The Government has done a U-turn on rental housing policy settings, backing down on axing landlords' tax breaks.

Housing Minister Megan Woods has today announced that owners of rentals offering tenancies of 10 years or more would now be able to claim interest deductibility on mortgages.

This is to encourage that sector to flourish, she indicated, naming the fast-growing build-to-rent sector.

Last year, the Government announced it would abolish the breaks landlords enjoyed: deducting the interest paid on mortgages for rental properties against their tax bills which encouraged PAYE earners to buy rentals so to reduce their tax bills.

The changes were first announced last March.

Ending the breaks caused outrage from landlords including Ockham Residential chief executive Mark Todd who said he feared he would be forced to sell 85 apartments.

Changing the tax policy resulted in dire predictions from various vested interests that they would cause a max exodus of investors from the residential property market.

But landlords buying a brand new property would still be able to claim their mortgage interest as a tax-deductible expense for up to 20 years.

Landlords of existing older properties would be unable to claw back tax on the interest portion of mortgages for rental housing.

Today, Woods couched the U-turn in positive terms.

"We're providing an exemption from the interest limitation rules to certain types of new and existing build-to-rent developments in perpetuity," she said.

To qualify, developments need to offer tenants leases of at least 10 years. Tenants can ask for shorter agreements if they wish and the development will still qualify for the exemption. Tenants will be able to break their tenancy agreements at any time, with a 56-day notice period.

"We believe security of tenure is critical for people who are renting. This requirement will enable people to settle and personalise their homes, reduce how often they must find a new place to live and all those associated moving costs, especially as people face cost of living challenges, and help them to build and maintain connection to their community," she said today.

"We recognise the big role the build-to-rent sector can play in filling a gap in the general rental market by increasing the supply, density, and diversity of housing.

"Aotearoa New Zealand needs to build more houses where they are needed and at prices that low- to moderate-income households can afford. Build-to-rent can help to continue the current momentum of new supply and improve the quality of rental housing with new warm, dry, secure homes," she said.

Leonie Freeman, chief executive of the Property Council. Photo / Doug Sherring

Leonie Freeman, Property Council chief executive, welcomed the turnaround.

"Today's announcement is one of the best levers to unlocking the potential of build-to-rent. We support the Government's desire to enable build-to-rent in order to provide warm, dry rental homes that offer Kiwis long-term security of tenure," she said.

Woods said legislation would be introduced to Parliament at the end of August.

The Herald has reported how Woods was seeking policy advice about encouraging the build-to-rent market.

Last November, Ockham's Todd said the Government wanted to eliminate mortgage interest deductions on loans for existing purpose-built rental properties which would hugely disadvantage Ockham's existing build-to-rent city properties.

Teachers and emergency service workers were among long-term tenants in those buildings but may have to find new homes if Ockham sells, he said.

"It is odd that [Housing Minister] Megan Woods supports the BTR sector to provide more new, warm, secure tenure properties but [Revenue Minister David] Parker is happy to kill off providers already delivering on Government policy," Todd complained last year.

"I may be forced to sell 85 rental places worth $60 million to $80m if interest which is the main cost of owning these buildings becomes non-deductible," said Todd referring to apartments the company owns in Sandringham, Grey Lynn, Ellerslie and Mt Albert.

Mark Todd of Ockham at the Domain Wintergarden. Photo / Fiona Goodall, Getty Images

On one project alone, Ockham could lose a $500,000 mortgage interest tax deduction, he said. He cited a $22m development 50 per cent geared via an $11m loan, incurring a $500,000 annually interest rate charge, Todd said in November.

The build-to-rent sector is expanding fast here and overseas.

Thousands of Auckland build-to-rent apartments are planned and many are under development by NZX-listed Kiwi Property, developing at Sylvia Park and soon to start at its LynnMall.

Greg and Helen Reidy's Reidy & Co and Kim Barrett's Resident Properties is also developing build-to-rent apartments at three central Auckland sites and it bought an Ockham block a few months ago.

Reidy said he expects the first three apartment buildings to have a total value of around $210m