Eaqub warns OIAB will wreck build-to-rent market
Outspoken rental housing advocate Shamubeel Eaqub warns that by shutting out foreign equity, the Overseas Investment Amendment Bill will make it impossible to build enough new rental properties to meet the country's housing needs.
Economist and commentator Eaqub told Parliament's finance and expenditure select committee in Auckland that it’s essential New Zealand develops a sustainable rental sector, but that won’t be possible without bringing in significant amounts of overseas capital - mostly from institutional investors.
Eaqub has invested in a 208-home development at Hobsonville Point being built by New Ground Capital. Almost 25 percent of the homes in the development, which will start coming on stream in July, will be long-term rentals.
While the main backers for this project were local - the New Zealand Superannuation Fund and Ngāi Tahu Property - Eaqub told MPs that New Zealand institutions weren’t used to investing in residential property. To get any scale into the build-to-rent market would need overseas investors, who had deeper pockets and were far more familiar with the concept.
As an example, the Canada Pension Plan Investment Board has recently taken an 80 percent stake in a 450 million British pound build-to-rent project in London’s Elephant and Castle neighbourhood.
Jonathan Holden, New Ground’s chief operating officer, says New Zealand needs big rental developments rather than lots of one-off rental homes - and that will need overseas investors.
“We’ve found over the last three years, that trying to attract local institutional money into this space, to get scale, is difficult. We started looking for international capital 18 months ago and we are having ongoing discussions with various institutional investors, mostly in Australia and the US. We’ve seen good interest," he said.
“We will be able to go a lot faster with offshore capital and do it at greater scale.”
As it stands, the Overseas Investment Amendment Bill doesn’t allow foreigners to buy land for a residential property development and hold it for the long term - an essential part of any build-to-rent project. Instead, the bill forces them to sell the land as soon as the houses are built.
“We believe that the current draft of the bill would inadvertently constrain the flow of such important and significant large scale overseas capital (estimated to be in the hundreds of millions of dollars) into this critical part of the NZ housing supply solution, namely large-scale professionally managed long-term rental accommodation,” New Ground said in its written submission.
Holden estimates that with foreign capital, his company could build 5,000 rental homes over the next 10 years. Without it, he’ll be lucky to build 1,500 - and it’ll take longer.
Rental properties make up 50 per cent of the Auckland market.
At present, the bill gives leeway for overseas investors to be involved in developing retirement villages, rest homes and student accommodation - all of which involve companies holding on to properties longer term.
Holden said the simplest way to deal with the problems for build-to-rent projects is for the government to add “long-term rental accommodation portfolios” to the exempted list.
He said he's optimistic a solution will be found. The government has been upfront in saying that the bill was drafted quickly, largely because it needs to be passed before the Trans-Pacific Partnership (now the CPTPP), and Holden believes policymakers didn’t consider the unintended consequences for the rental sector.
“Government was keen to get bill out the door. The build-to-rent market is so much in its infancy in New Zealand that I think it just wasn’t on their radar. If you are building new stock and adding to the housing supply and making houses available for renters to live in, that’s just got to be good.”
New Ground is just one of almost 250 submitters to the select committee, a large proportion arguing overseas capital in some form is essential to build enough houses to meet the country’s needs.
Companies argue foreign capital will be driven away by the need to buy and flick. And even if they are able to apply for an exemption, submitters repeatedly told the select committee that inevitable delays from an overstretched Overseas Investment Office will put investors off and slow projects down.
While each submitter will ask for an exemption for their own particular industry, Eaqub argues a fundamental shift in thinking about foreign investment is necessary.
He said the bill starts with the flawed premise that overseas investment in the housing market is basically bad because it takes homes away from New Zealanders and pushes up prices. But this is simplistic, Eaqub said. There is good and bad foreign investment - and because there's virtually no data on the latter, no one knows how much “bad” foreign investment there is, and whether it’s even a factor in New Zealand’s housing crisis, he said.
“It was a good idea in principle but when you look at implementing it, there are lots of fish hooks.”
Eaqub said it’s obvious the bill was drawn up in a hurry. “If the world was perfect, we wouldn’t have such imperfect bills coming to select committee - but that’s the purpose of select committees, and I think they will use that process.”
If they don’t, New Zealanders looking to buy or rent a house will be the losers, Eaqub said.
“Once this thing is in, it’s going to be very hard to undo. We don’t want to have a terrible piece of policy in there that’s going to muck things up.”
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