By Ross Stitt*
Australians and New Zealanders have much in common. From an investment perspective, one of their less appealing similarities is an obsession with residential property. House prices have long been a favourite topic of conversation on both sides of the Tasman.
The downside of this obsession is a housing affordability crisis in both countries that makes home ownership an increasingly unattainable goal for many people. While most Australasian politicians still publicly champion home ownership, there are signs of a growing realism that more and more people will rent all their lives.
One such sign in Australia is the recent rapid growth of the ‘build-to-rent’ residential market and the promotion of that market by tax concessions.
Build-to-rent (BTR) refers to multi-unit property developments by institutional investors where the units are built for the purpose of long-term residential renting through a single ownership structure. The objective is a stable long-term return from a combination of rental income and capital appreciation.
The much larger ‘build-to-sell’ market involves the building of units to sell to individual owner occupiers or ‘mum and dad’ investors.
Some state governments in Australia are seeking to actively promote the BTR market. They perceive a range of potential benefits. One obvious one is the stimulation of the construction industry at a time when the Covid-19 pandemic continues to drag on the economy. Another is that while new BTR units might not prevent the inexorable rise of house prices, the additional supply of housing might at least temper that rise. In addition, it should relieve pressure on rents.
Participants in the sector claim that BTR buildings can offer secure, long term tenancies in good quality apartments with professional property management. These features do not always apply to single, individually owned rental properties.
To date the primary governmental tool for encouraging the BTR market in Australia has been land tax concessions. Both New South Wales and Victoria have halved the land tax impost applicable to qualifying BTR properties. For example, the concession applies in NSW to properties in metropolitan areas with at least 50 units, subject to a claw back if the property is subdivided within 15 years. NSW has also introduced an exemption for BTR projects from the foreign investor surcharges that normally apply for land tax.
The Queensland state government has adopted a different approach by providing a targeted rental subsidy through its ‘Build-to-Rent Pilot Project’. The objective is for the government to partner with the construction industry in the development of affordable rental housing using the BTR model.
The global commercial real estate services group CBRE issued a report on the Australian BTR market in February. That report said that the pipeline for BTR had expanded by 68% over the previous year, “with 40 projects and the total number of units approaching 15,000”. According to CBRE, the aggregate size of the market at that time was in excess of $10 billion with a further $3.5 billion of projects under consideration.
While these numbers are impressive, the reality is that the BTR market in Australia is tiny as a proportion of the overall housing market. It is still in its infancy compared to many other developed countries.
Home ownership has always been much lower in most European countries than in Australia. There is a much higher level there of lifetime renting and the institutional ownership of apartment buildings.
In the United States, more than a third of renters live in BTR properties, or ‘multi-unit rental communities’ as they are known there. That is more than 10% of the US population. If just 1% of the Australian residential market was BTR, that would equate to $70-80 billion. The scope for growth is clearly enormous.
So what’s happening in New Zealand?
There have been a couple of BTR developments such as the one at Hobsonville Point but the sector is much less active than in Australia.
BTR has been on the Ardern government’s radar for a couple of years. Former Housing Minister Phil Twyford raised the possibility of the government facilitating BTR development back in 2019.
Last August, Housing Minister Megan Woods told a Property Council NZ conference that “build-to-rent can offer some really good solutions” and that “the next big policy priority is making sure we're putting in place the measures to stimulate that market in New Zealand”. However, there has been little sign of stimulation to date.
In fact, there are concerns that the government’s changes to interest deductibility on property investment could kill off BTR altogether. Property Council NZ has specifically requested the government to exempt “this dynamic new asset class” from the deductibility changes on the grounds that they would “make it much more difficult for Build-to-Rent’s potential to be unlocked”.
Just last Monday, the ACT Party announced that it “would remove barriers to finance build-to-rent schemes”. In particular, it said that it would provide exemptions from the Overseas Investment Act for foreign investors in build-to-rent residential projects and would “abolish any changes to the interest deductibility tax rules”.
The benefits, according to ACT, would be to “super charge building and development” and to “deliver more choices and opportunities for New Zealand renters”.
Environment Minister David parker claims that tweaking the Overseas Investment Act is unnecessary and would just open the door to “overseas speculators”.
If the Australian BTR experience is any guide, foreign investment is an important issue. The Australian Property Journal noted in February that “international investors are increasingly showing greater appetite for the asset class in Australia”.
For example, Greystar Real Estate Partners, a US specialist in the BTR sector, has established the $1.3 billion Greystar Australia Multifamily Venture I fund to invest in Australian BTR projects. Investors include the Dutch APG Asset Management and Canada’s Ivanhoe Cambridge. The fund is expected to deliver 5,000 plus housing units.
Another Canadian investor, Oxford Properties, is partnering with Australian Investa Office Management on a 702 apartment $450 million BTR project in Melbourne. The pair recently announced that they are looking to develop 5,000 BTR units under the ‘Indi’ brand.
The trajectory is clear. There is significant demand among global investors for BTR developments in Australia. Local developers and construction companies, aided by state governments, are moving quickly to meet that demand.
In Australia at least, the future of the BTR market looks secure.
Ross Stitt is a freelance writer and tax lawyer with a PhD in political science. He is a New Zealander based in Sydney. His articles are part of a new 'Understanding Australia' series.
30 Comments
I lived in a complex like this in the US, had maybe 200 units. As a tenant there are a number of benefits, for example the office is staffed during working hours and they had a full time maintenance worker so any issues were dealt with quickly. There was even a shared pool, gym (very limited) and outdoor space with a couple of bbqs.
When we were looking there was a good range too, less expensive units would have shared laundry facilities and more limited facilities (e.g. no pool or gym), but also more upmarket ones that might also have an indoor space with a pool table, PCs and printers available to use, better equipped gym, spa pool, etc.
HM
You going to justify that or just a throw away line.
For a starter, tax deductibility on new builds will support such developments.
As article states; one third of US renters live in these developments. From my experience also very common in UK and Europe: stayed in a number of such complexes with some units being used as Air BnB such as in London, Edinburgh, France and Germany.
The reality is that the cultural notion of homeownership and the quarter acre section and pavlova paradise is increasingly a thing of the past.
Changing homeownership is not a recent thing: for 25 to 35 year-olds homeownership has fallen from 65% to 35% over the past 35 years and being a continous trend that is an illustration of that change.
Welcome to the new real world.
HouseMouse
Why not currently? New build tax exemptions in place only since March and if you read the article it is about a possible trend.
You make a specific claim that it is being pumped up by those with a vested interest - the authour does not have skin in the game.
HouseMouse, be accountable for your comment. Who are these vested interests you claim and what do you have to back that up? Be specific.
Otherwise, a baseless post.
I don't know whether Mr Stitt has vested interest or not.
It was a general comment. Some of the people pumping this up clearly do have vested interest.
Anyway, beside the point. My main point being - if this is all so great, if it offers such great returns etc then why are we not seeing significant uptake?
I remain unconvinced.
The need to remove GST of new house builds. Do we want to live in a country where les and less people can afford to own their own home? Therefore you get more and more wealthy people who own homes and inequality grows. I don't like the direction NZ is heading in. Even the UK is not has bad as NZ is becoming. NZs house prices have risen more than almost every other country in the world, largely due to greed fueled by FOMO.
True but I'd rather us taxpayers foot the bill for housing infrastructure and bring more stable supply of rentals into the market than continue spending billions each month in emergency grants and accommodation supplements, not to mention the huge socioeconomic costs of putting young families in cold, mouldy houses.
There are lots of smaller players in New Zealand that do BTR on a much smaller scale and would like to expand. Unfortunately with the new non tax deductibility of interest on our existing portfolio, it makes new projects very challenging. Every large company starts off small, but in NZ we seem to like to kill off small companies with dumb tax rules. A large number of developers start as investors, and have just had their hands tied. Thanks IRD
If you have been carrying out build to rent before the cut off date, over many years, all of a sudden you can’t claim interest costs, albeit phased in. So the new tax laws have stuffed many of the existing BTR players and will stop new projects. Of course the ultra wealthy can carry on, but was not under the impression that the government was supposed to be giving them a free licence at the expense of everyone else.
Now that you cant get rid of tenants, how long will it take for these buildings to fill up with tenants who dont even bother attempting to look after the place or be civil to their co-tenants? All the good tenants will get sick of the state of the place and move out, and the building owner will be forced to take lower and lower quality tenants just to get it rented, and soon the building is a slum. Thats how it works in the US and UK.
that's how it works in NZ State Housing areas too. I've lived in Epuni & Porirua back in the '70's; saw the demographic changes from the older people who appreciated a State helping hand & were very houseproud through to those who believe they were owed a roof over their head & that someone else should pay for it.
This would had solved many complaints on lack of housing but every new rental law makes it increasingly unattractive to implement it on a larger scale.
It's easier to get rid of violent tenants, vandals, community thieves, drug peddlers, weed growers and party animals from motels than an actual nice rental.
Some people can't have nice things; it is what it is.
I think we should just focus on motels- the model works and is appropriate for the country demographic.
Or you repeal the law that says you can't evict tenants without cause. That would at least give the tenants some incentive to behave themselves. At the moment, once they are in a corporate owned rental, there is no ability to remove them. The building owner cant sell the place, cant move into it themselves, can't demolish it, so their only option would be to claim they are doing a substantial renovation, which would be unlikely to fly considering its an apartment. Under the new Labour law tenants can do what they like and there is no comeback from the landlord to get rid of them. Consequently the state of these buildings will deteriorate very quickly.
Build-to-rent promoters point to various European systems where substantial numbers of people enter into stable long-term rental contracts that allow for security of tenure, certainty of rent levels, and the expression of individuality within the rental property.
Looking at these systems, there are a significant number of deviations from what we consider to be normal and usual under New Zealand laws and our accepted practices:
- The organisations providing rental properties own and manage several hundreds if not thousands of such properties and retain that ownership for many years with no expectation of ever selling.
- The Tenants enter into the agreement not only to pay rent on that property but also to be directly liable to pay all other overhead costs of that property such as local authority rates, insurance premiums and utilities.
- When Tenants rent the property they then pay for, supply install and maintain their own floorcoverings, kitchen and bathroom appliances, light fittings and all the other fixtures within the apartment. The property owners then maintain only the exterior of the building with all internal maintenance being the Tenant’s responsibility.
- When the tenancy finally does terminate, the rental property must be handed back by the departing Tenant to the property owners in exactly the condition it was in on the day the tenancy commenced. There is no allowance for wear-and-tear.
As can be seen, under these regulations the obligations of the property owners during the term of the tenancy are minimal. This means that these organisations have low operational overheads and can run as viable and sustainable long-term business models.
Under the current requirements placed on NZ landlords I cannot see how these build to rent schemes can possibly be profitable.
If every leaky tap and sticky window catch requires a tradesman callout all the rents will be sucked up in fees and maintenance costs.
Most astute landlords only make an income because they do a lot of the minor work themselves.
The reality is that landlording in NZ is a high workload low income business quite unsuited to the largescale professional ownership seen overseas where the obligations placed on tenants are far more draconian.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.