Is building to rent the answer?

Is Build to Rent (BTR) the answer, or have the amendments to the Residential Tenancies Act already addressed many of the issues BTR is designed to address?

The housing crisis is real, and it is nothing new. Governments have tried new initiatives and schemes, and some have had a positive impact, and some have not. Kiwi Build would be the pin-up example of a modern-day failure with barely any ground being broken, and whatever was built certainly didn't end up in the affordable house bracket. But, you have to give them points for trying.

Build to Rent ties in with the term Generation Rent, and you could argue that Build to Rent is a more contemporary term for people that either choose to rent or have no other option. Generation Rent is the reality for many developed countries worldwide, especially in areas with a supply and demand imbalance.

But ultimately, there are two categories for tenants—people who choose to rent and people who have no other option but to rent. And this is important when looking offshore to understand where there has been a success and why.

Build to Rent has seen encouraging success in countries like the UK, where the product is designed to appeal to a specific market. They say that on average, Build to Rent properties in the UK achieve roughly 8-9% more rent for a comparable property that is not part of a Build to Rent complex. The additional rent is achieved as the BTR properties have much more to offer prospective tenants. Such as beautifully designed outdoor areas and shared spaces. Gym, pool and other facilities as well as a concierge in some cases. There is also greater scope for renovations and provision for pets.

All of this sounds incredibly appealing for people who choose to rent, and there certainly is a growing market in this country for this type of living option. However, above market rents and amenities that are more of a luxury than a necessity do not necessarily address people who have no other option.

Another key area of success with Build to Rent is the security of tenure for tenants, as typically, the contracts are far longer than usual. A typical tenancy agreement within a Build to Rent complex could see a tenancy of 3-5 years in duration. Furthermore, within the contract, clauses are included that provide detail and structure around future rental increases.

These are set at a specific percentage which removes a lot of the unknowns for tenants. All of this certainly adds peace of mind for tenants. However, interestingly, one of the amendments to the Residential Tenancy Act that came to law in February 2021 was the security of tenure for tenants. The amendments included substantial reforms to the owner's ability to end a tenancy, and notably, the 90-day 'no clause' termination was removed. The reforms to the Residential Tenancies Act in New Zealand arguably provide more security of tenure than Build to Rent in other countries.

Since the amendments received Royal Assent, we have seen a significant shift in any prior imbalance with the security of tenure across the industry. Unless the owner wants to move back into their property, do an extensive renovation or sell the property, the tenancy will continue indefinitely. Evidence of this is the average tenancy term across provincial New Zealand. Within the properties managed across the country, the average term is now over two years, and in several areas, it has already surpassed 30 months.

One area that cannot be overlooked is the attraction for prospective investors and potentially people looking to build capital to get into the property market. Overseas, BTR properties are typically owned by institutional investors and managed by specialist operators. Similar to syndicates that usually look to invest in the commercial market, BTR can be purchased by investors who own shares in the development, meaning that you do not own an individual unit.

Shareholders are paid dividends based on the number of shares owned, with the units rented out to the public. Therefore, it becomes advantageous to maximise occupancy, and the value of the shares could increase depending on the rents achieved and long-term tenancies in place. Again, not unlike the commercial sector, where a property value can be increased simply due to the structure and terms of the lease agreement.

Build to Rent is proven to work in countries around the globe, and it certainly is an exciting new opportunity within New Zealand. However, there are two different areas to solve in our country right now, and if BTR is seen to be the answer to the housing crisis, then the product needs to be developed for that specific need.

Fortunately, in Auckland, developers are underway with BTR projects, and some of these initial developments are targeted towards providing simple versions of BTR (without all the bells and whistles). Going forward, it will be interesting to see if this helps provide secure rental accommodation and returns for investors.

However, you cannot forget that any new initiative or emphasis on developing more homes in New Zealand is a hugely positive step forward. There is a massive deficit of housing across the country, and it is exciting to see new ideas and energy entering the market.

More houses equals more homes for Kiwi families and BTR, although rental properties could well end up creating a much-needed solution to the current housing crisis. It also could help future/first home buyers build their net worth through shares in a BTR project to eventually buy their own property. Again, a positive step forward.

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