The ‘new-build’ residential sector, Build-to-Rent (BTR) projects and commercial property sectors may be big beneficiaries of the latest government housing package, according to a new report from Colliers Research.
The government announced a raft of new policies on the 23rd of March 2021 aimed at cooling residential demand and boosting supply. This was in response to a market that recorded a REINZ median house price increase of 24% over the 12 months to February 2021 that pushed Auckland to be the 4th least affordable city for housing in the world, according to the annual Demographia international housing affordability report
Ian Little, associate director of research at Colliers, notes that the key objectives of the government’s housing package were to incentivise and pivot activity towards first home buyers, disincentivise investors from buying-up existing residential homes via tax changes, and boost supply through additional funding.
“Providing first home buyers with more assistance via an extension of the First Home Grants scheme will be welcomed, along with additional funding of almost $6 billion for infrastructure development, Kainga Ora’s land acquisition programme and an extension to the Apprenticeship Boost initiative,” says Little.
The First Home Grants Scheme has been amended and will result in a lift in eligibility for single buyers earning up to $95,000 and $150,000 for two or more people. This is up from the previous $85,000 and $130,000 respectively.
The purchase of new-build properties has also been incentivised with the maximum value of the First Home Grant being set at $10,000 versus $5,000 for existing premises while the eligibility value cap sits higher for new-builds than that for existing premises.
All eyes though are on investors who are considering their next move after the announcement, Little notes.
“The investment sector has definitely been given pause for thought as a result of the extension of the bright-line test and the removal of interest deductibility allowances for existing property purchases.
“The bright-line test is to be extended from its current five years to 10 years for existing residential property which means that those selling a property within this timeframe could be liable to pay tax on any capital gain at their marginal tax rate – reportedly a higher rate than almost every other country in the OECD,” says Little.
The tax position of investors will also change significantly as a result of the housing package announcement with the right to offset interest costs against income derived from their property to be removed.
The change comes into force immediately in respect of properties purchased after March 27th 2021, while it will be phased out over four years in relation to properties owned prior to this date.
“The impact that these changes will have will vary across the country, but it is likely that values for existing residential property will flatten across most regions while value declines cannot be discounted.
“With the potential for capital gains to be more limited in the future and tax benefits curtailed, investors will be more reliant upon rental income.
“This could lead to residential rents rising as many landlords have, previously, relied upon capital gains and tax benefits to provide desired returns from their residential investments.
“However, additional rent controls have not been ruled out by the government yet,” says Little.
In addition, while there is still some consultation to occur on the recent housing package announcements, and potentially some modifications, it is likely that the new-build sector and the build-to-rent sector, that is becoming increasingly popular in New Zealand, will also get more support.
Little says “the purchase of a new-build property, after March 27th 2021, carries an additional incentive with the bright-line test period continuing to be capped at five years in comparison with 10 years for existing residential property.
“And the rules around interest deductibility in respect of new-builds may, again, differ from the balance of the existing residential market, this is seemingly up for further industry consultation.
“The BTR sector seems also likely to benefit given its boost for much needed rental accommodation – potentially both existing and new-builds – however, consultation is still required.”
While there are a number of changes afoot in the residential sector, an uplift in demand in the already busy commercial property and syndication sector may eventuate.
Chris Dibble, national director of partnerships, research and communications at Colliers notes the changes to the residential investment landscape will see alternative strategies explored by an increasing number of investors. While the commercial sector is different from residential, there is likely to be some upside.
“Commercial property sales are not subject to the bright-line test while depreciation can be claimed on the buildings themselves.
“The ‘buy-in’ cost may not be too dissimilar to what some residential investors are already committing as approximately 65% of all commercial and industrial assets nationally sell for under $1 million,” says Dibble.
An alternative means of gaining exposure to the commercial property sector, known as syndicated property offerings, could also be set for a boost.
“Lower entry prices typically between $10,000 and $50,000 for retail investors, relatively hands-off investments and additional tax benefits through PIE schemes, are also likely to be favourable aspects for some residential investors looking for an alternative,” says Dibble.
Colliers Research noted in its March 2020 New Zealand Research Report that the total value of funds raised across syndicated offerings in 2020 was just over $525 million, ahead of the previous high of approximately $485 million raised in 2018 and approximately $100 million more than the total recorded in 2019