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Rosie Collins looks at ways to make 'build to rent' more useful in mitigating New Zealand's housing crisis

Property / opinion
Rosie Collins looks at ways to make 'build to rent' more useful in mitigating New Zealand's housing crisis
rent sign

By Rosie Collins*

We have a rental crisis. There are more people renting, but the number of rentals isn’t increasing fast enough. We need policies that encourage long-term rentals, not house price speculation by accidental landlords. 

One solution for one part of the rental market is ‘build to rent’. If done right, it could introduce sorely needed housing for renters, with more secure tenure and certainty of rent increases. That’s because the homes would be owned by investors and managed by professionals. 

While institutional landlords and build to rent are common in Europe and America, they are just starting in New Zealand. I want to see changes made to supercharge this. 

Rental crisis 

We have a housing crisis. Houses are unaffordable: the average house price is over $1 million. We are now building at a record rate, but this follows many decades of underbuilding. This shortfall will take decades to fix. 

Despite a growing number of homes, the number of rentals is not growing as fast. Only four districts had enough rental supply to keep up with demand in the last decade (Hamilton, Waitomo, Christchurch, and Dunedin). In places like Gisborne and Porirua, the rental stock has barely grown in nearly a decade, despite fast growing populations. 

Unsurprisingly rentals are hard to find, rents are through the roof, there is overcrowding, and the unfortunate are on the housing register or worse. 

The situation is so bad that government is spending nearly $4 billion a year on housing assistance. Half of this is spent on those in emergency, transitional and public housing. The other half is spent on the Accommodation Supplement, mainly subsidising rents. But all this is the proverbial ambulance at the bottom of the cliff. It is not encouraging more rentals, making tenure more secure, or increases in rents more predictable. 

Could build to rent help?

There are two things we need to achieve: more new rentals that stay as rentals, and rentals which are better in terms of tenure security and price certainty. 

Build to rent has addressed this in some places. But we should not expect it to supply affordable rentals, nor for it to be without risks. 

The key risk is that we just add deep pocketed land speculators to the list of house buyers. In some markets private equity investors have bought up existing homes and are doing everything they can to limit new developments or density, to create scarcity and drive up the value of their houses. 

Any qualification for build to rent should be for new houses only, which add to supply, are generally of higher quality, and are retained for a minimum period, with robust monitoring and tough punishments for failures. This can only happen in the backdrop of permissive planning, abundant land supply, and defined infrastructure plans and funding. 

The model works best when a large, usually institutional, investor owns and professionally manages a whole building or community, delivering high-end units to specifically serve the upper quartile of renters. By nature, this means it usually isn't affordable housing, because rents must be relatively high to make the project commercially viable (because land and build costs are crazy high). Build to rent developers explicitly target those willing to pay a premium for amenity and stability.

But by making the rental market work better for ‘independent’ renters, those who are relatively well to do and do not need subsidies, it at least reduces the competition for limited rental supply. It is a flow-on benefit, but right now we need every relief we can get. 

In the UK, increases to the affordable rental supply have been because the local authority has required it for a set amount of time, usually in exchange for more permissive planning rules, tax benefits or discounted land. Only Queenstown has used similar tools (called Inclusionary Zoning), but the Resource Management Act (RMA) makes it very hard to do. If we want more affordable rentals in the mix, we should develop an Inclusionary Zoning policy with the reform of the RMA. 

Since we don’t really use these tools, perhaps we could better use the Accommodation Supplement. The Government could negotiate leases for say half a building for 20 years, on the condition that upper quartile rents could only grow at 2% a year, with higher Accommodation Supplements to people who rented them. 

The landlord would have full certainty of occupancy and the cashflow of an inflation linked bond (rather than an equity investor who is also looking for capital gains), and renters would have more security, live in better homes, and have more financial certainty. 

Flirting with versus embracing build to rent 

New build to rent policies are being developed on the back of the government’s new rules that ban tax benefits from interest payments. It is very likely that the change in interest policy will further slow the growth of the rental stock, worsening the rental crisis.

Right now, policy for build to rent is reactive, rather than a deliberate attempt to catalyse and grow a whole new industry that will build new rental homes at scale. We may not like it, but the number of renters continues to increase, and they are not well served by slow supply, old and poor quality stock, tenure risk and erratic rent increases. 

There are two key things I would like to see.

First, a clear definition of what qualifies as a build to rent. How many homes must be in the portfolio, how long they have to be held for, what kinds of terms they have to offer (for example, greater tenant rights than the regulatory minimum). We already do this for retirement villages, we should also define the build to rent sector. 

Second, the Overseas Investment Act should allow foreign investment in this newly defined sector, like with retirement villages and student accommodation (it practically bans foreign investment in residential property). It would bring in experienced investors and institutional landlords, who know how to design, build and manage large rental portfolios. 

Both require a champion for build to rent, who can see the benefits and risks. Given our growing rental crisis, that is worsening despite record house building, we can’t wait for the big fix. Build to rent is not going to solve all our housing problems, but it sure could be one thing that makes renting better for some, while our politicians figure out the big fixes on land supply, density, construction capacity and performance, and infrastructure.


*Rosie Collins is an economist at Sense Partners.

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63 Comments

There aren’t too many good rental houses that become available in areas like Ponsonby, Auckland. And when they do turn up, they’re pricey. 

Not everyone wants to live in an apartment, so it would be nice to see more choice for renters wanting a house.

Auckland house rents are likely to leap up in January 2022.

TTP

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Auckland house rents are likely to leap up in January 2022.

Possibly, but I doubt it. It defies economic logic. Incomes are going nowhere why the prices of goods and services are going through the roof. This means that businesses are making less revenue and profit margin. Therefore, there is less "income". Govt and RBNZ are not depositing currency into people's accounts. 

So rents have quite possibly already peaked for now. While it might defy logic, they could even possibly go down, even though cost inflation is raging. And this all comes back to income. The sheeple are 'generally' not receiving more of it. Potentially a perfect storm for the house of cards "I reckon."  

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And Auckland currently experiencing a declining population.

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Don't sweat that Labour's got your back - "It’s estimated that around another 150,000 migrants could be eligible for the 2021 Resident Visa in Phase Two which opens for applications from 1 March 2022"

https://www.beehive.govt.nz/release/applications-open-new-2021-resident…

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Maybe. Moving to a residency visa will allow some of these people to purchase a house and move out of their rental.

Creating 10’s of thousands of eligible home buyers at the stroke of a pen in a country with the highest house price inflation in the developed world in recent years (bar that other rock star economy, Turkey), well ...

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I guess I need to be careful not to assume too much but I would be surprised if more than a very small minority of this group will be in a position to buy.

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Correct there wont be many larger homes with land to rent in the future Auckland.

The new tax deductibility rules mean that investors will shift to new builds which are typically shoe box size and holding hands. Not great for larger families.

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Drive down any street on the North Shore and you'll find a house that is in the process of being torn down and turned into multiple units (4 on my street alone).

These will most likely be rentals. 

Looking at figures from a decade ago is pointless.

 

" This shortfall will take decades to fix. "

This is based on what evidence? Based on current figures it is more like 3-4 years.  

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I think the post covid figures actually have that number down to around the end of 2022.

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The Govt has made the mistake of believing NZ's accommodation providers are also developers. The majority are not, building requires a completely different skill set. Building is for other people! This is not to say NZ's housing stock doesn't needs improving/updating.

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Developer Harry Triguboff  (Sydney) has just clicked over 9,400 properties in his personal portfolio. (And that was 2019!) https://www.rogerspropertygroup.com.au/a-portfolio-of-9400-properties-y…\

And I can't put my fingers on how many properties Berkely Homes (London) retained as they built, but quite a lot!

It was soon building more than 600 houses a year, and when (owner and founder) Tony Pidgley spotted the coming housing market crash in 1989 he initiated an early and aggressive selling programme. https://www.theguardian.com/business/2020/jul/01/tony-pidgley-obituary

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Buying off the plan is where the value is created, you get capital gains before the construction is complete and are able to take the new price to the bank for your eventual mortgage.  Why would investors not want this model??  Is that sarc I have missed?

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Yeah that is a real risk, especially with construction costs hiking.

Having said that it's also a risk for the developer to try it on, especially as the market cools.

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No, value is created when you take land, and subdivide it to allow it to be developed, or develop it into housing.

 

What you've just described is speculating on a Ponzi.

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I don't get what you are saying.

You only put a deposit down at the start, when buying off the plans.

So say 10% on 800k = 80k.

A year or so later, at the settlement stage, the developer says 'nah, it will be 900k,  construction costs have risen 30%'.

The person who put the deposit down has not gained anything.

If the party can't afford 900k, the developer needs to find a new buyer.

Easy for the developer in a hot market, much harder in a cooler market.

This is one of a few reasons I think we will see carnage within a year in the housing construction sector. I don't think it will be at all pretty.

 

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I'd like to see some figures on the number of people who are currently renting and could and would buy if houses were e.g. 30% lower. Then we'd know whether there is actually a shortage of rental housing for people who want to rent.

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I think we can look back to that time (December 2020) and see that even then not a lot could buy.

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I have 4 adult kids. You have described two of them.

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I think the correct will be All I need for Xmas is a booster shot... And combine with the song till I die.

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For those interested, or wanting to invest in build to rent, Kiwi Property Group are starting to head down this path at Sylvia Park.

https://www.nzx.com/announcements/379455

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That is good news, hopefully they get support from public agencies for this model.  As a private investor we ran 3 rent to buys from 2011 to 2015, those families are set up for life but the risk is all with the investor.  For the three families that made it two did not.  It's not a game for the private investor and we have not tried again.

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The premise of this article seems to miss the point.  There will always be some people who'd prefer to rent, but right now we have the situation where a huge portion of the population is forced to rent despite having a steady income, and the desire to own their own property.

 

What a cop out to say we need to focus on making renting better instead of actually trying to help give people the same opportunity Kiwi's have had for decades.

Handing housing over to the "free market" has been a colossal failure, and should never have happened.

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The recommendations at the end sound great.  As the Chinese RE Ponzi collapses any capital they can manage to sneak out can come here, go into shitboxes and we can rent them forever.

Things turn for the worse and not enough renters?  Import them too!

There are always solutions.

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My observation of the whole mess is that ratepayers haven’t paid enough rates to allow councils to put in the infrastructure in.So land prices are too high and that’s just the beginning.... add a very inefficient cartel like industry and you now have a generation coming through locked out of housing.

These schemes do nothing to address the root causes of that problem.

if people are to thrive then they need self independence... not rely on benefits.... ie; working for families, accomodation   supplements, state pensions...

easy decisions become the hard decisions later....and I think NZ is following the same path when we subsidised farmers and manufacturers... we went broke and our banks failed

but it was great for some while it lasted

 

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Good perspective on one of the root causes of the issue:

https://youtu.be/ORzNZUeUHAM

 

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The author should be declaring that the company she works for is an advocate for the build to rent industry.

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If we did that surely we would need to also change the intro to all RNZ interviews with Labour...

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That is disingenuous rubbish. It's just standard practice for representatives of Commercial entities that write articles on a matter which they gain a commercial advantage from to declare that.

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I was trying for humour but missed the mark.  I appreciate your point.

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Oh ok, no probs, sorry...

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The author should be declaring that one of the partners at the company she works for thought it made much more sense to buy a house after saying people were better off renting.

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Yes we will provide build to rents for longterm tenants and affordable pricing not overpriced. When the govt changes the zoning which at the moment says one house per 40 hectares, ridiculous. We are within peeing distance of Hamilton 

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'Any qualification for build to rent should be for new houses only'

????

Obviously build to rent is new housing.

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No that is not always the case and in fact part of the model we ran was to identify areas the buyer could add value via remedial works during the tenancy period.

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Are you part of the consultancy?

Well, that's not really build to rent. At least in terms of the common understanding of the term.

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No you're right, we called it rent to buy, but the concept of finding a way for the renter to add value to the capital is still there.  (just through pure capital growth as opposed to adding value to the building).

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Inclusionary zoning? Well known in many constituencies to generate significant unforeseen consequences.

All of these economists simply don't get it. Our crisis is so marked that only massive state house building will address.

It's actually dangerous and distracting to pretend that market mechanisms, as advocated by the author, will make a meaningful difference.

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Agreed, and living not far from where the original state houses were fabricated (Hamilton) I can see how we could do it again.

I would suggest mulit-story dewellings (5+?) of 150sqm would be best having seen these types of building in London.  Quality of life remains due to the green space that is preserved, mass transport makes sense and the dwellings themselves can be very nice indeed with views etc.

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It's been done before including in NZ. 

Sure it costs lots but that is the price you pay for creating a social and economic disaster.

 

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Why should it cost lots?

if the govt were smart they would form three companies.... put $500m into each to invest in turnkey sawmills and prefab plants...give them an order for a billion each to begin and let them list(oh and rezone land for them so they are paying base rates)

sorry fletchers and Carter’s but the game is up

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Exactly.

David Shearer's Kiwibuild policy was actually premised on that sort of approach, rather than the flimsy compromise that the government under Ardern landed on to underwrite private developers.

But then this government is an ever so slightly redder shade of neoliberal centrists than national.

They still fundamentally believe that the market is the only solution, and they will keep de-regulating in the vain hope that it is, until they finally realise that it isn't.

By which time they will be in opposition...

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The market is a cartel..... have a royal commission into what’s gone wrong

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A mass state building investment as you mentioned would solve a lot of the problem.

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It’s not just a building investment but as much a technology investment for our children. Savings will be made in closing branz, scion & all the other useless groups.

and in social and welfare costs

ring robin jack and spend the money on real assets.... turnkey house plants please and put one in northland and in the bay of plenty... one at bluff would work to

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Agree

Unfortunately we seem to have lost all competency doing big scale things, since the MOW closed down

So while I think this is 'the solution', I don't doubt for a second that it won't be done. Both because of the lack of appetite and the lack of capability.

 

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Yep, it did a stirling job in Russia, all those lovely square concrete boxes that everyone was just loving to live in. And just think, if they did it here, they'd be able to weld peoples doors shut during a pandemic, just like China. What a genius idea. 

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Ah, views. Like into each other's back yards

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Weak piece I am afraid with too many holes to pick through than I have time to do.

Build to rent can be part of the solution, but only one small part of it.

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I have my doubts that big institutional investors would be good for renters. Maybe renters would have more security of tenure, but no one can price gouge and rip off people like big firms, where the  imperative is to make as much profit as they can and seek to dominate the market.  Some rental management firms in NZ for example are really bad, uncaring and unresponsive to tenants.  Instead of our taxes further subsidising big landlords (via the accommodation supplement as suggested in the article), let’s support an increase in non-profit providers (eg central or local government, or cooperative community providers). 

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Well, the market is starting to slow down around here in Whanganui & Marton. Property listings have gone up by nearly 50% so there are more properties to choose from. Prices have certainly gone crazy but I would expect prices may now level off with better supply. If you are looking to buy a house in Wanganui I would highly recommend Whanganui Mansions www.whanganuimansions.co.nz which is a free online real estate magazine and real estate search facility featuring houses for sale in Wanganui, Waverley, Marton & Bulls, New Zealand. You can find all the local real estate agents & private listings in all price ranges. And if you are a real estate agent or a private seller, your listings are all free.

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Yeah....and young people who are growing up in whanganui can move to raetihi I guess to get on the ladder thanks to Aucklanders.

greed, greed, greed will be our downfall

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I thought 'Greed is Good'?

Sarc

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We are now building at a record rate, but this follows many decades of underbuilding. This shortfall will take decades to fix.

When I looked into this it seemed to me that, based on the increase in the number of households, New Zealand still fell well short of the required build rate. The growth in the number of households is much higher than population growth due to a smaller household size.

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An affordable rent for the average household is now around $500 per week (based on 30% of gross median income) - around a quarter of households can afford no more than around $250 per week. We are now clearly in a position where affordable rental properties are only viable for hundreds of thousands of people with a significant Government subsidy. 

Govt can still choose how it subsidises though - it could (a) continue to throw money at topping-up rents forever so that investors can build and profit from a growing portfolio of properties, or (b) build some more bloody houses, hold the liabilities and assets on their balance sheet, and rent out the houses at an affordable rent - accepting a breakeven point 100 years in the future if that is what it takes.       

 

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All the more reason to raise rents.

Don't waste a crisis.

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Every time I see one of your posts I picture Gollum, but instead of a ring you have a property investor magazine in your hand. 
 

MY PRECIOUSSSSS 💍=🏠=👹

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Haha!

I see brown slacks, and I skip right to the end of the post for the Be Quick!.  Sfunny.

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We used to have a perfectly functioning rental market until the Labour Govt destroyed it.  Now everyone wants to reinvent the wheel. Or they could just undo the damaging policies that are forcing investors out of the rental market and let people continue to subsidise their tenants with cheap rent in return for long term tax free capital gains that are necessary for their retirement savings.

We don't live in Manhattan, so building large highrise buildings with "premium" apartments is not going to drive high quality tenants to give up their single family house in the good school suburbs with a nice backyard and a garage.  There will be no "moving up the ladder".  Build to rent developers will end up owning ghettos full of troublesome tenants that they cannot get rid of, along with very high vacancy rates because the buildings' tenants' reputation will prevent other good tenants from ever moving in to these places.

And the main problem with build to rent by institutional investors is the return referred to above.  The old system relied on investors subsidising their tenants, agreeing to fund low yielding or negative cashflow properties in return for eventual capital gains when the property is sold.  Build to rent developers dont have that luxury - rents have to provide a commercial return immediately, and a return at least equal to the return available elsewhere if they invested their money in commercial or industrial property buildings for instance.  Which means rents need to go up a lot.  Like at least double, if not triple (if one considers a 9% return in a higher inflation/interest rate environment to be the minimum to be satisfactory).  If any KiwiSaver fund attempts to put savers money into a fund paying a 3% return they deserve to be sued for breach of their trustees duty to not deliberately make poor investments. I certainly wouldnt want my retirement savings invested long term at such a low return, even a basic stock market ETF should be able to deliver 7% return compounding over time.

 

 

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Note seeing Kate in these comments. Her rent control idea would harpoon any investments unless there was a cut-off build date implemented. That would incentivise the building of ghettos where single houses once stood.

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"Accidental landlords". Sure, there might be a few, but most become landlords deliberately and with plenty of research. You don't fork out north of $500k without doing your research and number crunching. And tenure? It's not the renters property, so you are always at the mercy of the owner. From a purely personal point of view, my rental properties have an average to date of 7 years. We have booted none of our tenants. Short tenures tend to be for a reason. Shit tenant's mean short tenure. No landlord in their right mind will keep someone who (a) isn't paying, (b) is wrecking the joint or (c) is antisocial and upsetting the community (oh wait, maybe I should take that all back, the Government rent to people who are all of these).

Also, "In some markets private equity investors have bought up existing homes and are doing everything they can to limit new developments or density, to create scarcity and drive up the value of their houses". Which markets? And of course, you claim they are trying to "limit new developments or density". Using what evidence? 

I'd suggest that most home owners who have a nice section for their kids and parking for 3 cars in a quiet suburb, don't want 8 houses crammed into the neighbouring section.  Especially when none have a garage or any parking, so you have 20 cars parked on the berm. Do you think that's a good idea? How does that stack up in your economic theory re density?

Lastly, the Government have made it more difficult and less financially viable to provide rental properties. So if there is a shortage of rentals, and the Government is paying billions in accommodation benefits, the buck stops with them. 

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there is no hopes from politics 

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Build-to-Rent proposals are being promoted as the solution to the lack of rental housing at the very same time as private investors are being forcefully expelled from the market.

However, I can see many problems with these proposals. The bottom line is that residential landlording in New Zealand, despite popular belief, is and remains a low-return high-workload activity. Over many years I have seen a number of corporates grow enthusiastic about the idea of building a large portfolio of rentals, but then they have faded quietly away once the harsh light of economic reality sets in.

As residential landlords, these Build-to-Rent entities will always be subject to the restrictions of the Residential Tenancies Act. It is all very well for firms like New Ground Capital to state that “tenants are given a seven year lease” but they haven’t, really. What they have actually been given is a RTA-mandated fixed term tenancy where, under recently introduced legislation, the tenant can extend indefinitely if they choose to do so and with the property owner having absolutely no say in the matter. Residential tenancies are not commercial tenancies and very different rules apply.

Sure, the concept works in some overseas jurisdictions where the laws and customs around renting are quite different from those in place here. Transferring this concept into New Zealand,  how will these property ownership companies feel about:
- tenants being able to freely damage the property, and then have no responsibility for the resultant, often substantial, repair costs as long as the tenants claim that the damage was 'accidental';
- handling the risk of the few tenants who, by become socially disruptive and obnoxious, proceed to drive out many good tenants but themselves being almost impossible to expel from their own tenancy;
- being obligated to act as an unwilling guarantor and unpaid debt collector for Watercare;
- being bound to keep housing their tenants until the expiry of any fixed-term tenancy and beyond, but the tenant in reality being able to leave at any time they wish;
- being legally barred from imposing any financial penalty for unpaid rent;
- having to give a tenant the exclusive possession and  occupation of a property worth many hundreds of thousands of dollars but only being able to legally extract a security bond of a maximum of four weeks rent – probably somewhere around 0.003% of the property value?

These companies are already asking for changes around the taxation system to suit their own business model, and it would appear highly likely that this will be followed by requests for changes to the Residential Tenancies Act once the full impact of the current restrictions sink in. If these changes are then applied to all residential landlords then this could possibly be beneficial to our industry as a whole, but I can see the danger that, once again, these changes would be set to benefit only the big boys while citizens who own just one or two rentals will be left out in the cold.

The reality is that these ownership companies will only enter and remain in the market if they can make and continue to make a profit. They will need to set their rents at a level to allow for the cost of professional management and administration, trade costs on all maintenance, and still have enough left over for a dividend for the shareholders. Thus by necessity  their rents will either be well above current levels or there will be demands for the substantial taxpayer subsidies that will be required to make the project fly.

So once again the dreamers and the schemers in the halls of power seem to be courting the fantasy of Build-to-Rent while at the same time ignoring any advice from those of us out there in the real world, those of us who have survived for years in the heat and dust of the market, those of us who already own around 540,000 homes housing some one and a half million of our fellow citizens. We could be the solution to the problem but are never asked. We are at best ignored and at worst abused oppressed and blamed.  

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