Alternatives to residential property
The financial implications of recent changes to residential property investment rules are clear: a handbrake is being applied to housing speculation. But where should you invest your money if it’s not in another house?
For investors with more appetite for risk, some growth-oriented sectors have provided especially good long-term returns over the past two decades.
Property as an investment has done well in recent years, buoyed by high demand and extremely low interest rates. Plus, residential property is an investment Kiwis feel familiar with, says Harbour Asset Management’s managing director, Andrew Bascand.
The Government’s 2021 housing package however has tipped the scales in a different direction and may make many investors think twice about adding to their rental portfolio.
The extension of the bright line test (a form of capital gains tax) to 10 years and the surprise removal of mortgage interest deductibility will make highly leveraged residential property investment less profitable, says Bascand.
A WEIGHT ON INVESTORS’ SHOULDERS
The housing package comes on the heels of a long list of policy changes in recent years, including the removal of depreciation claims on rental houses, ring fencing of housing investment losses, and the Reserve Bank of New Zealand’s loan-to-value ratio (LVRs) restrictions for investors.
Investor returns could be cut thanks to the 2021 housing package by an estimated 1% per annum. That could mean paying thousands of dollars a year in extra tax per property. Property prices have risen by 21% over the past year but rents rose only 3.5%.
CONSIDER OTHER INVESTMENTS
If you’re not going to buy more property, what are the alternatives? “For someone who already owns two or three houses, investment funds may provide strong diversification,” says Bascand.
“For a similar risk profile to a small portfolio of rental houses, you can invest in commercial property funds, many of which are taxed at favourable Portfolio Investment Entities (or PIE) rates.
BETTER RETURNS THAN RESIDENTIAL HOUSES
Currently the listed real estate investment sector returns 3.7% after tax, which may look appealing compared with residential property returns. You’re still invested in physical property, such as offices, aged care and healthcare facilities, childcare facilities, data centres, malls, transport logistics and high tech distribution/fulfilment centres, but not paying real estate agents fees or legal costs, and you don’t have to manage ongoing repairs and maintenance.
“Over the past 10 years, the S&P/NZX Real Estate Index, an index that matches the New Zealand commercial real estate sector, has returned 248%. Many PIE funds have done even better than that,” says Bascand.
BETTER RETURNS THAN RESIDENTIAL HOUSES
Investors also have a wide range of other fund investments available to them. For example, diversified income and growth funds, similar to KiwiSaver, can offer more tax effective returns than property. “These types of funds can provide a solid basis to develop real wealth and would be more diversifying than having all your money solely in housing.” says Bascand.
For investors with more appetite for risk, some growthoriented sectors have provided especially good long-term returns over the past two decades. Technology shares on the Nasdaq exchange in the US, for instance, have risen 13.5 times over since 2001, significantly eclipsing house price growth in New Zealand for that period.
Finally, says Bascand, the policy message suggests that returns from residential investment portfolios may not be as good going forward as many other investment alternatives.
Harbour provides a range of local and international funds for investors. Visit Harbourasset. co.nz for more information. This article does not constitute advice to any person.