December 2023
Build to Rent (BTR) developments are larger scale multi-unit communities, purpose built for long-term rentals. They are usually characterised by higher quality, durable materials, extra amenities for tenants, proximity to other services (often accessed without a car), long-term tenancies, and more options for tenants to personalise their exclusive areas.
An attractive proposition for all parties involved, recent legislative changes to the Residential Tenancies Act 1986 and interest limitation rules in New Zealand directly relate to BTR developments and have created additional incentives for investors and tenants.
The changes to the Residential Tenancies Act include that:
Parallel changes to interest limitation rules include the ability for interest to be deducted from tax payable by owners of BTR developments.
Owners of BTR developments will only be able to deduct interest provided they meet certain criteria, including:
These law changes arguably provide more security for long-term tenants. The offer of 10-year tenancies and the ability for a tenant to personalise their property can mean tenants feel a greater connection to where they live. In addition, with BTR being purpose-built for renting, tenants are not at risk of eviction because of a property sale or the landlord deciding to change the use of a property.
Tenants may also be drawn to these developments as the demography of New Zealand shifts, with an ageing population, more people living alone, and growth in population driven by migration – which brings with it people who might not share the quarter-acre dream. While there will always be a place for single family homes, there is increasing demand for connected neighbourhoods, which can be provided by BTR. BTR developments are by nature larger projects, and they need the rental population in place to support their development and operation. Unsurprisingly, Auckland is the current focus for BTR developments in New Zealand and will likely remain so given its primary city status.
BTR developments are one of the few property asset classes which qualify for an exclusion from the interest limitation rules, making them an increasingly attractive option for investors.
Furthermore, benefits to tenants also means benefits to those who invest in these developments. Happy, long-term tenants mean less turnover and less vacancy. This brings with it the prospect of secure and reliable income and possibly fewer problems with tenants who are encouraged by the BTR system to be more invested in where they live. Properties that are built to a high standard, offer additional amenities to tenants, and are able to provide convenient access to services can also attract higher rents and therefore increased returns. Reports from overseas have indicated that BTR tenants can accept higher rents, provided there is transparency around pricing.
We can see why these sorts of developments have passed the test for investors answerable to their stakeholders, such as KiwiSaver provider Simplicity and listed property group Kiwi Property.