Everyone deserves a warm, safe and comfortable home. Unfortunately, a housing shortfall has increased demand, pushed up house prices and put mortgages out of reach of many low to middle-income New Zealanders.
Affordability crisis
A common measure of affordability – the ratio of average house price to mean household income – has increased from about 3:1 a few decades ago to around 9:1 in 2022. Anything greater than 3:1 is classified as unaffordable, according to a BRANZ study report that references the World Bank.
The problem is that incomes haven’t kept pace with house prices. Over the long term, the average house price increases by about 5% per annum and average income increases by around 3% per annum.
The difference may not seem much, but compounded over several years, it creates a widening gap between the cost of home ownership and the means of those who wish to own them.
Falling ownership rates
As a result, a growing proportion of New Zealanders are forced to rent rather than buy their home.
The Westpac NZ Shared Home Ownership Report, released in July, paints a clear picture – home ownership fell from 75% in the early 1990s to less than 60% today and is on track to fall below 50% by 2048. Essentially, more New Zealanders are renting and renting for longer.
Some in the industry see this as a maturing of our housing market – an inevitable shift towards more stable, longer-term tenancies, much like the long-term and generational tenancies seen in other developed countries.
Build-to-rent developments
A crucial question remains though – where will all these rental dwellings come from?
Widely used overseas, build-to-rent is any residential development designed specifically for renting rather than for sale, typically owned by institutional investors and managed by specialist operators.
Here in Aotearoa, build-to-rent schemes have received a lot of attention as a means to provide for growing rental demand and deliver housing to New Zealanders. Several local institutional investors have invested heavily in build-to-rent assets in the last few years.
Investment potential
‘Build-to-rent provides stable, long-term investment returns for our members through all phases of the economic cycle,’ says Sam Stubbs, Co-Founder and Managing Director of KiwiSaver investment fund Simplicity, one of the largest build-to-rent asset owners in the country.
‘Simplicity was set up with the firm belief that you can make money and do good, and this is a classic example. The returns from build-to-rent are very attractive. They aren’t as high as some other investments, they’re much less volatile, and that really matters when, for example, people are drawing down their savings in retirement.’
Build-to-rent developments typically yield around 5% in the first year and grow over time with inflationary increases in rent. In Simplicity’s case, it constructs build-to-rent assets for approximately 30% less than valuation and keeps all the development management, project management, construction, leasing and property management in-house to avoid external provider margins.
‘It also helps you sleep at night when you know that whatever the share market does, people will keep paying their rent. And the ultimate fence at the top of cliff for social problems is a warm, dry home and housing security,’ says Stubbs.
What it means for tenants
Build-to-rent seems like a no-brainer for tenants – secure tenure in a dry, warm, well-located home, a responsive property manager, protection from maintenance cost shocks and the flexibility to invest in other assets – shares or managed funds, for example.
Some schemes even allow tenants to customise the interior fit to their preferences in an arrangement like many commercial leases.
The downside is that tenants miss the opportunity to participate in the capital gains of home ownership, although mechanisms like real estate investment trusts (REITs) can enable anyone to access the property market. Residential REITs are common overseas, and while they do exist in Aotearoa, for now, they’re mostly associated with commercial property.
Limited progress
So far, though, build-to-rent development has been slow.
‘There is a lot of talk about build-to-rent which has yet to turn into action. If you look at actual homes built, rather than talked about, the numbers are relatively small,’ says Shane Brealey, Managing Director of Simplicity Living, the home-building subsidiary of Simplicity.
‘I believe the reason is that build-to-rent isn’t easy given New Zealand’s high construction costs and the approach the sector takes to design, procurement and construction,’ he says.
Simplicity has 1,250 new homes in construction, design and consenting with sites for further homes under negotiation. There are a handful of other developers in the game, but the cumulative numbers are minuscule compared to the housing shortfall.
For example, the Auckland region has about 600,000 homes, of which about 200,000 are rentals. Those 1,000 new homes represent an increase of just 0.5% per year – well shy of the region’s estimated 2–3% per year population growth.
Even without considering other factors such as older homes that must be replaced, so far, it seems build-to-rent has had minimal impact on the rental shortfall.
Scaling up
However, spurred by build-to-rent’s positive impact on similar housing woes in Australia and the UK, the government has announced plans to loosen overseas investment laws to encourage more foreign build-to-rent investments in Aotearoa.
Not only does Brealey see this as a good move, he also believes it’s the only way build-to-rent can have a meaningful impact on our housing market.
‘Australia has about 5,000 build-to-rent homes completed, another 5,000 in construction and another 5,000 in planning. Even with their A$3.5 trillion superannuation funds (compared to $120 billion in New Zealand), over 80% of the funds came from offshore,’ he says.
‘Build-to-rent is very capital intensive and requires patient capital, but any option that increases the number of quality homes available for New Zealanders is a positive thing.’