The end of the amateur landlord?

The Government’s recent housing shake-up could be rocket fuel for New Zealand’s build to rent sector.

Residential property investors have criticised moves to remove tax deductions from interest payments on rental properties and extend the bright-line test to 10 years, arguing that they will lead an exodus from the sector.

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Paul Winstanley, senior director of alternative investments at JLL, says that while mum and dad property investors – typically those who own one or two rental properties – still have a big role to play in the rental market, the changes could open up the market to large institutional investors.

“The mum and dad landlords are absolutely crucial for New Zealand’s rental market, but we need a whole lot more rental properties than they can supply,” he says.

“Build to rent will improve the standards of renting, but we’ll still need private investors.”

Build to rent has gained huge traction in the United Kingdom and, more recently Australia, but has yet to achieve scale in New Zealand. Build to rent properties - usually large, multi-unit developments - are designed specifically for renting rather than sale.

The first build to rent developments in New Zealand are small in scale and will deliver 20 to 40 rental homes each, but Winstanley says the vision is for developments of 150 to 450 units, backed by institutional investors.

Modal, in Mount Albert, Auckland, is a build to rent development of 32 units by Ockham residential. Photo / Michael Craig

Schemes have onsite management (Winstanley prefers the term “concierge” to demonstrate the quality of service tenants could expect), substantial customer service and shared amenities for residents. Smaller schemes in high-value locations are also a possibility and are typically owned by institutional investors and managed by specialist operators.

The newest New Zealand build to rent project, Modal in Mount Albert, Auckland, has 32 units with a shared residents’ lounge and balcony, a music room, indoor bike storage and easy access to public transport.

The biggest plus, in build to rent schemes, is that the tenancies are typically long-term, between three to seven years, sometimes even for a life time.

“It’s really about customer-service. Tenants are treated as customers, not someone just putting rent into the bank each month,” Winstanley says.

“We know the anecdotes about how tenants are treated, we know that uncertainty of tenure is the biggest stress for Kiwi renters and while we’ll never replace investors renting out one or two properties, build to rent will provide quality not seen in New Zealand.”

Although build to rent is about creating good returns to long term investors, it also recognises housing is an emotive issue, Winstanley says.

“Happy and content residents are better customers for a rental product and better retention clearly has a monetary value for investors,” Winstanley says, meaning both owner and occupier win.

Across the Tasman, the concept is taking off fast: JLL estimates there are 1,840 build to rent units in operation and 7,360 in the pipeline, mostly in Melbourne and Sydney. In Auckland, there are just 1750 apartments in Auckland, most of which are in the design or planning stage.

Winstanley says: “The early leaders in the Australian sector have set a high bar, with things like rooftop terraces, gyms, resident lounges, common dining areas and working spaces. These common areas add value to the customer experience and separate the new wave of build to rent from much of the existing rental product.”

About 40% of Aucklanders rent, and that number will grow as the number of single person households increases. “This is especially true for those who become single later in life as they often don’t wish to share. They are not catered for by traditional housing,” Winstanley says.

But building large scale developments is beyond the financial capacity of many residential developers, who instead focus on building boutique high quality apartments targeted at the big spenders, well-off downsizers and owner-occupiers. “This means, there will be little new rental stock entering the market beyond 2020,” Winstanley says.

“Filling this supply gap and providing additional new housing appropriate for renters is the most important value that build to rent offers to society. New Zealand needs this housing supply especially as we enter a crucial period of economic recovery."

And the solution?

“The key is attracting domestic investors – the big ones like ACC, Kiwi Saver funds and NZ Super. In order to do that, we need to give them a global market to sell to, as the key for a good investment is tradability. We also need international funds to invest to create that global market.

“It’s the same as with private houses – you buy a property on the expectation you can sell it eventually for more than you paid for it.”