Build to Rent: The future of renting in New Zealand?

  • Build to Rent Forum gives a glimpse of what renting will look like in the future

  • Time to embrace change and accept that renting has to evolve

Although renting in New Zealand may not be entirely broken, I have come to the conclusion that things desperately have to evolve and the status quo cannot remain. Well-intentioned, Government policy has only succeeded in making matters worse by driving up rents through an anti-landlord policy that has resulted in many small ‘Mum and Dad’ investors selling up. Landlords and the Property Management industry have to take some ownership too. If landlords had maintained their properties sufficiently, there would be no need for a Healthy Homes Guarantee Bill. And for too long many Property Management companies have tolerated poor landlords, scared of upsetting them in case they lose their business, continuing to manage poorly maintained and in some cases, non-compliant properties.

What we have now is a serious shortage of stock leading to many tenants paying over-inflated prices and in many cases, for a sub-standard second-hand product. What can be done to improve the situation?

Build to Rent; What is it?

One idea that seems to be growing traction is the concept of ‘Build to Rent’ or BTR as it is more commonly known. The BTR model is an emerging and fast-growing model, particularly in the UK.

Not to get confused with ‘Rent to Buy’ schemes which have been suggested as a potential fix to the Kiwibuild fiasco, BTR is large real estate developments specifically built as long term rental accommodation. With the vast majority of rental accommodation being owned by small scale, amateur landlords who often fail to deliver a good consumer experience, BTR looks like a viable option. 

How does BTR work?

David Faulkner was invited to be the Chair of the first Build to Rent conference in New Zealand

Developers and large scale investment companies will build purpose-built rental accommodation, usually in the way of apartment blocks or high-density housing. These developments will be sold to investors who will own shares in the development meaning that you do not own an individual unit.

The shareholders will then be paid dividends in way of rent payments, usually at a yield of around 4% per annum. The more shares you own in the development, the more you earn as a return. These units will then be rented out to the public, usually on a lease for between three to seven years. However, unlike a typical fixed-term tenancy, the tenant will be free to give notice when they choose. The benefits of this are obvious to tenants. They have long term security without the fear of being ousted by the landlord for whatever the reason may be. 

Tenants will also have the benefit of living in tailored apartments where maintenance requests will be dealt with immediately rather than having to deal with a private landlord who doesn’t want to spend the money and often takes the least expensive option available to them. Therefore the tenants in BTR accommodation will be living in a superior product, paying a set rent that increases usually in line with inflation and they do not have to worry about dealing with landlords who refuse or who cannot afford to maintain the property.

BTR properties are also pet-friendly and the tenants are free to make minor modifications as well. It all sounds too good to be true. 

The Build to Rent Conference

On the 19th of September, the very first Build to Rent Conference was held in Auckland and I was invited to be the Chairperson for the Conference. It was a huge privilege to be invited to do this and I also believed it would be a great way to learn about a concept I knew little about. The day was extremely insightful and I left the Conference believing that although it will not solve all our housing issues, it will certainly go some way to being part of a solution. To fix housing in New Zealand it will need a collective approach by a variety of state and private enterprises. A number of the presenters and panellists had had first-hand experience working with the BTR Sector and in particular, within the UK. One presenter had worked on the Wembley Park BTR development in London by the iconic Wembley Stadium whilst another had worked with the transformation of the Olympic Village in East London which had been converted into BTR accommodation. 

The model looks like a perfect fit for places such as Auckland and in particular Wellington, which is a city bursting at the seams.

Build communities that thrive, not ghettoes of crime

The key to success is ensuring that the product is built with quality materials and with a focus on building communities that support families. Apartment blocks will come with a number of shared facilities such as gymnasiums, swimming pools and shared community living spaces.

The infrastructure has to be right as well. Sufficient roads with places to park your vehicles, as well as close proximity to major transport hubs, are all key components that have to be taken into account. Other key factors that have to be right as well are things such as schooling, daycare centres, shops and entertainment. 

As a teenager growing up in the North West of England, I well remember some of the high-density high rise towers that became ghettoes of crime and poverty. This was predominately due to the lack of good infrastructure, employment issues and poorly maintained buildings. The same mistakes cannot be made in developing major projects like this in New Zealand.

One of the major talking points around the entire conference was that many Millenials no longer saw value in owning their own property and when you look at how society is evolving, you can see the logic to their thinking.

As a tenant, you no longer have the burden of paying rates, maintenance, insurance on the property and interest on mortgage payments.

They are not tenants, they are your customers

New Ground Capital is building this 230 apartment complex in Queenstown where 80 apartments will be allocated as long term rental accommodation

Paul Winstanley, Head of Research at JLL New Zealand and a man with extensive experience with BTR in the UK summed up the concept wonderfully well. He stated that you need to remove the word tenant and call them customers. This is their home and you have to respect this. Property Management becomes a concierge service for the occupants of the developments.

In another presentation, Dr Natalie Allen, Director of innovative urban strategy company The Urban Advisory demonstrated how BTR was working around different cities in Europe. Many developments had shared spaces which included kitchens, games rooms and community centres. These hosted a number of different functions for residents such as coffee groups for young stay at home parents, cooking classes, even whiskey tasting evenings. Neighbours got to know each other and communities thrived as a whole.

People lived in the developments for years which helped build a community spirit. Children went to the same schools and developed roots which benefited them in their upbringing.

Overall, the concept was working extremely well and the BTR proved to be a safe investment for any potential investor who took a long term approach to build for their retirement. With chic and modern designed complexes which had smart home devices to help run your apartment efficiently and environmentally friendly, it is very hard to find flaws with the concept of BTR. 

There are issues however that do need to be addressed.

Not a solution for the lower class

This is a concept aimed at the middle class and does very little to solve issues at the lower socio-economic end of the spectrum. This means that at the lower end of the market, where the majority of the problems lie within our societies, there is little benefit for the tenants of tired, cold and damp properties of suburbs such as Manuwera or Naenae.

These properties are generally in poor condition leading to health issues of the occupants who can never truly settle in their homes. The houses are typically reaching the end of their shelf life and are costly to run which has major consequences long term not only for the occupants but also on the environment.

There are also big question marks as to how the Residential Tenancies Act applies to BTR. Matt Heal who presented at the conference is already involved in BTR developments in New Zealand with housing projects in Auckland and Queenstown. Matt gave a wonderful presentation on how BTR works. When I questioned him around how their leases work he explained that tenants sign a fixed-term lease for three years but are free to give 90 days notice when they want to vacate. I’m not sure how this would be interpreted in Tenancy Tribunal if someone challenged this and applied.

What will become of the 90 days ‘no cause’ eviction?

I left the conference believing that our tenancy laws and our industry have to adapt and evolve. Many components of the Residential Tenancies Act are no longer fit for purpose and maybe the current Government is right to remove the 90 days ‘no cause’ evictions. However, Paul Winstanley did give a warning to the New Zealand Government. Do not hammer the private rental sector and in particular, ‘Mum and Dad’ landlords. This happened to a degree in the UK and it has also happened here which has added to the rental squeeze.

Build to Rent will not solve housing issues for lower-income tenants in places such as South Auckland

The biggest discussion point around the proposed changes to the RTA will be the removal of the 90 days ‘no cause’ evictions. Currently, the landlord does not have to give a reason if they want to give notice. Although I do really understand the concerns of landlords and there are serious health and safety concerns for Property Managers as well, I firmly believe that the benefit of ensuring that tenants have a safe and secure home outweighs the needs of the private landlord. The vast majority of tenants simply want a warm dry place to call home and they want to establish roots in a community. The threat of losing the property is always hanging over them. Issues that will be too difficult to solve will be if a landlord wants to sell the property vacant. I can understand why a landlord may want to do this and in my opinion, that is a valid reason to give notice.

I am comfortable with the removal of the 90 days ‘no cause’ eviction however certain conditions must apply. Tenancy Tribunal is slow, cumbersome and many would say inconsistent. We have to see serious improvements in regards to how our Tribunal system works. Although I have no data to prove this, I do suspect that there are huge inconsistencies with the decisions that come from certain adjudicators and if you have to go to Tribunal to be able to give notice to a tenant you need to have a fast, fair and robust Tribunal process. Would it be too much to try and get the wait time for a hearing down to one week? That is what we should be aiming for.

With over 32,000 applications to the Tribunal every year, of which 85% are made by landlords, this number will only increase if landlords have to apply to Tribunal to get a problematic tenant out and then, they have to have enough evidence to do so.

A great place to start with improvements is to remove rent arrears only cases from the slow laborious process that is the Tribunal. 69% of all Tribunal applications have a component of rent arrears in the application. Rent arrears only applications should be done remotely to save time and speed up the entire Tribunal process. Landlords should not have to wait to remove problematic tenants the same way tenants should not have to wait for basic repairs to be undertaken to their home.

BTR part of a wider collaborative approach

There will be multiple ideas as to how to improve housing and in particular security of tenure.  Owning your own home will be out of reach for many Kiwis due to high prices and the inability to save due to so much of their income going on rent. However, BTR will have an overall positive effect. The concept may be able to be taken out of the cities into some of our provincial centres such as New Plymouth, Tauranga and Nelson, however, developers will need to do their research before undertaking such projects. 

The major take away point of the entire Conference was this. We simply have to look after tenants better than how we currently do. They are paying consumers and they deserve better. There will always be bad tenants as there are bad landlords, but overall if you treat them with respect and dignity, they will respond in kind. We all have to adapt and work together to improve the renting experience in New Zealand.