Weighing the pros and cons of investing in New Zealand property: Cameron McEvoy

Weighing the pros and cons of investing in New Zealand property: Cameron McEvoy
Cameron McEvoyDecember 7, 2020

A couple of years ago at an property show in Sydney, I noted the abundance of overseas property investment stands.

Whilst most were related to the US, Thailand, and Bali, there were a couple of stands fronted by New Zealand specialists.

At the time I was focused on other things and did not really entertain the prospect of investing in the Kiwi market.

However, after doing some further digging recently, I uncovered more about our neighbour to the East, Aotearoa; the ‘Land of the Long White Cloud’.

Today I thought I’d provide a few of the pros and cons I perceive for investors considering the New Zealand market.

Whilst my findings are certainly very limited, and my own knowledge of, and experience in, this market is limited to many snowboarding trips and a few tongue-in-cheek jokes, I think New Zealand is certainly a market to consider for those who can see value in offshore property investment.

As merely a ‘tourist’ in my coverage of this market, I am keen to here from other Australians who have had residential property investment experience in New Zealand.

No doubt there are many further pros and cons that I have neglected to mention.

Cons:

Macroeconomic factors that challenge job security:

Some macroeconomic limitations can adversely affect many of the property markets in employment centres such as Auckland and Wellington.

According to Wikipedia, New Zealand overall has a market this is quite connected to international trade partners such as Australia, Europe, USA, China, Japan, and Korea.

However, what comes with these connections are the peaks and troughs that these bigger markets can fluctuate through. What I am getting at is that for a country so heavily dependent on trade with other markets, jobs can be adversely effected at random, in Auckland and Wellington.

Environmental challenges:

The tragedy that was the 2011 Christchurch earthquake changed the city of Christchurch forever.

The quake was the result of what was a previously-unknown defined tectonic plate fault-line until about 2010; leading to the big 6.3 magnitude quake, just outside the CBD area of the city.

Since then the city has been rebuilding and creating infrastructure that is better-equipped for future tremors. Still, the unpredictable volatility of the ground beneath this city has led to many investors recording losses and selling properties at reduced costs in and around this Canterbury region of New Zealand.

Environmentally and ecologically, Australia and New Zealand could not be more different. In Australia, the continent is very secure, with zero tectonic plate faultlines meaning that we can pretty much build what we want, where we want.

Conversely, New Zealand as a nation is constantly reviewing and upgrading needs-assessments for construction projects ranging from small granny flats, all the way up to skyscrapers on the city skyline.

There is actually one main pro and one main con to perceive this moving into the future:

Con: existing dwellings may later be required by law to be ‘future-proofed’. As an investor this is high risk. You could pick up a house for a great rate now, but what happens in a few years when new compliance construction laws come in, requiring you to fortify the dwelling to ensure its compliance with new laws?

The costs involved could completely diminish any further gains-potential from the property, as a viable investment. This trend may or may not be confined to ‘known’ Earthquake-risk areas. I.e. the New Zealand government could nationalise these compliance laws, which could upset the property investment landscape significantly

Pro: This has potential to create the ‘San Francisco Effect’ for property investors. The San Francisco Effect is a term I have just made up then! San Francisco is a city on a limited volume of land – a trait that on its own is enough to effect supply and demand ratios positively for investors – with the added challenge of being earthquake-prone.

This reduces the height of buildings that can be built there, and also the materials able to be used. Ever notice how those pretty three-storey weatherboard homes line the streets neatly in San Francisco and cost a small fortune to purchase? Well, that trend was not down to a designer saying ‘let’s make San Fran a city of really cute, adorable old-fashioned houses and not big concrete-and-glass apartment blocks like every other city’.

No, the materials used and height limits decided are necessary to earthquake-proof the dwellings. This creates further limitations for future city expansion, making those dwellings highly coveted in demand, and thus increasingly returns and values sharply. Cities like Christchurch, which is an important economic hub for New Zealand, could go down this path in the future, meaning that securing a good deal on an earthquake-compliant, well-located property in Christchurch now, could pay significant dividends in the future.

 


Pros:

Opportunity exists for year-round holiday investment property types:

Though I mentioned above some challenges with job security due to macroeconomic and international-dependent factors adversely affecting job supply, there are opportunities in New Zealand property in areas not as affected by these drivers.

Take, for example, certain areas of the south island where tourism is high, year-round. In Australia, it is harder to find tourism-dependent property types that can consistently (read: ‘year-round’) provide secure rental revenue.

Here in Australia, the weather greatly affects such areas. For example, in the tropic north, tourists avoid the wet season, making an investment property up there, very seasonal, with a high risk of long-term vacancy during the ‘off’ months.

In cooler tourist areas such as the Snowy Mountains and Tasmania, it changes again, with the demand in the ‘off months’ for each of these regions arguably reducing heavily.

In New Zealand, many holiday hotspots are valued year-round for their appeal. Queenstown in the South Island for instance; is valued in winter for its skiing/snowboarding, yet in summer it can still achieve similar patronage numbers for is river-sports and extreme sports activities along with trails and trekking that is otherwise difficult in winter. Areas with year-round appeal like this can make for solid investments.

Your Australian dollar buys you more:

This is a pretty obvious one but must be stated nonetheless. The AUD certainly performs well when buying NZD currency.

At the time of writing, XE.com reported that 1 AUD will buy NZD 1.22. This is significant when considering the entrance costs to any property investment. Furthermore, regardless of the dollar conversion figure; without a doubt your dollar goes further in many parts of New Zealand when compared to Australia, on an apples-for-apples basis.

Yields can be as significant in some parts of New Zealand as say a US investment. Whilst capital growth may not be as significant as Australia, if you can ‘hold’ a high yielding property for five years, the opportunity to open more doors and grow a portfolio quicker, is significant.

Stamp duty concessions:

When you compare Australia with New Zealand in terms of ‘up front costs’, you cannot help but think somewhat that Australians are being ripped off. The extortionate stamp duty costs attached to investment (aka non-first-home) properties in Australia are amongst the worlds highest.

In truth, it is important to note that ‘stamp duty’ as a tax, does weed itself into a property investor’s balance sheet in some way or another, in many other countries in the world; but it is certainly not as initially prohibitive in the way Australia’s is, when spread out over a longer term or payable later on. For example, in the US, ‘county taxes’ are payable yes, but these are significantly higher than say the ‘council rates’ you’d expect to pay quarterly when holding property in Australia.

This is due, in part, to some of the ‘stamp duty’ tax making its way into county tax costs. The difference is, you do not have to pay an huge sum up front.

This enables you to pour more money into the actual deposit and start your property investment career much more quickly. Well according to a 2012 white paper by Deloitte on ‘Taxation and Investment in New Zealand 2012’, New Zealand does not carry any stamp duty on property purchases. And it gets better; in addition to this, there is no transfer fee/tax on property purchases, along with no national or provincial (I.e. ‘North Island’ or ‘South Island’) land tax on physical plots of land in the country.

Counties and councils will charge their own land rates but these are certainly not as extreme as land tax thresholds payable in states of Australia when you own land of greater values than these thresholds. One thing to be mindful of though, is the way Australians are taxed for New Zealand investment properties.

Whilst NZ will not charge capital gains tax at the point of sale, in Australia you will be liable for tax when selling your NZ property, though this tax rate is in line with your tax rate in Australia. This is as per the CER agreement between the countries. You income from the NZ property whilst you are holding it is taxed at your Australian rate.

However, building depreciation schedules are much better in New Zealand and higher depreciation rates can be claimed on any property (no age restriction like in Australia).

 


Fostering the ‘Special Relationship’ between Australia and New Zealand in loan terms:

Following on from the taxation incentives of buying, holding, and selling residential property in New Zealand, there are added financial advantages when investing as an Australian that many other non-New Zealand citizens are not privy to.

One of the biggest advantages comes via lenders who operate in both countries. As an Australian, when buying property in countries like the US and UK, investors are often at the mercy of dealing with in-country lenders in these places who, on top of charging higher interest rates on mortgage products, will charge additional set-up fees to foreign investors.

Lenders such as ANZ, however, are able to provide access to Australian citizens, loans securing properties in New Zealand, at competitive interest rates and often-times without any of the additional fees that they may ordinarily charge investors from other countries.

New Zealand is a very business-friendly country:

Seemingly contradicting one of the cons I mention above about the NZ economy being tied to other regions, New Zealand is becoming a very attractive country to do business, and offers many incentives to international business to set up shop there.

Just as some states in the US (Delaware, and Nevada, for example) offer tax incentives and infrastructure support to encourage business to those states), New Zealand offers incentives that countries such as Australia, Indonesia, and Singapore, do not.

According to Wikipedia, back in 2005 the World Bank praised New Zealand for being the most business-friendly country in the world. Being so reliant on its agriculture and tourism industries and knowing it cannot continue to compete with much larger countries in the agriculture and technology sectors, Kiwi’s have cleverly aligned their incentives to their strongest suits, resulting in an economy that continually ‘defies the odds’ that are stacked up against it.

Supply and demand ratios are trending upwards for investors:

In Australia, we know that certain cities (Sydney and Darwin for example) are significantly undersupplied with available properties.

In other words, demand is greater than supply which in turn pushes both rents and values up. This is great news for investors, not so great for aspiring home owners and renters. Other areas though (Melbourne and Gold Coast City for example) have the opposite problem – oversupply, which is not good news for investors but holds potential opportunity for aspiring home owners in those cities).

But how does this differ in New Zealand and what is the trend? According to February 2013 research from Properazzi NZ, supply and demand is varied in the main cities and population centres; so one must tread very carefully, as you would do when considering property in Australia.

No doubt Auckland continues to drive local demand, with supply levels subdued against demand for property, so there are opportunities in this city. However, there are also opportunities in smaller population centres based on demand. The Otago region is one such example. The other ratio in supply and demand is New Zealand’s ageing population. Just like Australia and many other developed countries (Japan, Sweden, Canada etc.), New Zealand is experiencing an ageing population that on the long term, could result in slower population growth. Curbing that however, is an incentivised skilled immigration program and as I mentioned previously.

There are incentives for more international business to set up shop there, which would in turn bring new workers in to New Zealand, which over time would increase the population again.

So, where does this leave us, and what is my verdict (if there is one to be made from my limited findings)?

Well, like most markets around the world, New Zealand is no doubt a market comprised of hundreds of sub-markets, and there is value and risk to be associated with many of these.

Personally I would consider a NZ investment as a component to my portfolio, as I think whilst the potential for rapid capital gains is not as great as Australia, this could be offset by reduced holding costs and overall better mid-long term yield as you progress along with holding property there.

All of the existing Australia-based ‘due diligence’ checklist of items still apply, when canvassing potential properties in New Zealand. However, there are unquestionably some additional items that are specific to this market.

An ‘outside the box’ approach is required to due diligence when contemplating taking a plunge into this market as an Australian.

Cameron McEvoy is a NSW-based property investor and maintains a blog, Property Correspondent.

Cameron McEvoy

Cameron McEvoy is a NSW-based property investor and maintains a blog, Property Correspondent.

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