No stamp duty. No land tax. A mortgage approved in as little as five working days. Affordable housing with enormous potential for capital growth. So where is this investment paradise, and where do I sign up?
Seasoned Australian property investor Paul Brown asked himself this question when sizing up the New Zealand property market. Having built, renovated and sold homes in and around Sydney, Brown realised that affordability was in a downward spiral and yields had fallen below 4%.Across the Tasman, Brown spotted a number of rapidly growing towns on the South Island offering yields in excess of 10%. “My wife and I looked around and bought several properties using the cash flow from our Australian investments. Over the last three to four years we’ve accumulated 18 properties,” he says.
Rugged mountains, rolling green hills and magnificent fjords combine to make New Zealand one of the South Pacific’s most picturesque locations. Clean air, a relaxed atmosphere and close-knit communities are attracting newcomers in droves. In 2003, the New Zealand Department of Statistics forecast that the population would increase by around 64% by 2020.
A strong economy in recent years has been underpinned by low unemployment, strong domestic demand and foreign investment, although some of that shine has come off after a series of interest rate rises in 2005. Rate hikes chiefly resulted from short-term inflationary pressures driven by surging oil prices and a falling New Zealand dollar.
House prices in most regions have tended to grow in line with the national economy, with growth rates in the median price band easing off in the early months of 2006. “What’s happened is that the median price for the whole of New Zealand has stayed in a very tight bracket since October last year: from $285,000 to $300,000. In the 24 months before that, prices were going up very steadily and the market has now levelled off price-wise,” says Howard Morley, president of the Real Estate Institute of New Zealand.
That said, prices in a number of regional towns and holiday resorts have continued to perform strongly. “I think the beauty of New Zealand is that it’s so decentralised; there are a lot of regional areas in which you can find good positive cash flow returns. New Zealand offers higher yields but more security because of this decentralisation,” says Brown.
Holiday properties have traditionally been highly valued by investors, particularly those who reside overseas. “A lot of our markets in the major cities have probably settled more so than in the resort markets of Queenstown, Nelson and Rotorua,” says Stephen Hebbend, principal of Southern Lakes Real Estate.
“The most attractive type of property is a holiday home in a managed development that provides strong returns. There’s no maintenance and when they come over to visit they’ve got something to call their own and they can holiday in it.”
Rules and regulations
New Zealand’s similar political, legal, banking and regulatory environments make it easy for Australian investors to get involved.
As a result of the Closer Economic Relations (CER) trade agreement struck between Australia and New Zealand in 1988, Australians can take out NZ dollar-denominated mortgages and purchase property – although they pay tax in Australia, not New Zealand.
Fortunately, a double taxation agreement between Australia and New Zealand means that Australians earning rental income from properties in New Zealand only pay tax once – in Australia. While New Zealand itself has no capital gains tax (CGT), Australian residents must pay CGT on any gains derived from New Zealand-domiciled assets.
“Even though the property is located in New Zealand and earning income there, if you are a resident in Australia for tax purposes you have to account for the income and expenses in your Australian tax return,” says Andrew Clark, principal of accounting firm Clark and Jacobs.
Expenses such as interest incurred on borrowings, depreciation and maintenance expenses relating to investment properties can be offset against rental income received, as is the case in Australia.
The prime cost depreciation rate on buildings is 3% in New Zealand, compared with 2.5% in Australia, while the diminishing value rate is as high as 4%. Furniture and fittings can generally be written off at 33% per year over three years.
“They’re slightly more generous in New Zealand in terms of depreciation, although they’re starting to pay a lot more attention to it. In Australia depreciation is only claimable on a property built after 1983, whereas in New Zealand it applies to any property,” says Clark.
X marks the spot
Areas with rapid population growth (especially in the regions) and holiday destinations with both summer and winter tourist seasons are New Zealand’s stand-out investments.
Paying close attention to the fundamental indicators of price, rental yield and occupancy level will form an essential part of your research. Tease out the finer points of your strategy – are you predominantly chasing growth, income or a combination of the two? Will you negatively gear your property?
“The investment has to be a sensible commercial proposition. So don’t go investing somewhere just because you can negatively gear; you’ve got to buy an asset that’s going to give you a real capital and income return over time,” says Clark.
Examine the population growth, major employment industries and demographics of your selected area. You can build up a detailed picture by visiting Statistics New Zealand at www.stats.govt.nz. Seasoned investors recommend you then speak with a number of local real estate agents to gauge which types of properties are in demand.
“I looked on the web, went to a number of areas in the South Island, then met some agents in New Zealand and built up good relationships with them,” says Brown. “One real estate agent spent a lot of time with me, taking me around to look at properties, and he was interested in what I was doing.”
Finding a reputable lawyer is crucial if you wish to purchase New Zealand property. Unlike in many states in Australia, solicitors – rather than conveyancers – manage the transfer of title, and maintain a large degree of involvement throughout the settlement process.
Interest rates are generally more volatile in New Zealand than in Australia and are closely linked to fluctuations in US rates. As a result, fixing rates is extremely popular amongst mortgage holders.
“The average fixed rate period is 18–24 months. Nobody is fixing for longer than three years because fixed rates will probably go down before then,” says Mary O’Brien, principal of New Zealand Mortgage Solutions Sydney, who helps Australians looking to invest in New Zealand.
As is the case in Australia, the lending sector is highly competitive, especially since the arrival of non-bank lenders and mortgage brokers.
“Because of the interest rate war, advertised fixed rates will continue to be competitive. While the trend for the next two years, alongside the world economy, is for fixed rates to increase, there’s always room for negotiation,” says O’Brien.
Lending products are for the most part similar to those in Australia, although some extras (like offsets, honeymoon rates or professional packages) aren’t yet available. On the flipside, most lenders will accept a 5% deposit and do not charge exit fees, aside from those associated with breaking a fixed interest term.
O’Brien says that some of her clients already hold property investments in Australia, while others are new to investing and haven’t been able to find a suitable property in Australia. Purchasing in New Zealand is also popular with first homebuyers because of low deposits and legal fees.
“Property has appreciated in Sydney, so many people have built up a large amount of equity in their homes. It’s hard to find occupancy with a good rental return. [Investors] demand rental return, which is now drying up in Australia, so many put their investment dollars into New Zealand,” says O’Brien.
Once you’ve decided where to buy, you can apply for pre-approval with a New Zealand lender. If you go through a broker, you must either choose one who is New Zealand-based, or an Australian who is accredited to write New Zealand loans.Pre-approval gives investors an added degree of confidence when they make the trip to put an offer on a property. An agreement between you and the vendor is then drawn up and sent to each party’s solicitor. Once finance has been arranged, the solicitor arranges for an inspection and for the preparation of a land information memorandum (LIM).
An LIM is an overview of the property from the local council’s perspective, including the property’s history and anything that the new owner should know about it. Your solicitor will then draft an agreement for sale and purchase and, having received the mortgage documents from your New Zealand lender, prepares the transfer of title.
The best thing about settling on a New Zealand property, aside from the fact that it only takes around six weeks, is that you can do it from home. Your solicitor can courier the documents to you in Australia to sign, and settlement can proceed as soon as you send them back.
So if Australia’s cooling residential climate has dampened your enthusiasm for investing, you may wish to cast your eye across the Tasman. Affordable properties in growing regional areas, favourable tax treatment and easily digestible banking system make New Zealand a more heavenly proposition each day.