Build to rent pioneer New Ground Capital considers 10-year residential leases

Ten-year residential property leases are being considered by a New Zealand pioneer in developing build to rent apartments and townhouses.

Roy Thompson, co-founder and managing director of New Ground Capital, told the Property Council’s annual conference today that tenants in that business’ properties now had lease terms of up to seven years.

But New Ground was looking to extend that to 10, “with the flexibility for tenants to exit at very short notice”.

That would give people far greater security of tenure, he said of places where pets and minor modifications are allowed as of right.

Build to rent has been in the news this week with Kiwi Property announcing it would develop hundreds of apartments at Sylvia Park and LynnMall and Housing Minister Megan Woods saying policy advice had been sought on build to rent projects.

New Ground was founded in 2014 and had pioneered BTR in New Zealand, developing more than 600 new homes.

Those included 49 terrace places at Whenuapai, finished in 2018, all rented to the NZ Defence Force.

At Hobsonville Point’s Kerepeti, 208 apartments were developed. In December 2015, New Ground joined the NZ Super Fund and Ngāi Tahu Property to develop the places of which 47 have been retained by the consortium as long-term rental units and the balance sold on the open market.

More recently, a Queenstown project Toru is being built: 236 apartments, of which 66 per cent are to be rented. Construction started this year.

Build to rent was purpose-built for longer-term rental accommodation, or retained by owner on a longer-term basis, Thompson said.

Community trusts were starting to show more interest in the sector, managed by professionals, Thompson said.

New Ground saw the scale of BTR projects as having anywhere between 50 and 300 homes. The primary focus for investors was on rental yield, not sale price, he said.

Tenant interests in order of priority were location, cost, convenience, contract terms, the desirability of the place and extras like gyms and other amenities.

Investors’ or owners’ main interest was firstly net rental yield thresholds which differed. Some had higher thresholds, some have a greater propensity for development risk, Thompson said.

Other aspects important to investors/owners were total returns, liquidity if the owner needed to sell and sustainability which was of growing importance with Homestar ratings “which can and should be built into the development”.

On the current state of BTR in this country, Thompson said: “It remains in a nascent state, with completed units numbering in the hundreds rather than the thousands. There’s a lot of talk and interest.”

New Zealand residential property was valued at $1.4 trillion and 1.8 million dwellings. Around 35 per cent of households rent in New Zealand but 40 per cent in Auckland rent. All up, half New Zealand’s population rents.

Around 600,000 rental properties are home to 1.4 million people. Much of this was older homes and very different to what New Ground Capital was building.

“Most landlords are private individuals investing primarily for capital gain,” he said.

Asked why New Zealand is 40 years behind the United States on BTR, Thompson said it was the size and sophistication of the institutional investment market. New Zealanders were not as used to apartment living and that would take time to evolve here.

“In a market offering such poor quality choices as our rental market does, renters may not be willing to pay a premium for value-added services,” he said of the BTR market.

Challenges facing the BTR market were land availability and prices, rising construction costs, poor infrastructure, slow consenting, high and rising development contributions, central government uncertainty

“We’re quite frustrated by uncertainty re tax deductibility. BTR suffers an unlevel playing field in respect of GST and OIA rules are unfavourable.”

BTR requires “large slugs of long-term equity” and institutional investors were not yet big players in BTR.

Asked how BTR could combat the mentality of New Zealanders who want double-storey five-bedroom houses, he said: “We simply don’t see this mentality as a problem for BTR. BTR only services a segment of the housing market but that’s large, broad and growing.”

The growth of BTR will be driven by institutional investors, Thompson forecast. The housing market required scale and more stock.

BTR should be able to deliver large-scale equity-funded supply and should help catalyse a desperately-needed transformation in rental housing standards.

But he called for the central Government to align its policy settings.

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