Build-to-rent (BTR) remains an investment asset class on the brink of huge success in New Zealand, offering both housing solutions and stable, long-term returns for investors.

According to market insiders, the sector still needs greater legislative support to give developers access to the wider pool of investors it needs for BTR to realise its full potential.

The BTR model sees large-scale residential developments designed for long-term rental tenancies. The buildings remain investor owned via shareholdings rather than landlord owned, with the ownership company handling all building management and maintenance. Buildings are often multi-use and located near transport and amenity hubs to ensure tenant appeal.

It is a living style and asset class already extremely popular in the US, and rapidly growing in both the UK and Australia. By contrast, BTR is a relatively new concept in New Zealand where the traditional model has long been home ownership, adding additional challenges for local developers.

The lay of the land

Bayleys Residential Report for Q2, 2023 puts the average estimated pre-tax net yield for residential property investors at 3.3 percent, with an average estimated annual capital gain of 7.1 percent (over 20 years).

Bayleys head of insights and data Chris Farhi says while the figures don’t talk specifically to BTR assets they are a good indication of the stability and health of New Zealand’s rental market, of interest to BTR investors.

After an economically volatile 12 to 24 months, the return to positive net migration is likely to add demand into the rental market, particularly in Auckland, causing rents to rise over the next year, Farhi says. “Disruption and damage from extreme weather events in the region are also expected to add to rental demand.”

Intensive new-builds such as BTR typically offer investors a higher rental yield than other residential developments, he says.

“BTR assets also benefit from more favourable tax treatment such as interest deductibility which improves their after-tax returns.”

In August 2022, the government announced new legislation that would exempt new and existing build-to-rent developments from interest limitation rules in perpetuity. The change means owners of build-to-rent assets can claim interest costs relating to these assets for as long as the asset is held and operated as a build-to-rent development. But legislative support needs to go further according to Property Council New Zealand (PCNZ), a long-time campaigner on the benefits of build-to-rent.

PCNZ CEO Leonie Freeman says the interest deductibility change was an important start, as was recognising BTR as an investment asset class.

“To give credit to the government, we have worked constructively with them over many years to remove some of the barriers to build-to-rent.”

While some larger-scale build-to-rent projects are underway, or applying for resource consent, the numbers are still in their infancy, Freeman says. “Build-to-rent has the potential to be so much more, there are just a few legislative levers still to be pulled.”

The most important of which, she says, is making changes to the Overseas Investment Act 2005 (OIA) to open the sector up to international institutional investment. With other factors such as interest rates, construction costs and a shortage of skilled workers remaining a challenge for new development, the government holds the keys to BTR’s future growth and success, she says.

“If we are to get build-to-rent off the ground in large numbers to house more New Zealanders quickly, the asset class will need better, bespoke support from government.

“If we could wave a magic wand and see interest rates come down, that would help. But really, the government holds the key to build-to-rent’s success from a legislative perspective. Making some small changes to the OIA, along with allowing depreciation, as with other commercial assets, would see more large-scale projects swing into action.

“Until the OIA is amended to give confidence to large institutional investors, we won’t see the boom in build-to-rent homes that New Zealand renters so desperately need.”

As the country approaches the general election, Freeman says PCNZ would like to see parties not only confirm they will amend the OIA to give confidence to large investors but provide a timeline for when they will do it.

“Development is, at heart, a risky business that can take decades to come to fruition. The more certainty we can give to investors and developers, the more likely they are to choose to invest and develop in New Zealand, and the more build-to-rent homes we will see built.”

The Auckland experience

Auckland remains the key focus of New Zealand’s BTR developments and two of the key players back up PCNZ’s view.

Resident Properties operates two small-scale BTR properties in Auckland's inner-city suburbs, The Ed in Mt Eden and The Nix in Grey Lynn, and has purchased another neighbouring site in Grey Lynn with plans to build another 60-apartment development.

Resident Properties director Greg Reidy agrees changes to overseas investment rules and incentives like depreciation and tax deductions are essential to future growth for BTR in New Zealand.

“Large-scale overseas investment is what’s needed to scale up the New Zealand market to where it needs to be. Making the entry for all investors to the build-to-rent sector more straightforward is one thing the government could fix.

“We’d like to see more benefits like depreciation, tax deductions and regulatory changes so as an asset class build-to-rent is treated, from an overseas investment perspective, like commercial property.”

Reidy says with BTR having taken off in other countries, there is growing offshore interest in the market here, watching for favourable overseas investment changes. “Build-to-rent is going gangbusters in almost every other market it’s in. Investors recognise it as an incredibly diversified investment, that has high occupancy.”

There’s also been some frustration at the requirement for build-to-rent owners to offer minimum one-sided 10-year leases, when tenants need only provide 56 days to terminate.

“I think there’s a lack of understanding that, as a business build-to-rent is a very long-term asset class,” Reidy says. “This is not a ‘build it, rent it for a bit, sell it’ proposition. There’s no intention of build-to-rent businesses to terminate tenancies. It’s in our interest to have tenants stay on as we then have naturally more stable and better investment returns.”

Kiwi Property is a major player in Auckland’s large-scale BTR market, with a three-tower 295-apartment complex due to open at Sylvia Park in May 2024. It has resource consent for another site at LynnMall in West Auckland, and longer-term plans to include build-to-rent on its town centre development at Drury.

Kiwi Property development director, BTR, Greg Tolley says that while interest in the asset class is growing, there is more work to be done educating residents, investors and the market about the benefits it has to offer.

“We’re excited about the potential of BTR in New Zealand. With net migration on the rise and construction levels declining, we believe there is a significant opportunity for BTR to help address New Zealand’s housing shortfall and provide quality accommodation for Kiwi renters.

“Our first priority is ensuring the successful launch and lease-up of our first BTR project at Sylvia Park. Once that development is complete, renters and investors will be able to clearly see the strength of the offering, including the quality of the product and amenities on offer. Based on international experience, it’s a key milestone that will unlock future interest.”

Kiwi Property had a range of options for future BTR developments, Tolley says.

“We’re fortunate to have a large existing landholding, which gives us plenty of flexibility to proceed with new schemes at locations such as Sylvia Park or LynnMall, and we’re open to exploring additional locations if they had the right characteristics. Given the current economic uncertainty though, we’re willing to wait until market conditions, including construction and capital costs, are right before moving forward.”

Download full article (PDF)