July 08 ~ Welcome to the mid winter edition of the MA zine.
By
As we all try to predict this market there are numerous voices
clamouring for our ears. Like every other human being I can’t
accurately predict what will happen, however I can tell you what I am
seeing and the action I am taking personally as a result.
I’ve talked recently about the fact that we are selling houses at less
than replacement cost so I won’t highlight that again but consider some
of the following:
Firstly let’s look at some of the broader issues.
weather. Even in a raging boom this affects property so to judge a
market right now is very difficult. So any negative sentiment needs to
be tempered by the mini winter cycle.
affects property prices so again it is not an ideal time to be judging
a market. So negative sentiment must be considered as part of the
election cycle.
“cost of borrowing” curve that the banks track is just about a straight
line down. In fact in the last week some analysts are saying only fix
your loan for 6 months because the rates are going to come down fast.
This is simply good news for you and I. Uninformed citizens may sit on
their high interest loans not realising that the cost of break fees is
usually far less than the additional interest.
But people like you and I will move into the lower interest cycle as
soon as possible and of course continue buying with the new cheaper
money. (That is those of us who aren’t enjoying 3% for life off shore
money).
so even when we are keeping everybody out through bad policy a few
people are sneaking in.
increasingly obvious that the sub prime fallout hasn’t had the long
term impact nationwide in the USA that was prophesied.
Even with some big players over there in trouble life goes on. In fact
many markets there are still going fine. We only hear the bad news
stories which doesn’t give us a balanced view of the market there
nationally. Many other nations have not been affected much at all and
international credit markets are not being destroyed as predicted.
on. The general contraction in our economy is obviously a concern but
because housing is not an optional luxury, some belt tightening does
not by any means constitute a bath for housing long term.
of individual information but together paint a truer picture of where
we are at I believe.
one of NZ’s major finance companies and talked to senior economists in
2 major banks.
They all stated that their pick for the next phase of property was 6 to
12 months maximum doom and gloom with a recovery starting anywhere from
January to June 2009.
All 3 felt the election year cycle was a hindrance to recovery and all dismissed the long term negativity of some commentators.
businesses rely on them being informed and making decisions based on
that information. If 3 “experts” all think a recovery is less than a
year away then we shouldn’t ignore their view, quite the reverse. Many
people today say controversial things to raise their profile, this
shouldn’t be confused with sound critical thinking and analysis of the
future. It’s a bit like writing into an “agony Aunt” column in the
Womans weekly and taking their advice over that of a marriage
counselor. One is trying to sell papers, the other is actually trying
to help.
came out and said they are forecasting a recovery in the economy in the
second half of this year! Why?? Because our underlying economy is
sound and they felt the Reserve Bank had partly caused this recession
unnecessarily. They also said that as the RBNZ realized their approach
had “failed”, they would bring rates back down and we would see an
early recovery.
no doc loans and one major trading bank, Westpac, has relaxed it’s
criteria to make it easier for people to get highly leveraged mortgages
especially for first homes.
You can be sure that more lenders will follow. The banks always fight
over market share and they are currently awash with cash, so expect to
see more relaxed lending coming your way soon.
seeing agents suddenly getting interest on some properties I have had
on the market. Not a sausage for weeks and weeks and now suddenly
their phones are ringing.
who is suddenly finding competition at property again for the first
time in ages.
selling off property you don’t need to and taking an overly pessimistic
view of the current market. There is opportunity in the market right
now, but there is a recovery round the corner and it’s going to be big,
so you need to own some property to benefit from it!!
Keeping up with IRD
confuses me as well. Bottom line however is that if you are planning
on building or developing or trading property in the future you have to
be even more concerned about structuring and getting thing right than
you had to before once the new laws bed in. So expect to be spending
more money on structuring specialists!!
Associated Persons Update – July 2008
From Matthew Gilligan, Gilligan Rowe & Associates Ltd
The long awaited next step in the IRD’s review of the Associated
Persons Provisions arrived last week with the tabling of the Taxation
(International Taxation, Life Insurance, and Remedial Matters) Bill.
As you may recall, in May 2007 the IRD released a discussion
document which proposed substantial changes to the Associated Persons
Provisions. Changes to the association rules in relation to the
taxation of land transactions was particularly in focus. These
proposals generated an unusually large amount of feedback and as a
result the draft legislation that was expected to be issued in November
2007 has not surfaced until now.
Despite what we understand to have been a large amount of
opposition to the breadth of the proposals, the Bill that has been
tabled is only a slightly watered down version of the proposed rules.
In releasing the Bill the IRD have again made it clear that they
consider that there are major weaknesses in the existing associated
person’s definitions for the taxation of land transactions and as a
result the Bill focuses heavily on widening the rules in relation to
association between:
Two companies.
Trusts and settlors and / or appointors.
Two Trusts.
Whilst the rules of association between Trusts and Companies are
proposed to be significantly strengthened perhaps of even greater
consequence is the inclusion of a tripartite test.
A tripartite test is something of a “daisy chaining” test which
sees two parties who are not directly associated under the rules being
deemed to be associated if they are associated to a common party in the
middle. In other words parties A and C might not be directly associated
under the rules (including the new extensive rules in relation to
Trusts and companies), but then end up being deemed to be associated
because both of them are associated to a common party being party B.
The tripartite test has long been used in the context of GST and
represents an extremely wide reaching test of association.
In summary, the key points to note at this time are:
For the time being the existing association rules apply.
Therefore if you have taken care to structure yourself so that new
acquisitions of property are not tainted, then new acquisitions will
continue to not be tainted until these new rules come into force.
The new rules are projected to come into force on 1 April 2009.
This means that properties acquired prior to this date will not be
tainted if association happens to exist after this date. Although care
should be taken if you are in the business of erecting buildings as the
timing of association under this test is different to dealers or
developers.
This is still not finalised legislation. The Bill is only at
first reading stage which means that it still has to go through a
select committee and house debate. Naturally we will be monitoring its
progress and update you as appropriate.
The use of a Trading Trust is common for property dealing /
development activities and it should be noted that this may still
continue to be the case even when these new rules come into force. This
is because Trusts have other benefits such as greater flexibility in
distributing income and capital as well as flat tax rates of 33%. None
of these benefits will be affected by the new rules.
In summary the rule change will affect all dealers in land,
property traders and builders who also intend to purchase investment
property after 1.4.09. A three Trust structure is still appropriate
once the rules come in, though you will be tainted from 1.4.09. The ten
year rule saying if you keep a tainted property for ten years it loses
its tainted status, is unchanged ( good news). Properties acquired
prior to 1.4.09 are not affected by this rule change and will not be
taxable if sold after that time, assuming you were correctly structured
prior to 1.4.09 and broke tainting at time of acquisition.
If you are planning to conduct both property dealing / development
activity and buying investment properties in the future then you will
need to seek further advice as the landscape is changing.
Nuts and Bolts
Raewyn spent countless hours putting her 20 years of analyst
programming in to documenting the systems she uses to manage our
property business. All of her own spreadsheets are included in the
pack. It is essential material for anybody wanting to get their
business operating smoothly from the start, or sorting out a current
portfolio.
One of the difficulties however has been learning to understand
commercial, as it runs on a different set of rules. For example
valuing commercial involves something called “cap rates”. Let me
explain.
capitalization), rate. Basically you look at the income the property
is generating and divide that by this “cap rate” thingy to “capitalize”
it. This gives you the property value.
quality of the building, the value of the land etc., but that is how
commercial works. The calculation is the NET rental income after fees
and bodycorp etc. divided by the cap rate.
It doesn’t matter what the property may have cost to build, it’s value is based on it’s income!
enjoying strong RENTAL growth, then this instantly equates to increased
CAPITAL growth, unlike residential.
commercial and stop “playing with residential”. The thing that always
scared me was the cost of getting into commercial and the “scary”
factor of not knowing how to read involved leases etc.
That’s why I jumped at the Storage Zone deal because I can test the
waters on a low level/low risk deal and get an introductory education
on commercial property with an investment managed by commercial experts.
conservative CG rates of 7% PLUS 7% rental growth with close to 100%
occupancy, no property management fees and all for under 50 grand!! We
now have the full valuation for Storage Zone online which answers every
question re yield, the area, the industry etc. Get it HERE
seriously pursue commercial as a primary strategy get a decent mentor.
There may be others but Olly Newland is the only one I know of in NZ
who is highly respected. I like Olly because he has been in the game a
hundred years so has seen the good, the bad and the ugly. He really
knows his stuff.
You can contact Olly HERE
Final Thoughts
ways. I often look back over the last 4 years, which has been my time
so far in property, and I look at what I have and haven’t done and how
I might change things going forward and what would I say differently
etc. I thought some of those thoughts may interest you.
What hasn’t changed for me:
risk, tax friendly, has low entry barriers and can be leveraged to
create amazing results in a short space of time.
strategy and not one I would change. We don’t have enough hindsight to
be out the back of this yet but you only have to look at OZ to see it
begin to be fulfilled in a similar economy.
I never have liked small towns although many have made a fortune out of
them. I’m happy sticking to cities.
What has changed??
conservative investors are often ignored by us “Young Guns”. It’s easy
to decide that their ideas are old fashioned and too slow for today.
However get into a slump and it’s amazing how current their advice can
become.
invest so that is what we teach, but in a downturn having paid down
some debt would be of great benefit.
ridiculously conservative and lacking in leverage by us “never sell”
types. However get into our current phase and I think their position
is very wise.
most of the high yielding properties I started with. High yield often
means multiple tenants in bad areas and I have now off loaded all of
those early purchasers just about. Give me good quality property and
good tenants any day. The supposed lower yield is more than offset by
lower maintenance and vacancy.
me and speak into my life. I became a mentor when I still needed one
and I made lots of mistakes I could have avoided. One of the reasons I
try to inspire and create confidence in people is that I find so much
negativity amongst commentators and “uninformed experts”, so it is
really important to surround myself with people who love and understand
that what I am doing is a god thing
