with an average household of two people.
The demographics attracted to this development are mostly young to middle age, with the leases offered from three to seven years and the ability to shorten the lease term if circumstances change.
The Hobsonville example ticks many of the build-to-rent boxes; based in the suburbs, it is situated close to transport with easy access to motorways and the additional attraction of a ferry/CBD connection, and the area boasts quality infrastructure and amenities in the surrounding community.
Carleton explains “I expect that the pipeline of build-to-rent developments will have at least doubled by this time next year. To build on the current stock is a sizeable pipeline of over 500 units, offering a future work stream for the construction sector. 85% of these developments are located in Auckland and all are suburban based.”
Not without its challenges
One of the main challenges to the rapid development of build-to-rent is to do with tax and finance. With GST added to almost all purchases but not recoverable on residential rents, at present this disadvantages build-to-rent developers compared to build-to-sell developers. Additionally, unlike the US there is no preferential mortgage market specifically for lending on apartments; it’s as yet an unproven and untested sector here, which ultimately leads to unfavourable lending terms. Build-to-rent developments currently rely on institutional or private equity investment supported by construction finance.
With much talk around the landlord supplying a healthy home, lack of quality housing and the need for more long-term rental opportunities, build-to-rent seems a perfect solution. However, to encourage further developments the NZ government needs to support with regulatory framework to relieve the barriers of entry.
ABOUT CBRE GROUP, INC.
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2018 revenue). The company has more than 90,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 480 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com.
