New builds: what investors should know
Major supply shortages mean New Zealand needs more new dwellings built but there are good reasons why it makes sense for investors to opt for new builds.
Wednesday, July 19th 2017, 12:00AM
by Miriam Bell
There’s been lots of talk about encouraging the purchase of new builds as part of the solution to housing supply issues.
Should it win the election, the Labour Party plans to ban non-resident property buyers from buying existing housing stock and restrict them to new builds.
The Property Institute has suggested the Reserve Bank should increase the LVRs to 60% or even 70% for investors buying existing properties – and encourage them to invest in new builds instead.
But, political rhetoric aside, there are many sound reasons why investors might want to look at investing in new builds. Here are five of them:
1. Smaller deposit needed
Lending for new builds is exempt from the latest LVRs for both investors and owner-occupiers - and that means investors only need a 10% to 20% deposit for a new build loan.
Property Institute chief executive Ashley Church said that the more accessible finance option means that it should be counter-intuitive for investors to move into new builds.
“For investors who are pushed to the line with equity, or who don’t have much of a cash deposit, it makes financial sense to invest in a new build.”
Better lending conditions tend to be available with new builds, Property Ventures director Mark Honeybone agreed.
“The greater lending available for new builds offers new investors with better opportunities when starting out.”
2. Value for money
Conventional wisdom has it that existing properties offer a better value proposition but this is no longer the case.
Recent homes.co.nz data suggests that building a new property, rather than buying an existing one, can actually be more lucrative.
It found that, in hot markets like Auckland, Wellington and Queenstown, new properties typically sold for around $600,000 more than an empty section – which could equate to around $150,000 in capital gain on average.
Honeybone said that with just a small deposit you can get maximum growth from the whole purchase price while the property is being built.
“Any new subdivision done right will have solid capital gains as the area grows and develops over time - which means long term you will have an extremely valuable asset.”
In Real Estate Investar head of property Campbell Venning’s view, existing stock is now completely over-valued when compared to new builds.
“New builds offer greater value for money, especially with a standalone new build, where you get a green field section and a brand new house.”
Further, most people underestimate the true costs of renovation in New Zealand, he said.
“The days of throwing lots of money into a great renovation of an old villa and making more than you have spent back are gone.”
3. Easier, cheaper maintenance
New builds require much less maintenance work. This makes for much reduced maintenance costs for many years and this, in turn, is better for cash flow.
Additionally, the risk of large one-off repairs will be lower – which is a common worry when buying existing stock.
But, in the event something does go wrong with a new build early on, there should be warranties and guarantees to fall back on.
Venning said the maintenance costs on a new build are insignificant in comparison with the true maintenance costs on an existing build.
“The reduced maintenance requirements are also great for time-poor investors who don’t want to spend their time carrying out or arranging and overseeing maintenance work.”
For Honeybone, the reduced maintenance costs offer investors a further opportunity.
“Maximise the early years’ savings on maintenance costs and pay this against the principal on the loan. This will make for accelerated results in later years.”
4. Better quality properties
These days there is a growing emphasis on warm, dry, healthy and environmentally friendly dwellings, particularly if they are rental properties.
New builds use the latest construction techniques and have to comply with a host of building regulations and standards.
This means they are more energy efficient, environmentally-friendly and healthier than existing properties.
Venning said that events like London’s Grenfell Tower fire and the Christchurch earthquakes have led to government coming down harder on landlords who haven’t been keeping their rental properties in good condition.
“Compliance costs are only going to increase. Investors should want to own a warm, dry, compliant rental property and new builds fit that bill better.”
For example, recent amendments to the Residential Tenancies Act mean that by July 2019 all rental properties must have floor and ceiling and insulation to a specific standard.
With new builds this is not a concern as building regulations mean it will already have insulation to the required standard.
5. Tax benefits
Investors can claim depreciation on chattels, fixtures and fittings. With new builds, they will be at their highest value on purchase and will depreciate from there.
That means that tax rebates on a new build will, for the first few years, be at a greater amount than they would be for an existing property of the same price.
Honeybone said this is very much a good thing for investors.
“An investor can claim this as an expense and it can be worth thousands of dollars in the early years, especially when everything is new, and/or you purchase furniture with the build.”
As with maintenance cost savings, he said investors should look to the future and put depreciation returns towards the loan principal.
Some other bonus factors
New builds tend to have higher resale value and the higher quality construction attracts better tenants.
And, for Auckland investors with a conscience, Church said that buying a new build can be seen as doing a social good.
“Every new dwelling that is built is one more off the pile of 40,000 new dwellings that the city needs to have built to address the supply shortage.”
Read more:
Restrict investors to new builds – Property Institute
Build more bloody houses – Little
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