Commercial property sector to benefit from housing shake-up
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.
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 - up from $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 brightline 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 shake-up, 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-torent sector, that is becoming increasingly popular in New Zealand, will also get more support.
Little says “the purchase of a newbuild 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 newbuilds – however, consultation is still required.”