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More investments in construction expected

In March 2021, the way property investors are taxed in New Zealand changed. Over time we expect this is going to impact the types of loans that Southern Cross Partners lend on. So what does it mean for you?

Earlier this year the Government surprised Kiwi property owners with a raft of tax changes. As a result new builds now have an advantage over buying existing properties for all property investors.

The main changes incentivising new builds are:

  • Extending the bright-line test from five years to ten years for properties subject to a binding agreement dated on or after 27 March 2021. But exclusions apply for all new builds, which are only subject to a five year bright-line test.
  • Interest deductions on residential property are being phased out. For all residential property acquired on or after 27 March this year interest deductibility will not be allowed from 1 October this year. Interest on loans for properties acquired before 27 March this year can still be claimed as an expense, but the interest deductions are being phased out from 1 October 2021. An exclusion applies for new builds.

The changes provide a clear indication that the government wants to drive property investors to build new homes, rather than buy up existing properties.

We’re already starting to see an impact from these changes at Southern Cross Partners. But it’s probably just the tip of the iceberg.

As the tax advantage of investing directly in property decreases, we’re seeing more people asking us about our investments. They see it as a way to have an investment secured by property, without having to actually buy an investment property.

We’re also seeing a healthy number of loan applications for new builds and this will be showing up in our investment portal.

Lending and investing in construction

When property investors investigate buying another property, they often prefer an existing property. It’s immediate and physically complete upon purchase, opposed to new builds that take more skill to get off the ground.

But the latest tax changes will drive more people to think about building or buying new builds. This means they need to bring together a plethora of specialists to help them get their dreams off the ground.

As a specialist lender, with a long history in construction loans. We’re used to handling new builds. Here’s just some of the ways we keep on top of it:

  • Eyes on the ground – For the vast majority of situations we visit the property before we lend and then require evidence to prove the construction projects are progressing. We also frequently visit construction sites to check progress during the project.
  • Progress payments – We fund construction with multiple progress payments, according to an agreed schedule. This ranges from funds when the pad goes down through to when the code of compliance is issued
  • Our money first – As with all our loans, Southern Cross Partners funds all loans with our own capital and then offers them to investors.
Then generally after we’ve funded construction the homeowners can move their mortgage to a major bank or sell up, and we move on to funding another construction project.

So as much as changes to taxation for property investors took many by surprise, a few months on it’s easy to see how the market is adapting and that it creates more opportunities for Southern Cross Partners and our investors.