The New Zealand Rental Market: New Opportunity

David Faulkner is New Zealand’s foremost leading expert on property management. As a former chair of the REINZ Property Management Sector Group and founder of Property Management training company, Real iQ, David has helped herald in a new era of professionalism into a vital industry. Not bad for someone who fell into the career by accident.

David is now back where it started and heading up the award-winning property management arm at Property Brokers. David gives us his insight for the future of the rental market in New Zealand and challenges and rewards of the industry at the centre of it

Can you talk a little bit about your journey?

I moved here 20 years ago. I became a landlord by accident, it wasn’t a strategic decision. I did everything myself, trying to save money and did everything wrong and I thought it was too hard. I ended up giving my investment to Property Brokers, I shopped around and I thought they were the best people. They managed my investment, and I ended up one day going to talk to them about potentially selling the property and ended up walking out as a property manager. That was 17 years ago.

I spent 10 years at Property Brokers then went off to do my own thing with a company called Real iQ, which focused on property management training. And then Property Brokers got a hold of me late last year and asked me to come back to the property management division again.

I’m very, very passionate about the industry itself and about housing. It’s important, it’s a basic human right, so it’s never quite easy to get the balance right between looking after the investor needs and the investor requirements. But also, you can’t forget the human being at the end of this transaction; it’s for the tenant, it is their home. We’ve got a responsibility to coach our land lords to understand what the responsibilities are.

I found it interesting that you tried managing your own property, didn’t really like it but then went to Property Brokers and then ended up becoming a property manager with them. How does that work?

This is going back before the GFC, and at the time, there were very few properties managed in New Zealand, about 20%. A lot of people had the whynot-do-it-yourself attitude, how hard can it be? Oh, it’s actually really hard. Few people understand the level of complexity.

As a landlord, I want to make sure that I’ve got my time back. It’s important that there is a dollar value on the time people spend. It takes about 30 hours a year to manage a property. That’s doing inspections, the rent payments and so on and I want someone to take that responsibility for me.

In terms of a career, when I fell into it, it wasn’t really looked at as a career. The GFC back in 2008 changed that a lot. We are going to go through something similar now. With interest rates rising, properties don’t sell, so real estate companies don’t make as much money. What property management does is it provides cash flow, rents are coming in continuously.

In real estate, you’re dealing with very big transactions, but very few of them. With property management, you’re literally dealing with 1000s upon 1000s of small transactions and it provides cash flow. A lot of real estate companies back in 2008, when we had the GFC, actually realised that this is a good little business model. We’ve started to see it grow. Now, roughly about 50% of properties are managed in New Zealand.

The industry has become more regulated, it’s a viable career. I might have fallen into it, but the opportunities it’s given me are incredible and no two days are the same. It’s challenging and quite often there are a lot of conflicts that you have to deal with, but if you’re the right type of person, you can deal with that.

It’s a rewarding career which can lead on to other things. I’ve managed a division, I’ve managed my own company and came back here again because of a chance meeting 18 years ago.

In terms of the symbiotic relationship between a real estate company and the property management side, apart from the revenue dynamic, do you notice any other benefit from having these two arms connected?

Personally, I think you should build your real estate company based on the property management side, because we’ve got investors who are available to buy more properties and sell more properties. So you’ve actually got a bank of sales leads for you.

When you think about the journey of real estate, 90% of people start off renting and you get the whole journey for a tenant to then become a purchaser, then a vendor, and hopefully an investor.

From a real estate perspective, we want to help clients for life who first of all become tenants, and then they go through that journey.

Do you get the sense these days that there seems to be more of a divide? People aren’t looking at it as a pathway anymore, you’re either an investor or you’re a tenant.

It’s unfortunate that it’s gotten worse in recent times. You can get into debates around the politics of it and what has caused it. For me, personally, I’m about New Zealand and making our country a better place to live in. I’ve got teenage kids, they’re going to be renting soon and you want to make sure that they are educated and they know what their rights are and what their responsibilities are.

Obviously, it’s not good for New Zealand to become so unaffordable and for house prices to become so unaffordable that people can’t get into housing and that all that income is going on rent, because it’s not good for New Zealand as a whole. We’re really going to damage the country long term if rents are just so astronomically high. No one’s got disposable income, which grinds the economy to a halt.

A lot of tenants have got more and more frustrated that they’re looking at the baby boomer generation who have bought properties. When I came in, in 2001, I was very, very lucky. I paid under $200,000 for that first house and now when you’re looking at what house prices are, even in provincial New Zealand, it’s a challenge. This is divided at the moment. Hopefully, we get a bit of equilibrium and a bit more balance.

What is the solution? What would you do if you could pull any lever that you wanted to modify the situation?

From my perspective, the first thing I would do would get rid of that interest deductibility, which I think is possibly the worst decision I’ve seen the government make. All that happens is those additional costs get passed on long term to the tenants. Once this kicks in, there’s an average $2,500 we’re going to have to pay extra in tax. That’s $50 a week in rent. We’re going to try and get that added on to the rents to make the investment work.

If you’re not going to get rid of interest deductibility, I would offer incentives to landlords who are long-term landlords. Most landlords are in it for the long haul. If you get capital gains, it’s a bonus. What you could potentially do is say to investors, if you guarantee that you’re going to hold that rental property for seven years, you will not have to pay interest. You’ll be able to sell, you’ll be able to offset interest, which means it gives you that tax incentive. If I’m holding the property for seven to 10 years, I’m not a speculator, it’s a long-term investment.

I think there’s more build to rent coming to New Zealand. There are so many factors; supply chains, the cost of building, the resource constraints, the availability of land. It always baffles me how a country the size of Japan and the United Kingdom, with only 5 million people living here, can have a shortage of land.

Yet, with infrastructure, you’ll see Transmission Gully will make big benefits to housing affordability, the capital costs all the way up. If you have an electrified railway, connecting paths up north to Wellington, all of that impacts housing.

There are lots and lots of levers that can be pulled to help in terms of controlling housing prices, and ultimately rents as well.

Have you noticed any change in the landscape recently? Have you noticed that people are starting to populate the regions a little bit more and setting up satellite offices?

Absolutely. What you would have seen in a lot of provincial New Zealand is rents have significantly grown and in some cases, they have gone up by 15% in the last 12 months.

Traditionally, you’re only seeing rents grow 6%. Demand is growing as people move to the regions; they look to rent first before they buy. So yes, we need to have good infrastructure, like rail, connecting these regions.

When you were starting out, what was it about this industry that really got you out of bed in the morning?

To me, it’s the psychology and the data. Property management has so many measurable aspects; how much do you spend on maintenance on average? And what maintenance you’re spending on it, and what the age of the property is? But then you’ve got the human aspect of it.

What’s predictable is the unpredictability of how human beings are going to react. You’ll always hear horror stories in our industry, but very, very seldom is it actually like that. 90% of your tenants are actually spot on, they just want a place to call home. 90% of your landlords will have to provide a warm, dry home and follow the responsibilities. 10% will be a challenge and you’ve got to relish the challenges in fixing those issues. If there were never any issues, you wouldn’t need a property manager.

I’ve always enjoyed the diversity of the job, the human elements of the job, the negotiation and fixing problems. But also the measurable statistics, the data, and analysis. It’s a combination of both and it’s exciting that no two days are the same. You’re never twiddling your thumbs looking for things to do in this industry.

Have you got any advice for not letting that 10% affect you and get you down?

The number one tip is education. In this industry, knowledge really is power. When I can start quoting sections of the Residential Tenancies Act to a landlord, they understand what their responsibilities are, and vice versa for tenants as well. It becomes quite powerful and it takes the direct emotion out of it.

You’ve got to switch off. If you feel that things have been going on, this is the job. The demands in modern-day business; you’ve all got your smartphones, people can get hold of you 24/7. You have to make time for you because you will burn out, so just make sure that you’re getting away from your computer, getting some fresh air, all those basic, simple things that you’ve got to do.

Yes, sometimes when someone is venting to you, it feels like it can be a direct attack on you. But, I didn’t tell the tenant to stop payments, or I didn’t tell the landlord not to do the repair. We can only do what we can do.

Have you noticed with all that data and the analytics that you are seeing if there is a shift in how we are living and the accommodation we require? Is it more multigenerational homes, for example?

That’s a good question. You can get this information from Statistics New Zealand, but the amount of residential dwellings in New Zealand as a ratio to the population hasn’t changed in 30 to 40 years. What has changed is that more people are getting divorced, people seem to be starting a family later, fewer people are living in dwellings.

Now, in the past we’ve built these four and five-bedroom mansions in the suburbs and one-bedroom apartments in the city. What we need in New Zealand though, for the long term, is three and two bedroom housing. We’re starting to see a move towards building smaller, more highdensity town housing, which is what we need across the country.

You will have seen a change in the dynamics of people living in houses. A risk that you see is overcrowding and because rents are going up, tenants may sublet a little and get people in to help out with the rent. What you don’t want is the crowded rental properties because there are different types of health issues that can result from that. We need to make sure that we’ve got enough affordable rental properties in New Zealand to meet demand.

I don’t suppose I need to ask your opinion on the CCFA?

I think it’s short-sighted, what’s happened there. People don’t generally default on the mortgage, you can see the statistic that it just doesn’t happen. What you end up doing is driving people to the second-tier lenders, which are probably higher risk. It’s actually having the reverse consequences of what it was designed to do, some local government policy does have unintended consequences.
Here we are trying to help people get into housing and the bill does the absolute opposite. It puts a greater demand on the rental market, because there are more people who are forcibly becoming long-term tenants. It’s just madness. It makes no sense.

Having talked about all of these unintended consequences, are you optimistic when you look to the future?

Yeah, I’m always optimistic. It’s just my nature to always believe that things will sort themselves out eventually. In Christchurch post-earthquake, the prices spiked and then once the rebuild kicked in, prices actually dropped and levelled down.

I do think that there is a cross-party desire now that they realise that we need to fix housing, but it goes beyond housing, it’s infrastructure. So I’m hopeful that we will get there.

How do you manage work/life balance?

For me, what I do is a passion. I don’t see it as work, I’m in quite an envious position where I absolutely love what I do. I’m very, very happy. It sounds sad, but I’ll quite happily read Tenancy Tribunal findings, I find it fascinating. It’s more than a job, it’s a passion.

You’ve just got to remember that you’ve got a wife, you’ve got kids who both share the same passion as what you do. Make sure that you’re there and they’re the big priority, as they should be in every person’s life.