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Budget 2022

Property: If the Budget genie gave me one wish, I'd ask for...

Dan Lowe Dan Lowe

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.

Here in Aotearoa, we have 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.

Renting as a customer-centred subscription service

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. In addition, rental properties are not always well managed or well maintained. As a result, Kiwis have an ‘ownership or nothing’ mindset.

Yet in other countries, renting works well. It’s affordable – much more so than home ownership. It’s reliable and tenants have certainty. Renting is like any other subscription service - you pay a fair price and receive a positive experience. Tenants can lease for life without being at a huge financial disadvantage because rents are affordable, and they have the option of investing the money saved by not owning a home.

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. Simplicity and Kiwi Property Group are already dabbling in build-to-rent developments, and I see huge potential for these types of projects. 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 or community.  

To be successful, these developments need alternative rules to the wider private rental market. There’s already separate regulations for other special types of communities – for example, 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, for instance. 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.

Longer tenancies, more scalability

Right now, private landlords are exiting the market because the numbers no longer work, primarily due to the recent tax changes. This is 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. This of course would only be a viable approach if there was stability in the renting market. 

Accommodation should deliver a quality experience, at a reasonable price. In the same way you can have a Netflix subscription and own shares in the company, tenants could invest in the company that owns their complex. They would enjoy certainty of tenure, remain in the same community, and comfortably rent throughout their lives.

It would be an outstanding result for the future of the 35% of Kiwi households currently renting – a number that’s only likely to rise.