“Build to Rent”. What is it and why should we consider it?

Rob Collins gives his observations as a property finance expert returning to the New Zealand market after 15 years in the UK.

I have been in the property finance sector for 25 years and for the last 15 years have been operating as an advisor in the UK market. Having recently returned to NZ I have noted that there are many similarities between the UK and NZ markets, but I wanted to highlight some of the differences that I have noticed with reference to the build to rent concept.

The build-to-rent banner encompasses a couple of different models – my first experiences with the idea was a few years ago when the UK suffered a soft property market following the Brexit vote. I had several clients that had finished residential development projects only to find that buyers were wary of purchasing when it looked like prices may be falling. However, the underlying demand for accommodation was still relatively strong and these clients became accidental landlords as they found that the units were easier to rent than to sell. You may be wondering what happened to all the pre-sold units? Well, in the UK a presale condition is virtually unheard of on a development loan, but that can be the subject of a separate article.

These accidental landlords found that they could refinance their development funding onto a much cheaper residential investment mortgage and even extract some of their equity to roll into the next project. Additionally, they had a cash flow positive rent roll after interest costs. It may not have been their first plan, but many clients liked the idea of building a long-term portfolio and the develop to sell model became replaced with the develop to rent model, albeit that most of the units being developed were standard, self-contained properties that could be sold if necessary.

The second strand of the build to rent model is a more specialized co-living version – here properties are developed specifically to be rented as a block and any sale is limited to selling as one block.
The properties can range from the smaller end where large houses may be converted / extended to provide self-contained bedrooms (sometimes with en suite), but with other facilities such as the kitchen and living space being shared and communal. At the larger end, the co-living properties being developed will be hotel-like in size and scope with some having communal areas that include bars, restaurants, and even cinemas. For the developer/investor, the goal is the same – to produce a property asset that generates a greater yield than standard residential property. For the occupants, co-living should provide a more private arrangement than a traditional house share, but with lower costs and more flexibility than a traditional purchase or rental.

I am sure that these ideas could help in the NZ housing market by providing a wider range of options for renters, but I am afraid that there are some impediments, and they really revolve around the funding (albeit the GST treatment of property here in NZ is another contributing factor). Remember my accidental landlord clients above – in the UK we were able to get them 75% LVR funding at prime rates for up to 20 units. Above 20 units you moved into the commercial lenders, but the rate premium was normally only 50 to 100 basis points as the capital weighting on the lenders’ balance sheets was lower for residential property. This means that UK borrowers can access higher loan-to-value ratios and lower pricing compared to NZ.

From my conversations with the banks here there are no comparable products available, and the non-bank market is currently only offering short-term finance. This means that the build to rent model in NZ is only going to be possible for groups that have large equity resources to deploy or the ability to arrange alternate funding arrangements such as a syndication model. For the standard developer or investor, the current financing options will keep them locked into the traditional process of develop to sell and to invest in single unit rentals.

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