New build Vs Resale. Which is better?

As a Singaporean investor, is it better to buy a brand-new property or a resale dwelling in the New Zealand market? This is a common question among investors looking to get started or expand their NZ property portfolio. Simply, the answer depends on you, as an investor, 1) the kind of approach you are willing to undertake 2) your investment objectives and 3) finding the best fit.

Are you an investor who prefers a more hands-free approach or someone willing to undertake some value enhancement (eg. renovations) if need to? Or are you a parent who needs a place to accommodate your university-going children on short notice and cannot wait for the completion of a new build?

In this article, we will explore the pros and cons of investing in a new build versus a resale property so that at a basic level, you know what to expect as an investor. Both options can result in vastly different investment outcomes, time & resources input, holding periods and even profitability potential. It may lead to disappointments and wasted opportunity costs if one takes on a path without first knowing the key differences. Understanding these differences will set you on a clearer path to take actions that will align with your investment goals.

What is a New Build?

They are brand-new properties, also known as Turnkey properties,

that can be bought off the plans at varying stages of construction depending on market availability. In some cases, newly completed houses may be available for purchase as a New Build, either due to subdued demand during launch or simply the developer's preferred method of sale. It is however important to check that when purchasing a newly completed property, the purchase date is within 12 months of the property being issued with a Code Compliance Certificate (CCC) in order to be considered as a new build to enjoy the tax benefits that come along with it.

Are Singaporeans allowed to invest in the Resale market in New Zealand?

Unlike Australia, Singaporeans are eligible to purchase properties on the secondary market in New Zealand either as an investment or for their own accomodation purposes. There are many platforms such as trademe.co.nz or oneroof.co.nz that you can use for your search. When it comes to investing in property in New Zealand, whether you choose to purchase a brand-new turnkey property or go for a resale option can depend on a variety of factors such as your investment approach, risk appetite, and personal preferences. Let's dive right into the pros and cons and how it may affect your investment outcome:

Tax Treatment

There are 2 main notable differences in terms of tax treatment between investing in a new build versus investing in a resale property. This may impact your holding period and overall profitability.

Holding period

In New Zealand, the sale profits of a property is subjected to a policy known as the brightline rule, which essentially determines whether capital gains on residential properties are taxable. Unlike Singapore where we have seller stamp duties which tax us on the entire valuation of the property if sold within a 3 year period (from purchase), in New Zealand, only the profits from the sale (selling price - purchase price - allowable expenses) are taxable under bright line rule.

Unlike Australia where capital gains tax applies regardless of when you sell the property (5 or 30 years later), New Zealand adopts a more lenient approach where the brightline rule only applies to properties sold within a specified period. In other words, it can be loosely interpreted as a time-based capital gains tax, which goes away after a certain period. To maximize your profitability from a property sale, an investor would likely do it after the brightline period so that he/she is not liable to pay a portion of his sales proceeds to the taxman. Pretty much the same strategy for selling your Singapore residential or industrial properties after the 3 year mark to avoid paying seller stamp duties.

Here's the brightline period rule for New Builds vs Resale properties:

New Builds: 5 years

Resale: 10 years

What it means to you as an investor:

Flexibility - New builds provide us with a greater level of time flexibility to exit our property investment after a short 5 year period without requiring our profits to be subjected to any capital gains tax. As compared to a resale, an investor would need to hold onto the property for at least 10 years to fully avoid paying taxes on their capital gains. You may be caught out in a situation when you are presented with an opportunity to sell at a good price that is within your brightline period, eventually ending up with a much-reduced profitability due to capital gain taxes. Having a shorter bright-line period gives us the flexibility to make a investment exit if needed or to take advantage of market conditions without worrying about capital gains tax as much. In this case, a 5 years difference could see the property cycle going thru several ups and downs, presenting different investment opportunities to capitalize on.

Profitability - As New Zealand continues to face a housing crisis, the government is in a race to fix the problem through several methods including policies such as the brightline rule. One could easily observe that the rationale behind a shorter bright-line period for new builds is to incentivize investors and developers to invest in building new properties, thereby increasing & rejuvenating the country’s housing stock to alleviate the housing crisis. This measure has seemed to work very well as we are seeing a huge uptick in new developments being purchased by homeowners and investors across New Zealand. This has caused enormous demand for brand new builds and has created a robust upwards price momentum for such properties due to factors such as rising land and construction costs.

As an investor in the new build sector, we stand to benefit from a long term upswing in properties prices, as the housing crisis continues to persist and the demand for new builds stays strong.

Tax payable on your rental income

As you would be aware by now, your rental income after allowed expenses are taxable. In a bid to minimize your tax liabilities on your rental income, other than running expenses (such as council rates and insurance), mortgage interest will typically represent the largest expense an investor would claim against. There are instances where property investors pay little to zero income tax on their rental income by maximizing their mortgage interest (through optimizing the loan amount to secure). However, this is no longer the case that can be applied to all properties. As of March 27, 2021, the New Zealand government removed the ability to claim interest deductions on residential rental properties as part of new legislation unless exempted. The good news is that New Builds are exempted from this and the bad news is that resale properties bear the brunt of this new policy change.

Can you claim mortgage interest as an expense against your rental income?

New Build: Yes

Resale: No

An interesting bonus to the new build exemption is that the interest deductibility has a 20-year lifespan, starting from the property CCC (similar to Sg TOP) regardless of the number of owners within this period. In other words, you pass on this benefit to your future resale buyer and they can enjoy the same interest deductibility on their rental income so long we do not cross the 20 years mark.

What does this mean to you as an investor?

More or less cash in the pocket? Unless you are buying a property in full cash, this change wouldn't make a difference to you regardless of a New build or Resale since there is no mortgage interest expense to begin with. However, if you are like most investors who embrace leveraging returns and utilize mortgage loans to purchase properties, investing in new builds instead of resale properties could potentially save you tens of thousands of dollars in taxes over the long run. If you are considering buying a resale property, do factor in the extra tax liabilities over the years (such as a 10 year period to avoid the brightline tax mentioned above) when evaluating the overall potential of a deal.

Future potential upside - While this measure does not seems to affect kiwi owner-occupiers directly (as there is no rent involved), many would-be home buyers would still take this an important consideration when buying their own home as there is a possibility that they may want to rent this property out for income in future as they progress on the asset ladder. In this case, they may opt for a New build in order to enjoy the interest deductibility benefits when the time comes around for them to be a landlord.

Property investment has continued to be the main tool used by kiwis to generate wealth. The interest deductibility rule will heavily influence the buying behavior of these property investors in New Zealand, particularly when it comes to choosing between new builds and resale properties. The impact of the extra tax bills can be substantial for a typical kiwi investor, as the rental income is added onto his main employment income, potentially pushing him into a much higher tax bracket. Losing interest deductibility can mean losing a large chunk of cash to taxes and reducing the overall attractiveness of the investment. While the impact is less substantial for a Singapore investor, since the rental income is likely to be the only source of income for tax purposes in New Zealand, the impact will grow exponentially when you build a portfolio of New Zealand properties. Moreover, the biggest impact will likely still come from the future potential upside for your property due to the change in buying/investing demand in the New build sector Vs the Reale market due to this change in interest deductibility.

As such, all of these are starting to push kiwi homeowners and investors alike, to put their monies into New builds to maximize the potential return on their investment, leading to extra pressure on the supply and demand dynamics of the new builds sector in New Zealand’s housing market. This then leads to stronger price growth and support that New build investors can ride along with.