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 (RTA) and
interest limitation rules in New Zealand directly relate to BTR
developments, and have created additional incentives for investors
and tenants.
Key Changes
The changes to the RTA include that:
- rent may only be increased once every twelve months;
- the automatic conversion of fixed-term tenancies to periodic; and
- changes to notice periods from 21 to 28 days.
Parallel changes to Interest Limitation Rules (ILR) 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:
- maintaining at least 20 housing units within the development;
- the development must be owned by one entity;
- the development must be located within one title, or multiple adjoining titles;
- tenants must be permitted to personalise their units; and
- owners must offer tenants a 10-year tenancy.
Good for Tenants
These law changes arguably provide more security to 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.
Good for Investors
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 means 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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
