Building to rent
Total Property - Issue 7 2019
A third of kiwi households live in rented housing, with numbers expected to double due to housing unaffordability.
For those who don't qualify for social housing, the private rental market has been the only option, largely reliant on ‘Mum-and-Dad’ landlords owning stand-alone dwellings. But the market is being disrupted by build-to-rent schemes, particularly in Auckland and Queenstown.
New Ground Capital, New Zealand's first specialist build-to-rent developer, has houses rented in Auckland and is set to have more than 2,000 new homes in five years.
While not a build-to-rent specialist, Auckland-based Duval Group recently put 19 leased Mangere residential buildings, with 171 studio units, on the market. Each property's land and buildings are head leased to two lessees with the interests managed by Duval. They return rent of $1.7 million a year on leases that finally expire in 2037.
New Ground – set up in 2014 by Roy Thompson, who once raised money for real estate investment trusts as Deutsche Bank's global head of investment products – rents properties long-term itself, with investor backing.
On its first project of 208 houses at Hobsonville, Auckland, it was backed by the New Zealand Super Fund and Ngai Tahu Property. “Everyone was a bit cautious initially, so three-quarters of the homes were sold on the open market and a quarter were retained as rentals peppered throughout the development,” says Thompson.
Subsequent developments have been retained almost entirely for rent.
New Ground sources investors as well as investing its own capital, acquiring the land, overseeing development and using its property-management arm to administer leases and maintenance.
Its second development was 49 long-term rental homes for the Defence Force near Whenuapai. Next are 236 mainly rented co-living apartments in Queenstown, and several other projects in Auckland.
Thompson says New Ground applied the best from overseas models, but not without challenges. “One of the main issues has been the flawed Residential Tenancies Act, which doesn't cater for long-term security of tenure while at the same time allowing tenants to get out of a lease early if they need to.”
Land is sourced through brokers and the company's contacts and off-market transactions are preferred to make medium-density projects stack-up, particularly as build-to-rent developers have to fund GST all the way through a project and can't claim inputs.
The average build cost is $2,500 to $3,200 per square metre for a medium-density development and $4,200 to $4,500 on high-density projects.
“Building attractive homes in places where people want to live and don't need cars and managing the property carefully is essential,” says Thompson.
New Ground is building mainly one- and two-bedroom houses of 40 to 70 square metres. These are rented out in the mid-$400 range for a one-bedroom and the mid-$500 to mid-$600 range for a two-bedroom home. Tenants get a seven-year lease and New Ground is open to requests for minor alterations, redecorating and keeping pets and allowing early termination.
The rents provide an investment return of 5 to 6 percent, benchmarked against commercial and industrial returns.
NZX-listed Augusta Capital aims to launch a built-to-rent fund offering $5,000 units.
“Augusta is well down the track in establishing a business case and how the fund should look and is actively looking at opportunities,” managing director Mark Francis says.
Francis says it could turn out to be Augusta's biggest fund. “We can fund projects and take out the end product, buy finished developments and manage them. It’s a good story for developers.”
If the fund can achieve, for example, a 4.5 percent return plus capital gains it shouldn't be hard to convince investors, as private landlords often accept little yield and rely on capital gains, he says.
“The rental market will grow. It’s a bit of a generational thing as millennials get their heads around forgetting about the quarter-acre dream, consider renting as a perfectly acceptable alternative and use their capital to invest in other areas.”
Augusta's fund will need a spread of developments – mainly in Auckland and Queenstown to start – costing anywhere from $25 million to $150 million.
Another new entrant is Haven Funds, founded by former commercial property sales broker Tim Lichtenstein and property investment company manager Kerry Hitchcock. Their fund will buy completed developments in bulk. “If we can take out 50 to 60 percent of a development we are effectively underwriting it,” Lichtenstein says.
Haven has yet to start fundraising as it awaits a licence from the FMA, but says it has backers and intends to raise $100 million in a year and have $500 million of assets under management within five years.
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