KEY POINTS:
The $4 billion listed property sector is on the rise after a tax law change which has made real estate trusts bloom.
Tax changes will give the same treatment to returns from listed investment property entities as directly held investments, and give a windfall to NZX investors.
Property owners and managers are expecting a bonanza as investors rush to pour money into the sector.
The number of listed real estate entities could rise quickly, and companies which have big real estate holdings could float new entities so their investors get the tax benefits.
On July 7, final submissions are due on the Taxation (Annual Rates, Savings Investment and Miscellaneous Provisions) Bill which proposes that investors in the listed real estate sector keep more dividends rather than paying additional tax.
From October 1, property trusts can opt into the new regime, which might help drag landlords out of direct investment into buying units or shares in NZX-listed real estate entities.
The drawcard is that after-tax returns to investors will be considerably greater under the proposed regime. Listed property entities will get a new tax-favourable status as portfolio investment entities (PIEs), giving their investors an immediate advantage.
Taxpayers now have to pay additional tax on dividends from property trusts. But under the proposed changes, the investors' tax rate will be capped and could be the same as the property entity's tax rate. Most entities have tax credits and pay well under 33 per cent tax.
"The new rules treat investment through PIEs in a similar way as direct investment by individuals, thereby removing long-standing disadvantages to saving through intermediaries such as managed funds," said Parliament's finance and expenditure committee in a report.
The overhaul has already sparked a reaction.
Trusts are being re-rated by leading analysts and unit prices are rising in a sector which had been shrinking so quickly this decade that was in danger of almost vanishing.
ING Property Trust, trading at $1.21 in mid-December, is now at $1.35. Kiwi Income Property Trust, at $1.42 mid-December, is now $1.56.
The main trusts are all trading at a premium to net tangible assets - an unusual situation in a sector where entities distribute earnings as quarterly dividends and usually trade at big discounts to NTA.
National Property Trust is the only exception. It is still trading at a significant discount to NTA; analysts attribute this to last year's deficit and the devaluation of its portfolio, and a management change.
In recent years, foreign investors have bought many entities and folded them into existing operations, halving the number of listed entities.
Mark Lister of ABN Amro Craigs said companies with significant property holdings, such as Auckland International Airport, SkyCity and The Warehouse, might now consider listing separate real estate entities because the tax changes made this an attractive option.
Goldman Sachs JBWere is prompting investors to buy real estate stock.
"Domestic investors, particularly income investors, should increase their property weighting," said analyst Shamubeel Eaqub.
He recommended investors re-weight into Kiwi Income Property Trust and AMP NZ Office Trust, out of Macquarie Goodman Property Trust and ING Property Trust.
Andy Evans, managing director of ING Property Trust Management which manages ING Property Trust, said the changes were revolutionary.
"The PIE regime is probably one of the most fundamental changes in property taxation I have seen since my time in the industry - probably even more significant for investors than the removal of stamp duty."
He attributed heavy buying and high volumes traded in the listed property landscape to "professionals getting in early".
Gavin Parker, chief financial officer of Kiwi Property Management which manages Kiwi Income Property Trust, said property stocks had been re-rated and the changes were designed to promote savings and remove some of the tax inequities that exist between direct and indirect property investment.
"We therefore expect greater domestic investor interest in managed property," he said.
"Investors in rental apartments and houses may now consider investing in office, industrial and retail assets via managed funds, with tax being less of an influence in the decision-making process."
Kiwi would distribute information on the new PIE regime to its unit-holders in a March newsletter.
John Dakin, chief executive officer of Macquarie Goodman New Zealand which manages the Macquarie Goodman Property Trust, praised the Property Council for its submissions on the law change. He said the council was successful in highlighting inequities in tax treatment of property trusts.
"The bill and PIE regime mean investors will be able to make decisions based on the characteristics of the investment rather than any advantage or disadvantage created by tax treatment," Dakin said.
Chapman Tripp said understanding the implications of the tax change would provide an intellectual alternative to "fiendishly" difficult Sudoku puzzles, but concluded the changes were good.
