Model a threat to private investor, says agent
An Auckland real estate manager says there is a new investment asset class that has been created as a direct result of global runaway property prices.
The build-to-rent model is a large residential (often multi-unit high-density) development designed specifically for renting rather than sale and is typically owned by institutional investors and managed by specialist operators and only available as long-term rentals.
The Property Council of New Zealand says build-to-rent is an emerging sub-market gaining huge traction, with reports of 35,000 units either built or in construction as of September 2021.
Read more: Govt urged to support build-to-rent development more
Mars Realty licensee Jeff Brill (pictured above) said the idea of build-to-rent properties was due to the aftershock and recovery of a housing bubble that got out of hand in 2008 following the Global Financial Crisis.
He said this resulted in countless families having to walk away from their homes either because they could not sell them due to negative equity following the crash or they lost their jobs and were unable to pay their mortgages.
“The situation was so dire that tent cities sprung up in suburbs to house people that were caught foul of the financial crash,” Brill said. “This led to people borrowing well above their means with the feasibility of the deal and affordability taking a back seat to the salivating bankers adding to a portfolio that they may already have packaged and pre-sold.
“These dodgy mortgages were all put together, partnered with some safe bonds, and then the whole package called something like ‘Prime Blue-chip Capital Investment’. The shiny new package was given to a rating agency and a AAA rating was requested.”
Read more: How are we going to fix the Auckland housing crisis?
Brill said a parallel could be drawn in New Zealand in 1995 when the government allowed untreated timber to be used for house framing.
“With the cheaper costs of untreated timber and the easy cheaper cladding system, developers went to town – building streets of duplexes and pocketing huge profits. So, not unlike the GFC, when regulation is not properly thought out, people can and will find the loopholes then try to get in and out before the system crashes into a brick wall,” he said.
“Developers made huge profits, and this too came crashing down, with estimates that leaky homes cost New Zealand close to $47 billion. When the government let go of the reins, a housing boom was created and many who navigated well by doing their own research benefited greatly during this boom period between 1996 and 2003.”
Brill said it was always difficult to compare residential and commercial property investments due to the different benefits that one received from each sector.
“For example, commercial investors have the tenants pay for maintenance, land rates and often the property management fee, whereas a residential investor has to pay all these expenses themselves,” he said.
“To equate the classes, Colliers have taken 30% off the residential rental return for the non-recoverable losses but also extrapolated the residential capital gain by spreading it over the term and adding this to the rent and returns.”
Brill said build-to-rents have taken off and after looking at what happened in the US with the mergers to eliminate competition, one would not need to look far on New Zealand shores to see where this could happen.
“Simplicity Living, which is a large player and Kiwisaver provider, has joined forces with NZ Living to build a planned 10,000 affordable houses over the next 10 years. NZ Living seems to be ploughing forward ignoring any obstacles that jump in the way of their progress,” he said.
“If the Simplicity Living/NZ Living partnership works, this will see them compete with Housing NZ (Kainga Ora) and become the second-biggest landlord in NZ. The partnership will sell down units in the fund to wholesale investors.”
Brill said there was a bad moon rising with the creation of a new class of people that used to strive to buy a house and would now settle into a build-to-rent.
“Primarily, the build-to-rent child was born out from the aftermath embers of the disastrous GFC,” he said.
“This may look like the ideal solution to provide tenants with more rights and security of tenure; however, I see a massive fallout by the eradication of the private investor trying to secure their retirement and the gap between the rich and the poor going from a crack in the sidewalk to something more akin to the Grand Canyon.”
As part of the build-to-rent model, tenants must be offered a fixed-term tenancy of at least 10 years with the ability to give 56 days’ notice of termination, but they may agree to or request other tenancy offers.
The dwellings and any common land or facilities for those dwellings can have a single owner, dwellings can be held in one or more titles and the building that a build-to-rent dwelling is in can include other dwellings or commercial premises that do not form part of the build-to-rent development (for example, an apartment block that has shops on the ground floor).
