[OPINION] Budget 2022 should back build-to-rent communities
New Zealand needs rental properties that give tenants a better experience, so let’s incentivise the creation of build-to-rent-communities, says Dan Lowe, Partner, and Property & Construction Leader. Read Dan’s full article here.
Thursday, May 12th 2022, 10:10AM 
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“New Zealand has a severe shortage of quality, affordable rentals. The good news is people are presenting solutions, but they need some impetus and support from the Government to deliver these large-scale developments”, says Lowe.
Renting as a customer-centred subscription service
Lowe says renting should be a positive experience.
“Currently, renting in New Zealand means frustration and uncertainty; at any time, a landlord can ask you to move out because they’re planning to move in or sell. When you’re attached to your community or your kids are zoned for the local school, this can be devastating. As a result, Kiwis have an ‘ownership or nothing’ mindset.
“If we look to other countries, renting works well – it’s more affordable than home ownership, it’s reliable and tenants have certainty. You pay a fair price and have the option of leasing for life without being financially disadvantaged because rents are affordable. These tenants also have the option of investing the money saved by not owning a home.
“By custom-building a community of renters all living in a complex where the individual units cannot be sold, tenants can have peace of mind about tenure. They can also enjoy the security that comes with having a sense of permanence in a neighbourhood of community.
“It’s like any other subscription service – almost everything else in our lives operates on a subscription model, why not housing?”
Build to rent communities need special treatment
Large-scale build-to-rent developments have the potential to provide tenants with the certainty they deserve. Some industry players are already dabbling in these developments, and Lowe sees huge potential in these types of projects.
“But to be successful, these developments need alternative rules to the wider private rental market. There’s already separate regulations for other types of communities like retirement villages and student accommodation. Because each of these are designated as a specific asset class, the Government can set sector-specific restrictions and create different tax regimes. The same approach could easily be used for large-scale build-to-rent projects.
“These communities can be more professionally run, with an onsite maintenance service making it a more liveable, pleasant experience for tenants, resulting in lower churn. This would help to keep rents down, because the complex would really be a commercial property proposition, not a residential one”.
Incentives to increase our supply of rental accommodation
“If a specific asset class were carved out for rental communities, incentives could be introduced to encourage more developments across the country,”
“These might include tax incentives such as perpetual interest deductibility, claimable depreciation, or perhaps a specific approach to establishing the rights between the tenant and landlord – something separate from the Residential Tenancies Act and bespoke to this form of accommodation.
“Whether they are subdivisions or apartment blocks, the construction of complexes like these would inject massive numbers of jobs and cash into our economy. Attracting major institutional investors would see a lot of money flow into New Zealand along with better accommodation for thousands of renters. Foreign pension schemes are always looking for solid investments, and this sort of asset class would have real appeal.
“Of course, if the Government wants to get really serious about tackling the problem, it could get large state-owned enterprises to back build-to-rent developments – an ideal way to put some money directly into solving our housing crisis”, says Lowe
Longer tenancies, more scalability
Lowe says recent tax changes are leading to a serious constraint of supply, driving up rents and making life even harder for tenants.
“Those mum-and-dad property investors are being incentivised to buy brand-new standalone houses further from the cities, creating urban sprawl which isn’t a great long-term solution for our renting woes.
“Historically, there has been an almost unnatural Kiwi fixation on owning your own home. This same mindset isn’t apparent when compared with more mature countries around the world. Maybe we are at that tipping point where the next generation doesn’t place so much importance on this outcome, and are happy to rent and use their surplus income for alternative investments”.
“Creating a stable, positive rental environment would be an outstanding result for the future of the 35% of Kiwi households currently renting – a number that’s only likely to rise”.
Access Dan Lowe’s full article here.
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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.
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.