David Faulkner just bought a commercial property to run his business out of.
Faulkner trains residential property managers for a living, and he owns a residential renter himself. But he is one of many eyeing alternative places to put his money now the Government has declared a low-level war on residential landlords.
“It wasn’t a case of, ‘OK, my god, let’s go commercial – but it was a good investment,” Faulkner says.
Part of his reason was commercial property isn’t subject to the policy changes that have convinced landlords that they’re the current Government’s least favourite block of voters.
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Residential landlords have been sent a clear message that the days of massive capital gains are over.
Banks expect house prices to flatten this year, and dip in the longer term as interest rates start to rise, and Government policy changes are being fast-tracked to make it less attractive to be a landlord.
National leader Judith Collins says bigger bills for landlords will end with higher rents for tenants.
Investors buying residential rentals will have to pay tax on capital gains if they sell within 10 years, and investors are to progressively lose their ability to offset interest paid on home loans against rental income, a move Westpac economist Michael Gordon called the “most meaningful intervention into the housing market in decades”.
There’s even been talk of rent freezes, parallelling wage freezes announced by the Government for even modestly-paid civil servants including police and nurses.
The Reserve Bank has also been told to target sustainable house prices, and in its monthly Financial Stability Report the Reserve Bank said investors faced this decision: whether to invest in housing and rent it out, or to invest in other assets.
So what are the likely alternatives investors will turn to that could generate them life-changing returns, as rentals have done for landlords?
Commercial and Industrial Property
Sharon Cullwick, executive officer of the Property Investors’ Federation, says a minority of her members are talking about shifting their focus to small commercial and industrial properties.
“I’d say two in every 100 landlords I’ve spoken to say they will change their portfolios and are looking to go into small commercial and industrial,” Cullwick says.
Commercial property, like residential property, is an option where investors can borrow to invest, which is one of the major draws of households which have equity, but little ready cash.
Cullwick says the vast majority of her members have stopped buying residential rentals, and the policy changes would drive some landlords with large debts to sell properties after they lose their tax advantages.
“I haven’t heard of anyone who’s borrowing more money.”
But Nick Goodall, head of research at CoreLogic, which tracks the property market, says there’s no evidence yet that landlords are dumping rentals.
Goodall says houses have something other investments, other than bank deposits, do not have: An implicit guarantee that the Government would intervene to stop house prices falling too far, and that is appealing to households.
More rentals and new rentals
Goodall thinks the next big thing for residential property investors will be more residential investment property, but without the emphasis on making quick capital gains.
Instead of banking on big short-term gains, investors would see homes as assets they could pay off using rental income, gaining equity as the loan is paid down.
“There’s still long-term appeal for buying property,” Goodall says. “It’s still a good retirement plan.”
The focus may change, however from competing to buy existing homes, to buying “new builds” as these will be exempted from the tax deductibility changes. This, Goodall says would have the benefit of providing capital to expand housing supply.
All of this depends on pricing of homes. Since May 1, Reserve Bank rules mean 95 per cent of all new loans to investors by big banks need to be less than 60 per cent of the property value.
Faulkner reckons some residential landlords will seek to change the way they operate, maximising rental incomes, and trimming costs, including skimping on maintenance, and dumping their property managers, which could lead to problems for tenants.
Cullwick says around 70 per cent of her members believe they charge below market rent, and rent rises could be a tool they use to partially compensate for losing interest deductibility.
Investing in your own home
“In Australia your house is your castle,” Cullwick says. “A lot of people have a lot of money invested in them.”
Australian homes are replete with swimming pools, landscaping, outdoor features, and spa pools.
She expects the landlord-targeting policy changes could result in a wave of people choosing instead to “invest” in their own homes, thereby increasing their value, without facing potential capital gains tax bills on their sale.
Last year, Jeremy Gray, who works for home renovations online marketplace Builders Crack, documented a project costing $89,000 to renovate a modest 1960s brick house into a modern family home, which added an estimated $103,000 to its value.
It included energy-efficient double-glazing, a feature many owner-occupied homes do not have.
Renovations that generate a return to the homeowner, like borrowing to install solar, insulation, or double glazing, could be a good option, says Glenn Harvey, chairman of the Solar Association of New Zealand, as long as homeowners did their research carefully, installed good quality systems, and did not pay too much for them.
Shares in punchy growth companies
The rise of the DIY retail investor enabled to become a sharemarket investor through online investment platforms like Sharesies, Hatch and Stake, has been one of the stories of the last decade.
Matt Leibowitz, chief executive of Stake, said the platform’s fastest growth was among younger people, many of whom are not property owners.
“80 per cent of our investors are under 45,” he says. “Home ownership is far less a reality for them.”
The focus of these investors has been heavily on the companies and technologies changing the way the world works, and how households spend and consume entertainment.
“Investing in Facebook, Tesla, Google and Disney is a lot more accessible than it was before,” Leibowitz says.
“We have seen investors who have invested in Tesla three to four years ago taking their money to buy homes.”
Financial adviser Stephen O’Connor from Mitre Wealth Management in Invercargill says some investors have played the rise of the technology giants by investing in technology funds like the overseas-based ARC fund.
O’Connor says while it is possible to borrow to invest in shares, that’s a risky game, and is something that’s generally only available to people who are already wealthy.
But investors in shares who want the backing of property can invest in New Zealand and overseas listed property funds and companies.
O’Connor urged caution against investors leaping precipitously into property syndicates, which involve investors buying a share in existing commercial and industrial buildings.
“There’s been a huge uptake in property syndicates, and much more interest, in recent years, but I urge caution,” O’Connor says.
Sometimes the risk of syndicates, including the risk of an investor not being able to get their money out quickly, is higher than people realise.
Investors from around the country are facing $23 million in losses after the high-profile failure of the Nido retail development in Auckland, which was supposed to be the country’s largest furniture retailer, but quickly collapsed into receivership.
Cryptocurrencies and other speculative ‘assets’
The biggest, boldest speculative assets available to retail investors are cryptocurrencies like Bitcoin, but O’Connor sees them as being at the very other end of the risk scale from property.
“Crypto is not an investment. It’s pure speculation,” he says.
“It produces no revenue, no income stream. It’s just speculative.”