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29-01-2018

Build to rent could be the missing piece of the affordable housing puzzle

A UK build-to-rent housing model that treats residential tenancy similar to commercial tenancy could be one answer to New Zealand’s inadequate rental stock.

A recent BRANZ study called “Building to Rent”, published as part of the Exceeding the Minimum research programme, cites the UK model as a way to help provide more affordable rental housing of better quality.

BRANZ General Manager Industry Research Dr Chris Litten said the study looked to answer the research question: ‘why don’t landlords choose features that exceed the minimum of the Building Code and what are the enablers for changing this?’

The study aim was to identify both the barriers to an improved rental stock in this country and the potential solutions, he said.

Other suggested solutions include Real Estate Investment Trusts (REITs), which provide capital for development and long-term ownership of real estate assets, and Energy Performance Certificates (EPCs) to encourage landlords to undertake energy-efficient improvements.

Problems and Barriers

  • House values are rising at a faster rate than household incomes, meaning mortgage holders have less left over for maintenance, including to rental properties they own.

  • The pressure on the rental housing market means that previously untenantable housing may be becoming part of the rental stock. This is particularly concerning for desperate or vulnerable tenants who may find themselves with no option but to occupy sub-par housing.

  • Over half of the current rental stock requires less than $5,000 worth of minor repairs to bring it up to the same standard as its owner-occupied counterpart, but a main barrier is that improvements are unlikely to be recouped through increased rents.

  • About half of the tenants surveyed said that they could not afford to pay any more in rent. In addition, many tenants did not consider other costs (such as electricity, transport, etc.) in choosing their current residence. This led to a lack of incentives for landlords to invest in their properties.

Potential Solutions

Build-to-Rent

  • Build-to-rent (or build-to-let) is a term used to describe the purchase of a property off the plans, and then rented out after completion. In the UK, build-to-rent models have provided improved housing quality, greater security and length of tenure, and the freedom for tenants to customise their housing. A new ‘shell and fitout’ model was developed, which resembles a commercial lease. The tenant commits to a basic shell structure in a multi-year lease, and is responsible for completing the interior fitout in a way that suits them.

Real Estate Investment Trusts

  • Real Estate Investment Trusts (REITs) can increase housing supply by providing capital for development and long-term ownership of real estate assets. In the USA, residential REIT typically own and operate large apartment complexes; and in the UK to date, residential REIT have provided capital to housing associations, which provide affordable rental dwellings. As long-term investors, REITs would be well placed to offer the long-term tenancies required for the ‘shell and fitout’ building-to-rent model.

Energy Performance Certificates (EPCs)

  • EPCs, common across the EU, are certificates similar to common rating schemes on many consumer products such as tumble dryers and washing machines. They aim to address the issue of imperfect information in the housing market and increase landlord investment in energy efficiency.

Dr Litten said about 35% of New Zealand households live in rental accommodation and this statistic is much higher in our major cities, tourist centres and amongst younger New Zealanders.

In addition, the number of people aged 65 years or over in rental housing is likely to more than double between 2013 and 2038, so some rental stock will need to accommodate those with disabilities.

“Meeting future rental housing demand and requirements is going to be a challenging task. However, it also provides an opportunity for landlords and the Government to look into solutions for the rental industry. Looking at replicating Energy Performance Certificates, promoting REITs, or investing in different models to deliver rental housing could lead to an improved rental stock.”

The Building to Rent research report was funded by the Building Research Levy. The full report can be downloaded at www.branz.co.nz/etm

Ends

For queries about this research study or the work we do at BRANZ, please contact:

Justine Storey

DDI:  04 238 1371

Email justine.storey@branz.co.nz

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