More investors are cashing out of residential properties - and some intend to put their money into commercial buildings, recent data and commentary suggests.
An October Tony Alexander Portfolio Investment Survey shows of 1753 respondents, a net 19 percent intend to reduce their residential property investments over the next year. A net 2 percent intend to buy commercial property, Alexander confirmed.
Intention to buy shares was strongest, followed by managed funds, survey results showed. Along with commercial property - particularly industrial and warehousing property - crypto assets and precious metals were among the options considered by investors.
Asked which assets they intend to sell to free up cash, the highest percentage said residential property, followed by shares and savings accounts.
"I don't expect the bulk of people moving out of residential will go into commercial - but some will," Alexander told Newshub.
New Zealand Property Investors' Federation executive officer, Sharon Cullwick told Newshub recent conversations with investors show a "definite shift" towards commercial and industrial investing.
While residential investors weren't selling up completely, some were offloading older properties and "diversifying their portfolio", effectively spreading their risk.
"There are advantages of having a new property compared to an older property...investors are moving into commercial properties and to new builds as well," Cullwick said.
Removal of tax incentives and increased compliance is making residential property investment a lot more difficult, Erskine and Owen director and cofounder Alan Henderson told Newshub.
Under Government housing measures introduced on March 23, along with doubling of the bright-line test, residential properties purchased on or after March 27 (with the exception of new builds) aren't eligible for interest deductions. For properties purchased before March 27, the claimable amount dropped to 75 percent from October 1, and will be phased out by April 2025.
Changes under the Tenancies Act, and Healthy Homes standards give landlords fewer options for ending tenancies - and there's increased fines for non-compliance.
Investing in commercial property syndicates as part-owners is an option investors looking to cash out of residential property could consider, he said. It's also an alternative to buying new builds to avoid tax changes.
"Residential property is a changed environment...instead of taking the DIY approach and looking after a property, the whole landscape's changed," Henderson said.
In places such as Canterbury, purpose-built manufacturing and storage facilities provide long-term tenants, and the opportunity to earn higher yields than in Auckland, Henderson added.
Having sold around 30 residential properties, from which funds were used to buy nine commercial properties, property investor Graeme Fowler told Newshub the main attraction was higher yields (returns). Residential yields are usually calculated as a 'gross yield', which means the landlord still pays for things such as rates, insurance and maintenance, Fowler said.
In Fowler's view, the actual net return (yield) on a residential property is often lower than on a quality commercial property.
"Cash flow is a very important factor when looking at any investment and so for me when I could get in many cases, double the cash flow with commercial properties, it made sense," Fowler said.
But as with any investment, there are things to watch out for.
Commercial properties often require a higher deposit, creating an additional barrier to entry. Borrowing to buy commercial properties can attract higher interest rates.
Those with two or more commercial properties may also find their cash flow is more affected when a tenant moves out, than if they were residential properties.
"With residential, there are generally 50 or more people wanting to rent a house when an existing tenant moves out, however with commercial it may take 12 months or more to find a replacement tenant," Fowler added.
