Themes and Issues
Standards of property management are variable
There are no provisions in the RTA to govern who can be a landlord, nor that specify the standards required of landlords. Property managers are partially regulated - if they accept a fee for letting a property on behalf of a landlord they must be associated with a licensed Real Estate Agent. If they do not accept a letting fee but work solely for a proportion of ongoing rental income they are not regulated [2].
More rental properties are now owned and managed by private landlords than in 1986. The reasons for this can be explained by the:
- decline in the share of properties owned and managed by HNZC and local authorities
- lack of regulatory or other barriers to becoming a landlord
- strong performance of property relative to other investments over most of the period since 1986.
Small time ‘DIY’ landlords are common amongst private landlords, and corporate landlords very rare. Figure 3 below shows the results of a 2003 national survey of landlords. It shows that most (42%) owned just one property and that only a small proportion (18%) owned five or more properties [3].
Figure 3
The reasons why people become landlords vary. Some are ‘accidental landlords’, having acquired an extra residential property through inheritance or having kept a house they formerly lived in. For many (64%), the primary motivation is capital gain. Other reasons for becoming a landlord include income for retirement (55.7%) and a regular stream of income (53.1%). Other important considerations include:
- The tax environment – including lack of a general capital gains tax and its allowance for private individuals, some trusts and small businesses [4] to offset income from other sources against expenditure on rental property investments. It is likely that this environment works to favour individual rather than corporate landlords.
- The expectation of capital gains and strong performance of property relative to other forms of investment.
- The perception that equity markets and superannuation schemes have performed poorly (relative to property investment) over most of the period 1989 to 2003.
While many landlords are experienced, with an average of either 6 to 7 [5] or over 11 [6] years experience in the business, the 2003 National Survey of Landlords also found considerable churn in those entering and exiting the market. It found that over one fifth (21.9%) of all landlords surveyed had been in the business for less than one year. This churn is likely to relate to investment cycles and the recent buoyancy of the property market. The trend could quickly reverse.
Most private landlords self-manage their properties. The 2003 National Survey of Landlords reported that few seek professional advice or use professional property managers to manage their properties. It also found that the management systems of most are far from sophisticated. It found that:
- Few landlords seek professional advice in setting rents, with most instead relying on information gained from real estate agents and newspapers.
- Most landlords do not have a budget for property maintenance and for most expenditure on maintenance is unplanned.
- Relatively few landlords use property managers to manage maintenance and repairs. Those that do use managers are more likely to also be members of industry organisations such as the New Zealand Property Investors Federation. In 2003, a survey by the ANZ and the NZPIF of landlords that were predominantly members of the New Zealand Property Investors Federation reported a more professional approach to property management by these landlords, with greater proportions relying on property managers and professional advisers (33% and 38%).
- Most landlords find their own tenants, rather than using a property manager, and most select tenants on the basis of a ‘casual chat’. Less than a quarter run credit checks, and hardly any systematically use background checks, references or credit information in their selection decisions.
- A large proportion (over one third) of landlords do not make routine property inspections.
- Most landlords (almost two thirds) have tenant problems, with the non-payment of rent the most commonly reported problem.
While more landlords are using professional property managers, their use remains less common in New Zealand than in other countries. The use of professional property managers can result in more consistent, more objective and more proactive approaches to rental property management and improved communication and relationships with tenants, but this is not always the case. Tenancy Services reports that many disputes arise from poor landlord and property management practices.
Given the large number of landlords in the market, it is difficult for a potential tenant to judge the ‘quality’ of their landlord or property manager prior to entering into a tenancy agreement with them.
An important question for the Review is whether the RTA should be amended to provide incentives for landlords and property managers to improve their performance. For instance, the Act could be amended to provide for the registration of landlords and property managers, in addition to the current provisions relating to accommodation brokers. This could be achieved by either:
- providing for everyone to be initially registered, and for landlords or property managers that fail to meet certain minimum standards to be struck off the register and prevented from managing properties themselves; or alternatively
- requiring people to demonstrate their competence or fitness against a set of standards before being allowed to manage properties.
Such provisions could, however, prove a barrier to entry for some landlords, especially those that own only one or two rental properties, and might result in private landlords providing fewer rental properties. Alternatives might be to provide incentives for landlords to register voluntarily or seek accreditation against some industry standard. For instance, options could be explored for the direct crediting of rental payments out of income support benefits for landlords who are accredited or registered.
Another option might be to amend the RTA to provide for the development of a standard or ‘quality mark’ that a landlord or property manager might choose to adopt as a way of signalling their quality in the market.
Questions
- What impact do variable property management practices have on the private rental market?
- What can be done to improve property management practices and professionalism amongst landlords and property managers?
- What level of regulation is appropriate for landlords and property managers? Should they be registered, or alternatively, should there be a “Qualmark” for these services?
Footnotes:
2. Accommodation brokers are covered by separate provisions in the RTA. An accommodation broker is a person or agency that lists properties for rent. Prospective tenants pay a fee to look at these lists. The fee is for looking, rather than a letting fee for any individual property. The RTA provides for regulations relating to accommodation brokers, but none have been passed to date.
3. A survey by the ANZ and Property Investors Federation found a structure somewhat more weighted towards larger-scale holdings.
4. Loss Attributing Qualifying Companies for example.
5. Kay Saville Smith (2004), National Landlords Survey, CRESA.
6. ANZ/NZPIF (2003), Investors Survey.