In a new analysis, law firm Dentons compares the maturity and progress of the Australian Build to Rent sector to that of New Zealand’s and its western counterpart in the UK.
Dentons’ real estate practice offers commercial solutions that leverage specialist industry knowledge in the Build to Rent sector across multiple jurisdictions. It advises a diverse client base, including funders, developers, investors, occupiers, operators and insurers, operating globally.
The Build to Rent sector in the UK is well established and growing rapidly. By the end of 2023, the total number of completed units had reached a significant milestone of 100,000, with a further 54,000 under construction and 112,000 in the planning pipeline.
The sector has also continued to expand geographically – during 2023, 38 new local authorities added Build to Rent schemes to their planning pipeline, giving a total of 208.
By contrast, the sector is very much in its infancy in both Australia and New Zealand. In New Zealand, as at December 2023, there were 1,307 units completed, 850 under construction and 3,395 units in the pipeline nationwide, with the majority of those units in Auckland.
In Australia, as at January 2024, 5,398 units had been completed with another 11,582 (over 31 projects) under construction and 21,627 units (across 54 projects) in the planning pipeline, with an assumed completion value in the region of approximately A$39bn, Dentons found.
However, as with any real estate asset, Dentons highlights that there are potential disadvantages to investing in the Build to Rent sector. These include the potential for high and/or unpredictable maintenance and management costs.
Although these costs are typically passed on to the tenants, they can act as a deterrent and therefore affect profitability. The sector is also vulnerable to market fluctuations affecting rental income and property values.
Globally, new Build to Rent developments face the same challenges as the wider construction sector in recent years. Among these is increasing labour costs, skills shortages and construction cost inflation.
Both New Zealand and Australia have historically contended with challenging factors in relation to Build to Rent, including regulatory and planning requirements in New Zealand, and detrimental tax and planning constraints in Australia.
In New Zealand, the Overseas Investment Act (OIA) is also seen as a barrier to foreign investment, as it requires non-New Zealand domiciled investors to undergo a lengthy and expensive consenting process before investing in any residential land.
While OIA changes that are currently proposed by the government are a positive step towards increasing offshore investment in Build to Rent, Dentons explains that there are numerous other barriers to entry to large-scale investment in the sector.
The Property Council NZ has identified that, in addition to OIA changes, changes to the rules around interest deductibility and depreciation, as well as changes to the Residential Tenancies Act, are also required to allow large-scale Build to Rent investment to grow in New Zealand.
A similar requirement also exists in Australia where foreign investment approval must be sought from the Foreign Investment Review Board (FIRB). The task of the FIRB is to examine significant foreign investment applications that fall within the scope of Australia’s foreign investment policy and the Foreign Acquisitions and Takeovers Act, and to make recommendations to the Treasurer, on behalf of the Australian government, on those proposals.
The FIRB acts to ensure foreign investment proposals are consistent with Australia’s national interest and the Australian government reviews major foreign investment proposals on a case-by-case basis.
The Australian government has recently made positive commitments to foreign investment in Australia.
“We [the government] are overhauling and reforming, strengthening and streamlining, the foreign investment framework.”
Hon Dr Jim Chalmers, MP (Treasurer)
Hon Dr Jim Chalmers made this statement with the intention of strengthening the process to minimise risk and maximise the right kind of investment. In particular, investment that is in Australia’s national interest will be streamlined and more transparent.
“There will be financial incentives, regulatory changes and other enablers.”
Hon Dr Jim Chalmers, MP (Treasurer)
The risk-based approach will focus scrutiny on high-risk investments to protect the national interest, while streamlining low-risk investments to bring in the capital Australia needs quickly.
“Streamlining means investors who we already know, who are making investments that don’t raise any sensitivities, and who have a good compliance record, get decisions faster.”
Hon Dr Jim Chalmers, MP (Treasurer)
Dentons highlights that one example of the proposed financial incentives specifically in relation to Build to Rent projects is the reduction in FIRB application fees. On a A$40m acquisition of land for Build to Rent, the FIRB fee will reduce from approximately A$1.1m to A$14,000, Dentons states.
Despite record numbers of completed Build to Rent homes in the UK, it also faces headwinds. 12-month rolling completions outnumbered rolling starts in Q4 2023 for the first time since 2020, and this trend continued into Q1 2024.
Additionally, the number of homes at detailed application stage is down 31% compared to Q1 2023, meaning new sites are needed to ensure long-term delivery of new homes.
However, Dentons emphasises that Build to Rent also offers several advantages to investors. There are economies of scale in funding and managing multiple units compared to the traditional single occupancy private rental, alongside predictable rental income for stable cash flow and the potential for long-term capital gains.
Additionally, Build to Rent schemes are typically run by professional property managers, so little to no ongoing involvement is required from the owner-investor in terms of maintenance and dealings with tenants.
The sector is also bolstered by strong rental demand. There is a significant shortage of rental properties across all three markets, particularly in major metropolitan areas.
A combination of demographic and economic trends is also changing attitudes towards home ownership and apartment living for many people, making the Build to Rent sector a realistic alternative to home ownership.
Build to Rent’s attraction for tenants is reflected in recent UK statistics – property consultancy Savills’ research shows that tenants are willing to move almost twice as far for a Build to Rent property when compared to those in the wider private rental sector (PRS).
Both Australia and New Zealand have recently tabled legislative changes with the aim of increasing investment in the Build to Rent sector. The Australian government has released for consultation the ‘Treasury Laws Amendment Bill 2024: Build to Rent developments’, together with explanatory materials and a policy fact sheet.
The objective of the proposed legislative changes is to stimulate Australia’s Build to Rent sector and address housing supply challenges through the offering of tax concessions for construction and investment. According to Dentons, it is considered that the proposed Australian tax changes will make a significant impact on incentivising construction of new Build to Rent developments.
In New Zealand, the government has agreed to make changes to the OIA to better support Build to Rent development by creating a streamlined consent process. While formal legislative change has not yet been secured, the associate finance ministers have recently issued a formal ministerial directive letter to the Overseas Investment Office, instructing it to consider investment in Build to Rent – including in existing developments – as a benefit to New Zealand “unless there is compelling evidence to the contrary”.
In the UK, increasing demand is reflected in the sector expanding beyond high-end metropolitan developments, into more single-family housing (SFH) schemes. Dentons expects the UK’s Build to Rent sector to become more like the US multifamily sector, which comprises a diverse range of property styles and locations.
Also, Dentons emphasis that ESG and green building considerations are becoming increasingly important across all sectors, but especially so in Build to Rent. Sustainability can be a major selling point to tenants.
Globally, many opportunities await within the market. In the UK, Build to Rent continues to expand and with increasing opportunities for successful schemes outside the major city centres.
For Australia and New Zealand, Build to Rent represents an exciting opportunity for investors to create much-needed rental homes while capitalising on lessons learned in the UK and the US, where the markets are much more mature.
Both New Zealand and Australia are small markets in comparison with the UK (and the US). Dentons highlights that this can have both positive and negative implications – although smaller markets provide unique benefits, they do not benefit from the efficiencies of scale of larger markets.
Dentons found that geographical location is, similarly, both a challenge and a benefit. The distance from Northern Hemisphere markets can be an issue, particularly for supply of materials to projects, but both countries are remote from geopolitical ‘hotspots’.
