BUILD-TO-RENT

THE BUILD-TO-RENT MODEL

With home ownership rates declining and population growth trends increasing, there is an ongoing global requirement to help fill the increasing gap in the property market with different forms of affordable housing solutions and New Zealand is no exception to this trend.

Part of the answer to the dilemma this shortage causes governments is, at least in part, the ‘build-to-rent’ model (BTR). This has the potential to address aspects of the affordability challenges thrown up by the current situation and to ease some of the issues arising from over dependency on the private rental sector. MHI NZ believes that this approach could form a key part of the New Zealand Government initiative to alleviate the housing crisis.

The idea of build-to-rent is not to provide social housing, but rather affordable, good-quality housing that suits the needs of low-to middle-income earners who are priced out of the owner-occupier and private rental market. For the model to work, investors need to think of tenants as customers, to the benefit of both parties.

BACKGROUND TO BUILD-TO-RENT DEVELOPMENT

The global residential market is seeing a growing appetite for institutionally owned, professionally managed, purpose-built residential accommodation, otherwise known as build-to-rent or multi-family. A well-established asset class in the US, multi-family accounts for up to 25% of the $2 trillion USD institutional property investment, second only in size to office property.

The interest in this investment class is not limited to the US. In the European market, the multi-family asset class now accounts for 14% of total real estate investment in Europe and half of all real estate investment activity in Denmark, a third of the activity in Sweden, 23% in Finland, 22% in Germany and 17% in the Netherlands, according to international real estate advisor Savills.

INCREASED INVESTMENT AND INTERNATIONAL INTEREST

One of the fastest growing markets for the build-to-rent model is in the UK, with record investment rising 22% to hit £2.4 billion in 2017, according to CBRE. The UK development pipeline has grown five-fold in the past five years with nearly 20,000 units now built and more than 80,000 either in progress or planning. By 2020 investment in the UK build-to-rent sector is expected to hit £50 billion, as indicated by researchers at Knight Frank.

While UK investors such as Legal & General and M&G are particularly active, 41% of the investment came from investors in the US and Canada. Such international investors have seen the success of the more established equivalent multi-family model in their own regions and want to grasp the opportunities available in other emerging, less-established markets.

UNDERSTANDING THE OPPORTUNITIES

The build-to-rent model presents a myriad of opportunities across global markets:

OFFERS A LONG-TERM STABLE RETURNS MODEL

For investors, build-to-rent schemes offer long-term, index-linked income with lower volatility and good fundamentals. In established markets such as the US, multi-family property has a history of stable, long-term income returns with strong appreciation rates and cap rates anywhere between 4-10%.

DELIVERS HOUSING QUICKER AND AT A GREATER SCALE

Purpose-built rental has the potential to take pressure off the existing housing stock and meet some affordable housing mandates that are cropping up in global cities. This has been particularly successful in the UK at delivering a quick and easy solution to the housing crisis. Such schemes can be delivered faster and be let more easily, than that of housing for sale. Investors will also often build larger schemes (i.e., implementing a 50-unit minimum in the UK) since they are more likely to find tenants than buyers for such property.

MEET CHANGING CONSUMER NEEDS

High housing prices and urbanisation across urban centres globally is driving the demand for rental units. Build-to-rent can provide secure, quality, long-term and professionally-managed rental accommodation in key urban locations that provide a financially viable alternative to ownership. For example, Toronto has one of the tightest rental markets and one of the most expensive homeownership markets in Canada. To meet the booming rental demand, there are 162 proposed rental projects across greater Toronto, which could add up to 34,054 units to the market.

NEW ZEALAND MARKET IN REVIEW

The New Zealand economy experienced unexpectedly strong growth in the first half of 2021 with GDP growing by 1.6% in Q1, unemployment decreasing to 4.0% by Q2 and retail demand remaining high throughout the six months. While the arrival of the Delta variant on our shores is a considerable short-term blow, most economists suggest that while the economy will take a sizeable quarterly hit, the rebound, just like last year, will be even stronger soon after we move down restriction levels.

ECONOMIC GROWTH

The New Zealand economy performed stronger in H1 2021 than previous expectations with healthy growth recorded in Q1 (1.6% positive in contrast to the RBNZ forecast of 0.6% negative) underpinned by high levels of business confidence, a steadily improving employment rate and strong retail sales. Although official numbers are not out until mid-September, Q2 GDP is expected to be similarly strong with a sizeable quarterly drop anticipated thereafter as the Delta variant induced restrictions dent the recovery in the second half of the year.

OUTLOOK

New Zealand entered strict nationwide lockdown in August 2021 to stamp out the Delta variant that emerged in the community and the immediate response of mainstream economists suggests that while the economy will take a sizeable quarterly hit, the rebound, just like last year, will be even stronger with the stellar performance of the first half of the year returning soon after we moved back restriction levels.

In this view, a successful elimination of the current Delta outbreak together with prompt and generous government support will be enough to keep the labour market tight and resume strong household spending, keeping a 2021 OCR hike by the Reserve Bank firmly on the table.

Others argue that even with the successful elimination of the current outbreak, there will be more to come, suggesting instead that from today’s strict lockdown the realistic way out is fast and comprehensive vaccination with ongoing, but confined restrictions for the foreseeable future, implying potentially longer business and social disruptions (and erosions in business and consumer confidence) as we transition from a Covid-free environment to living with the virus.

*Data Source - CBRE

A GOOD TIME TO BUILD-TO-RENT

The runaway housing market in New Zealand has accelerated rapidly during the pandemic, but will cool next year, according to a Reuters poll of property market analysts, but affordability will stay stretched or worsen over the next few years. House prices have nearly doubled in the last seven years thanks to super-low interest rates, slashed from 3.50% to 0.25% over that period, leaving first-time homebuyers and low-income earners behind as prices climbed beyond their reach.

After soaring 30% in just the past 12 months, the most among OECD nations, home prices were forecast to jump another 20% this year, according to a Reuters poll of 10 property market analysts taken between August 11-19, 2021.

With a series of Reserve Bank of New Zealand (RBNZ) interest rate rises set to start in the coming months, that blistering pace of house price appreciation was expected to slow dramatically to 2.5% next year and in 2023. "While we think the annual (house price rise) is very close to its peak, the ratio of house prices to incomes is simply off the chart," said Sharon Zollner, chief economist at ANZ. "Properties available for sale remain very low, and the only real solution to this madness is to build more houses.

"But the scary thing is, even if we assume house price inflation from here to the end of time is zero, and that income growth can run at the very solid pace of 5% per annum, it would still take six years for this ratio to return to pre-COVID-19 levels," Zollner added. "Without outright house price falls, it's a slog." Only two analysts in the poll forecast a fall in prices, and one of them said not until 2023. All but one who answered a question about affordability over the next two to three years said it would stay the same or worsen. *Data Source - Reuters.