This is a guest post by Meredith Dale and Greer O’Donnell, The Urban Advisory.
Housing in New Zealand generally falls into one of three tenure groups: home ownership, private rental or social housing, with a limited amount of community housing (Figure 1).
The housing system is dominated by for-profit development, creating housing for owner-occupiers or investors seeking a market rent. The remainder is largely public (‘state’) housing, plus a little community housing, which itself largely depends on government funding and the social housing register.
There’s a growing discourse about the challenges this system presents for moderate to low income households, with a severe undersupply of housing options which are secure, good quality and affordable for them. In 2018, 40.2% (95,400) of renter households in Auckland, or 16.5% of all households were ‘stressed’ – that is, unable to afford to buy a house at the lower quartile house price and paying more than 30% of their income on rental housing. These households fall into the growing Intermediate Housing Market category, with little option other than to end up on the social housing waitlist or endure expensive rental options in the market.
There are several types of housing overseas that could serve the Intermediate Housing Market, many of which are almost unknown in NZ. One development model that is starting to provide options for these households, and getting a lot of media coverage, is Build-to-Rent. However, there are also other options, such as cooperative housing, which are poorly understood in New Zealand, and are struggling to establish roots here because of our legislative frameworks, monetary and fiscal policy.
What are Build-to-Rent and Cooperative Housing?
Build-to-rent (BTR) are multi-unit residential developments that are designed and built with long-term rental in mind (rather than selling to residents as unit titles to own). Tenants benefit from long-term secure rental, often tailored to a specific price point or ‘market’ rent, and assurance of a reliable, professional landlord. In turn, investors receive a return on their investment for financing the project.
Cooperatives are housing developments where residents own a share of the housing cooperative, which allows them to have a legal interest in, and access to the property, as opposed to owning a title to an individual unit. Purchasing a share creates a pool of resources for the cooperative, which can be used to pay any existing mortgage, cover maintenance, management, services and provide collectively held amenities. This shared approach can reduce the cost of living and, if desired by the cooperative, can be designed to offer affordability, providing a third tenure option between pure ownership and rental. For more info, see The Urban Advisory’s crash course introduction to cooperatives.
Long-term, affordable rental tenure options like cooperatives and BTR support residents to ‘put down roots’ in their neighbourhood, and be involved in their community. At the regional scale, BTR and cooperative housing improve the quality and supply of rental housing by creating new warm, dry homes that are professionally managed, and consequently they improve overall community health and wellbeing with associated economic productivity, education and healthcare benefits. What BTR offers to the rental market is a stark contrast to the realities of rental housing in NZ at present. Renters often live in older, poorer quality houses with insecure tenancies; issues that are only just beginning to be addressed through recent policy changes.
BTR and cooperatives are often produced as medium to high-density housing typologies (e.g. apartments, terraced housing), but that isn’t always the case. There are examples of lower density build-to-rent emerging in New Zealand, with New Ground Living, who has been providing BTR for Aucklanders since 2014 moving into more detached typologies for BTR development. More recently several other forms of BTR development have emerged, such as 26Aroha in Sandringham (a ‘mum and dad’ developer who wanted to deliver a more sustainable housing product) and Modal by Ockham Residential in Mount Albert. The cooperative housing agenda is being advanced in small pockets in Aotearoa too, most notably by CLOSER Developments, in Katikati.
The Future of Build-to-Rent
Build-to-rent has been popular in the UK and Australia over the last decade, but has not yet taken off in New Zealand. However, a recent report from JLL records a growing appetite for build-to-rent in New Zealand among local and international investors. This is an important point, because pre-COVID, multi-unit residential and higher density development made up a large proportion of approved consents in Auckland (Figure 2), contributing significantly to our growing housing supply. Indeed, high-density housing is a critical piece of the housing shortage puzzle we need to solve in Auckland, and BTR developments are likely to be part of the solution. It seems that in post-COVID times, BTR is an attractive new prospect for investors and developers alike.
For renters, BTR also delivers something the market has in short supply: high-quality, secure long-term rental housing. And for the overall market, BTR encourages a more stable and resilient housing system. These benefits of BTR should not be underestimated: stable communities and healthy homes improve wellbeing outcomes for individuals, families and overall productivity, education and healthcare outcomes.
Current market projections for a growing BTR sector focus on the commercial investor-only model of BTR for NZ, however some developments still require a government underwrite or other forms of support. This has been raised with the government, who are looking into what they can do to enable the sector to scale.
The same challenges (and more) are hindering cooperative housing in New Zealand. For a more detailed look at the cooperative model and the challenges facing cooperative housing development in New Zealand see our report: Cooperative Housing.
Internationally, this sector is supported through both public sector funding (state or national, philanthropic and impact investment sectors), by banks providing longer amortisation periods, and ‘patient capital’ (low interest, over a long time period) from investors with social responsibility criteria, like pension funds. In Canada, for example, the Mortgage and Housing Corporation has a seed fund to support cooperatives. In the UK, the Community-led Homes programme offers funding at support at every stage of the development process, in acknowledgment of the benefits these tenures provide to communities.
Confused about the difference between BTR and cooperative housing?
The main difference between commercial build-to rent and cooperative housing is the cooperative governance, management and financing structure, that provides the opportunity for co-op residents to have both an ownership interest through an equity shareholding in the development, as well as their leasehold ‘rental’ interest (see figure 3).
Because of their characteristics, cooperative developments have a capacity and track record of attracting more diverse types of capital and investment, e.g. through impact investors. The below table provides a high-level overview of the key differences between the two development models.
The post-COVID environment and growing pressures on the housing market, presents an opportunity to work with the government to diversify the housing ecosystem, scale the BTR model and remove the barriers to cooperative housing in New Zealand.
Further work is required on what the appropriate support for BTR would look like. It could start with a commitment to support existing projects, through seed funding, capacity building within government organisations, development capital, underwrites or guarantees, and preferential access to leasehold land under The Land for Housing Programme. To ensure an enduring bi-partisan solution however, consideration should be given to what fit-for-purpose legislation and finance settings would like, that make BTR both commercially viable for developers and investors, and fair for residents.