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28-04-2008

Oz lures kiwi property investors

With little prospect of capital growth during the next two years, the local property market is losing its lustre for all but the canny, cashed-up bargain hunter, and the spotlight has switched to Australia.

The property capital growth "hotspots" are in Melbourne and southeast Queensland, says New Zealand-based property developer Mathew Gilligan. He is trading Australian property because, he says, unlike here, there is still pent-up housing demand bolstering values, and low rental vacancy rates in Victoria, New South Wales and Queensland where immigration inflows are strong.

KPMG's Population Growth Report 2007, based on Australian Bureau of Statistics data released last October, confirms that Melbourne and Brisbane are growing at close to record rates, fuelled by high migration, strong interstate migration and a high birth rate.

Melbourne is attracting nearly double the population growth of Sydney. The City of the Gold Coast is Australia's fastest growing place, and seven of the country's 10 fastest growing towns in the year to June 2006 are on the Queensland coast.

 However, the vice-president of the New Zealand Property Investors Federation, Andrew King, thinks some of those promoting investing in Australia are glamorising the situation, especially in Queensland. He says there's no shortage of land for development, so population growth won't necessarily drive up prices.

Auckland accountant Mark Withers agrees there's no real lack of land, saying the best capital gains are to be found in existing centres, showing scarcity rather than on their outskirts.

KPMG's report confirms the number of new residents moving into the central core of the largest cities now tops the numbers added to each city's fastest growing suburbs.

New Zealand-based property investment company Key2 has just launched a billboard campaign promoting Queensland as a property-investing hotspot. "Join one of our KEY2 Australian Property Specialists for a free Queensland Property Workshop where you can discover where the 'next' hot spots are and learn why you should buy BEFORE you leave NZ," says Key2's website.

Director Russell Benshaw says that the company is a licensed real estate agency which sources property from developers for its clients, generally in new suburban developments up to 30km out of town centres.

Enthusiasm for buying Australian property is often sparked by "spruikers trying to flog properties", Withers says. He recommends going over to look at the secondhand market instead, as that's where the good buying often lies. "Don't commit yourself here in New Zealand to something you haven't seen," he warns.

King also urges caution over some of the methods being used to push Australian property at the moment.

 There have always been developers who have done seminars and used quite aggressive marketing techniques," he says.

King's "warning bells" sound when promoters of Australian property investing give the impression of being experts in a particular area, and "base everything on statistics".

He says they claim to give information about the market when what they are really doing is plugging an area where they happen to have properties for sale.

King warns these promoters make "wild" estimates of what expected value growth is going to be when "the general impression of the market in Australia is that it's pretty much the same as ours.

"With high interest rates biting, essentially it's going to be levelling off or declining."

The Herald on Sunday spotted a post on online investor forum Property Talk stating that Australian property values were set to rise 30 per cent.

The poster is promoting seminars together with another, who has properties for sale in Australia.

"People believe that," says King, "but if it doesn't happen - it could be a terrible buy."

King's advice to anyone looking to buy in Australia is to get independent information.

As has been proven most recently with Blue Chip, "When you're dealing with a salesperson, you can't take what they say at face value," warns King. "There are so many other examples of people buying property without knowing what its true value is themselves, having put their faith in the people selling the property, and that's just not where you should put your faith." After all, their goal is to sell the property.

Buying an Australian investment property suits those with some experience of local property investing looking to diversify into a market at a potentially different point in the property cycle, Withers says. "Certainly at a time when people have equity, and are struggling to find yield in New Zealand, they could do a lot worse than going to Australia - it's a powerhouse country and that will only continue."

Typically people raise money locally against their New Zealand assets and buy Australian dollars for a deposit, borrowing the balance in Australia.

The strong exchange rate means investors can buy more Australian dollars than usual.

Withers advises clients to borrow more in New Zealand and reduce their Australian debt while the New Zealand dollar is high.

"When the Kiwi dollar weakens, you're better off having more equity in the Australian property - you can bring money back to New Zealand and do well on the exchange."

TAXING MATTERS

There are tax issues when borrowing money offshore.

Non-resident withholding tax (NRWT) is payable to the New Zealand IRD at 10 per cent of the interest that's paid on the foreign debt.

However, if the investor chooses a bank in Australia that is a registered bank in New Zealand, for example Westpac, they are exempt from NRWT. If a bank isn't registered here, NRWT exposure can reduce to 2 per cent of the foreign interest bill if the borrower applies for approved issuer levy status. This is a tax-deductible expense in New Zealand.

Mathew Gilligan, property developer and accountant, says Kiwis investing overseas need to be aware that under accrual rules, they may need to pay tax on the fluctuating value in kiwi dollars of their foreign debt. Foreign currency movements can give the investor windfall tax losses, or assessable income, depending on which way the exchange rate moves.

 Kiwis investing in Australian property must file tax returns in both countries. Owning the property in your personal name simplifies tax-filing obligations in Australia. Gains or losses on the Australian property can be included in the New Zealand tax return in the normal way.

There are different purchasing costs in Australia, for example stamp duties payable. Some states have removed stamp duty on apartment acquisition, and the land value being low anyway with apartments means there are some tax benefits.

However they generally don't provide the same capital gain.

Capital gains tax (CGT) applies if you sell a property. Gilligan says CGT can be avoided if investors use the right structure. The Australian regime discounts CGT if a property is held longer than 12 months, and he says there are other ways to reduce the burden of CGT - with the right professional advice.

"The right tax and legal structure makes a massive difference going into Australia - it's the difference between getting cleaned out with tax or not, and the difference between accessing your tax losses or not."

 

INVESTMENT TIPS

Local property investing expert Andrew King says whether you're looking to purchase at home or abroad, you should:

Be completely confident about the information you're receiving - watch your sources. Just as in New Zealand, Australian bank economists provide reputable forecasts of what's happening with Australian property freely on their websites.

Get to know the market very well yourself - independently of anyone selling property. "Get on a plane and go over there."

Spend time looking around the area and speaking to real estate agents before dealing with any companies promoting investing in Australian property.

The same rules apply as when buying here - look at the critical numbers such as yield.

Finding a trustworthy property manager is "worth a trip" in itself - interview him or her about their systems and how easily you are able to access information from a distance.

Don't underestimate the cost of administering an Australian investment property - dealing with banks, lawyers and property managers means international toll calls or catching a plane.

CASE STUDY: KAREN FARRELL

Karen Farrell was already an experienced property investor in New Zealand when she bought her Burley Heads apartment on Australia's Gold Coast with an Australian girlfriend.

When she purchased two years ago, she intended to spend winters in the apartment on her retirement - where she was when the Herald on Sunday caught up with her.

"My girlfriend over here hadn't got into property investing and I thought it was time she did, so I suggested we go in half shares to give her confidence."

They bought a holiday apartment in a large complex called Paradise Grove after Farrell researched the area for "a good year" beforehand.

"I was quite particular about it really." It fit her criteria of being affordable and maintenance-free.

"You've got to remember you're not on hand to do renovations. You don't know local contractors when you're buying out of your own area."

Buying an apartment also minimised the impact of Australia's 2 per cent land tax, but the body corporate costs are "quite high".

On the apartment's performance, Farrell says the yield hasn't been "that great," but has gone up in value on the back of two large million-dollar apartment blocks built nearby.

The Gold Coast property market at the moment is "following the world economy," she says, although rental property is in demand. "Particularly in Brisbane there's a dire shortage at the moment."

While Farrell intends keeping the apartment long-term, she doesn't anticipate buying more property in Australia. "If you don't have other investments in Australia you have to put in quite a lot of cash, which is not something property investors like doing. You can't do what you'd do at home and use your equity to borrow 100 per cent and pay interest only."

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