23/08/2023·5 mins to read
Build to Rent developments: A long game worth playing?
Investment in Build to Rent (BTR) projects are increasingly being discussed as an alternative investment to more orthodox residential developments in the current market, with many potential first-home buyers choosing to stay in rental properties while interest rates and the cost of living remains high.
In this article, we outline what a BTR project is, how BTR projects are funded, overseas investment and tax considerations, and much more.
BTR projects are popular with renters because:
- the property is purpose built;
- the renter has security of tenure with there being a lower risk of the landlord moving in or redeveloping the property;
- the property tends to have a higher standard of on-going maintenance due to professional management of the entire complex; and
- well-designed BTR projects will create a sense of community.
BTR projects are often considered an attractive asset class for some investors, such as large super and insurance funds, due to the long term stable returns from the revenue generated from the rental streams, rather than being limited to the capital gain made from selling the same property.
What are BTR projects?
BTR projects are multi-unit property developments where the homes constructed are intended to be held by the developer (or a single subsequent investor landlord entity) to be rented out indefinitely, rather than sold off. BTR projects can exist as either freehold or unit title developments, and are often accompanied with numerous shared spaces and facilities such as gyms or co-working areas.
BTR projects are generally understood to provide greater security of tenure to renters, and as a result, long term stable returns to investors. The security of tenure can be as a result of regulatory requirements or developers responding to market expectations. For example, a recently introduced tax change that assists BTR developers to obtain interest deductions for borrowing costs (discussed below) only applies where the developer offers tenancies for not less than 10 years. Some developers may also offer benefits to their tenants which increase the likelihood of retaining tenants in the long term. For example, a developer may allow its tenants to keep pets and redecorate their apartments, as well as providing desirable amenities such as co-working facilities and gyms.
Funding BTR projects
Funding BTR projects can be more complex than standard build to sell developments as a funder won’t have the security of proceeds from the sale of properties. Developers should consider how the following factors could impact their funding:
- Length of initial fixed term period: locking in tenants for longer periods can provide greater certainty of revenue;
- Combined BTR / build to sell development: pre-sales of units can provide early cash injections whilst the long term benefit of BTR property means that ownership is retained;
- Structure of landlord entity: what a funder may prefer in this regard can be a key factor where there are multiple investors participating in a BTR project; and
- Partnership with CHP/Councils: funders may be more attracted to BTR projects which have a commitment from a community housing provider or local authority to take on leases for a number of apartments.
Freehold vs Unit Title developments
Whether a BTR project will be established as a single freehold title with multiple units or a unit title development is one of the first and biggest questions that any developer would need to consider, with each option having its advantages:
|Single Title (Freehold) Developments
|Unit Title Complexes
|Reduced initial legal and survey cost without the need to undertake a unit title development and set up a working body corporate
|Divestment flexibilty - having an ability to either sell the entire building or individual units
|Reduced ongoing legal and internal cost required without the need to comply with Unit Titles Act 2010
|If unit titled at the time constructed, no risk of being impacted by Building Act law changes (eg as to fire rating) that could affect the unit titling of a building post construction
|Greater flexibility to alter or change tenancy layouts without separately defined units
|Individual records of unit title will have their own market values, which will be collectively higher than an unsubdivided single title freehold property
Overseas Investment Act (OIA) considerations
Any BTR project will be sensitive land under the OIA as it will be residential land. Being involved at the start of the development of a BTR project may provide overseas investors with a more straightforward pathway to acquiring assets in New Zealand under the existing consenting pathways.
Involvement at the start of the project will enable an overseas investor to access the “creation of additional housing” pathway for obtaining consent under the OIA. An overseas investor acquiring a completed BTR project would face the more demanding task of establishing a benefit to New Zealand arising from its investment post completion of the BTR.
In the lead up to this year’s election, National has indicated that, if elected, it will amend the OIA to give greater certainty for institutional investors to invest in New Zealand’s BTR market. In March this year, Hon Chris Bishop introduced his Member’s Bill, the Boost Build-to-Rent Housing Bill, which proposes to include BTR projects within the definition of ‘long-term accommodation facility’ which would give developers and investors greater clarity that BTR projects provide a clear pathway for consent. A new Government may also look to remove or relax the current restrictions on investment in residential land, the removal of which would free up the ability for overseas investment in BTR projects.
Tax measures and related issues
A recent income tax change introduces (with retrospective effect from 1 April 2021) a specific BTR focused exclusion from the “interest imitation” rules that generally disallow interest deductions on borrowings relating to the construction or acquisition of residential property for income-earning purposes. The exclusion is limited to interest on borrowings relating to qualifying “build-to-rent land”. In particular, it only applies to developments of 20 or more units offering lease terms of 10 years or longer, and meeting several other specific requirements.
Prior to this change, BTR developers could only claim interest deductions if their development qualified as “new build land” under a pre-existing exclusion from the interest limitation rules. A number of developments did not benefit from this exclusion.
The National Party, in its draft “Boost Build-to-Rent Housing Bill”, has proposed a change which would give BTR developers / owners the ability to claim income tax depreciation deductions for BTR buildings, in the same way the depreciation can be claimed in relation to non-residential buildings (which currently includes assets comparable to BTR assets, such as student accommodation and retirement villages). It would be expected that if National forms the next government, it would advance this proposal. It is highly unlikely to proceed under a Labour-led government, given that Labour’s election policy is to remove all building depreciation (including for non-residential buildings) to offset the fiscal cost of its policy to remove GST from fruit and vegetables.
Income tax issues aside, possibly the biggest tax issue facing BTR developers relates to GST. Because a BTR development is used to make GST-exempt supplies of residential accommodation, GST incurred on the development costs is not recoverable by the developer. Accordingly, BTR developers face significant GST “leakage” that developers who build to sell do not. The industry has thus far struggled to get political traction on this issue.
Is this the right time for BTR?
The current market downturn is making development land cheaper but building costs have increased materially and as such the margins between the cost of developing a site and what costs can be recovered from the sale of a new build are still narrow. By establishing BTR projects, developers can generate a revenue stream through renting out new builds while retaining the option to sell these properties off at a later date when the market creates more favourable conditions.
BTR projects have bipartisan support, with Kāinga Ora taking expressions of interest for those looking to make privately owned property available to rent and National announcing proposed legislative changes to increase funding and capital more available for developers in the BTR sector. BTR projects are also being encouraged at a local governance level, with Wellington City Council and Auckland Council amongst others taking steps to encourage BTR partnerships with private developers.
We have also recently seen National announce its policy that it will allow renters to access their Kiwisaver accounts to pay rental bonds. If National is elected in October, it appears that the Government will be focused on changes to the rental market in New Zealand.
If you are currently considering commencing or investing in a BTR project, feel free to get in touch with us to discuss any aspect of your project with one of our experts.
Special thanks to Zak Nasir and Natalie Wilson for their assistance in writing this article.
 An overseas investment is assessed against 7 broad factors including creation or retention of jobs, introduction of new technology or increased productivity. It is likely that the only factor available for an overseas investment in a newly completed BTR project would be that the investment reduces the risk of that BTR project becoming an illiquid asset, but this factor has yet to be tested in the NZ market.