Choosing between property and shares in New Zealand can be a daunting task for investors. Both offer potential for long-term growth and income, but they also come with distinct advantages and disadvantages. This article provides a comprehensive comparison to help Kiwis make informed decisions aligned with their financial goals and risk tolerance.
Understanding the Basics: Property Investment in New Zealand
Property investment in New Zealand typically involves purchasing residential, commercial, or industrial real estate with the aim of generating income (rental yield) and capital appreciation (increase in property value). New Zealand’s property market has historically been seen as a relatively stable investment, although it’s not without its fluctuations. One of the key attractions of property is its tangible nature; you own a physical asset.
Types of Property Investments: Within the property market, you have several options. Residential property includes houses, apartments, and townhouses. Commercial properties encompass office buildings, retail spaces, and warehouses. Industrial properties consist of factories and storage facilities. Each type offers different risk-return profiles and management requirements. For example, commercial properties often have longer lease terms and higher rental yields, but tenant vacancies can be more impactful than in residential rentals.
Financing Property: Most property purchases in New Zealand are financed through mortgages. Banks typically require a deposit, which can range from 5% to 20% or even higher, depending on the lender and the property type. Loan-to-value ratio (LVR) restrictions imposed by the Reserve Bank of New Zealand can influence the deposit amount needed. Interest rates, both fixed and floating, play a crucial role in the overall cost of the mortgage. Keep an eye on the Official Cash Rate (OCR), as changes to it will likely influence mortgage rates. Also, factor in other costs associated with owning a property like rates, insurances and maintenance.
Rental Income and Expenses: Rental income is a primary source of return for property investors. However, it’s essential to subtract expenses such as mortgage interest, property taxes (rates), insurance, property management fees (if applicable), repairs, and maintenance. Tax laws also impact the profitability of rental properties, particularly regarding deductibility of mortgage interest. Speak to a financial advisor or tax consultant to understand the impact of tax laws on your potential investment.
Capital Gains: Capital gains represent the profit made when selling a property for a higher price than the original purchase price. However, in New Zealand, the Bright-line test may apply. Per the Inland Revenue Department, the Bright-line test sets a period during which any profit from the sale of a residential property will be taxable as income. The length of the bright-line period depends on when the property was acquired.
Understanding the Basics: Share Investment in New Zealand
Share investment involves purchasing ownership stakes in publicly listed companies on the New Zealand Stock Exchange (NZX) or international stock exchanges. Shares represent a portion of a company’s assets and earnings, and their value can fluctuate based on factors such as company performance, economic conditions, and investor sentiment. Share investing allows you to participate in the growth and profitability of businesses without the responsibilities of direct ownership.
Types of Shares: Shares come in different forms, including ordinary shares and preference shares. Ordinary shares grant voting rights in company decisions, while preference shares typically offer a fixed dividend payment. Large-cap shares represent well-established companies with stable earnings, while small-cap shares denote smaller, potentially higher-growth companies with greater volatility. You can also invest in Exchange Traded Funds (ETFs) or managed funds which provide diversification across a basket of shares.
Brokerage Accounts and Platforms: To invest in shares, you’ll need to open a brokerage account with a registered financial provider. Several online platforms like Sharesies, Hatch, and InvestNow offer user-friendly interfaces and low transaction fees, making share investing accessible to beginners. Banks like ASB Securities and BNZ Invest also provide brokerage services, often with more comprehensive research and advisory support. Compare the fees, features, and investment options offered by different platforms before making a decision. Research and decide on the right platform for you. Some platforms charge subscription fees or account keeping fees as well as brokerage per trade.
Dividends and Capital Gains: Share investors can earn returns through dividends and capital gains. Dividends are a portion of a company’s profits distributed to shareholders, usually paid quarterly or annually. Capital gains occur when the price of shares increases, allowing investors to sell them for a profit. Dividend income is typically taxed as income, while capital gains are generally not taxed in New Zealand, unless you are considered a trader or dealer of shares. Many companies offer dividend reinvestment plans (DRPs) where dividends are used to purchase additional shares in the company.
Diversification and Risk Management: Diversification is crucial in share investing to mitigate risk. Spreading your investments across different companies, industries, and geographic regions can reduce the impact of any single investment performing poorly. Consider investing in index funds or ETFs that track the performance of the overall market, such as the NZX 50. Start small, invest regularly and be prepared to hold investments for the long term to ride out market fluctuations. Learn about risk management strategies like stop-loss orders, which automatically sell shares if they fall below a certain price to limit potential losses.
Property vs. Shares: A Head-to-Head Comparison for Kiwi Investors
Let’s delve into a direct comparison of property and shares, considering key factors relevant to New Zealand investors.
Capital Requirements: Property investment generally requires a significantly larger initial capital outlay due to the need for a deposit. Shares, on the other hand, can be started with smaller amounts, especially through fractional investing offered by some platforms. For instance, you might need a $100,000 deposit for a $500,000 property, while you could start investing in shares with as little as $5 or $50 through a brokerage account.
Liquidity: Shares are generally more liquid than property. You can easily buy and sell shares on the stock exchange, allowing quick access to your funds. Selling a property can take weeks or months, involving real estate agents, legal processes, and potential delays. The illiquidity of property can be a disadvantage if you need to access your capital quickly.
Income Generation: Rental properties generate income through rental payments, providing a steady cash flow. While some shares pay dividends, the dividend yield may be lower than the rental yield from property. However, rental income is subject to expenses like repairs and maintenance, reducing the net income. A well-managed investment property that has secured a good rental income is likely to provide better ongoing cashflow.
Capital Growth Potential: Both property and shares offer the potential for capital growth. Historically, New Zealand property has seen strong capital appreciation, particularly in Auckland and other major cities. However, past performance does not guarantee future results, and property values can fluctuate. Shares can also experience significant capital growth, especially in high-growth companies. Diversification can help mitigate the risk associated with individual share price fluctuations.
Risk: Property investment carries risks such as tenant vacancies, property damage, interest rate fluctuations, and market downturns. Shares are subject to market volatility, company-specific risks, and economic factors. Diversification and a long-term investment horizon can help manage share market risk. Property investment can mitigate risk also with insurance, but is not immune to general market movements.
Management: Property investment requires active management, including finding and managing tenants, handling repairs, and dealing with legal and regulatory issues. Property management companies can handle these tasks for a fee, but this reduces the net rental income. Shares, particularly those held in index funds or ETFs, require less active management. You may still want to review your portfolio periodically and make adjustments based on your financial goals and risk tolerance.
Tax Implications: New Zealand’s tax laws treat property and shares differently. Rental income is taxed as income, and mortgage interest deductibility rules can impact the profitability of rental properties. Capital gains on property may be subject to the Bright-line test. Dividend income is taxed as income, but capital gains on shares are generally not taxed, unless you are considered a trader or dealer. Consult with a tax advisor to understand the specific tax implications of each investment type.
Detailed Costs Involved: Preparing Your Investment Budget
Understanding the full spectrum of costs associated with property and share investing is crucial for accurate budgeting and financial planning. Let’s break down these costs in detail.
Property Investment Costs:
Deposit: This is typically the largest upfront cost, ranging from 5% to 20% of the property value. LVR restrictions may influence the minimum deposit required.
Legal Fees: Solicitor fees for conveyancing (the legal transfer of property ownership) typically range from $1,500 to $3,000. This depends on the complexity and location, and should include GST. It’s best to get a fixed fee quote before engaging.
Valuation Fees: Banks require a property valuation to assess the value of the property before approving a mortgage. Valuation fees typically range from $500 to $1,000. It’s best to check with your bank or lender to know the exact fee you will pay.
Building Inspection: A pre-purchase building inspection can identify potential issues with the property. These usually cost between $400 and $800, potentially more depending on the size and location of the building.
LIM Report: A Land Information Memorandum (LIM) report provides information about the property from the local council, including zoning, rates, and any known issues. LIM reports usually cost between $300 and $500.
Mortgage Application Fees: Some lenders charge application fees for mortgages, which can range from $0 to several hundred dollars.
Mortgage Repayments: Ongoing costs include principal and interest repayments on the mortgage. Interest rates can be fixed or floating.
Property Rates: Annual property taxes (rates) are levied by the local council and are a must for any property owner. These are usually between $2,000 to $5,000, but vary based on location and property value.
Insurance: Building insurance and landlord insurance are essential to protect against risks such as fire, natural disasters, and tenant damage. These are dependent on the type of insurance required, and can cost up to thousands of dollars.
Property Management Fees: If you use a property management company, they typically charge a percentage of the rental income, usually between 7% and 10%.
Repairs and Maintenance: Budgeting for unexpected repairs and ongoing maintenance is crucial. Experts recommend setting aside 1% of the property value annually for maintenance.
Vacancy Costs: Account for potential periods when the property is vacant and not generating rental income.
Share Investment Costs:
Brokerage Fees: These are charged by brokers for buying and selling shares. Online platforms often offer low brokerage fees, ranging from $0 to $10 per trade. ASB Securities would charge $15 per trade for up to $1,000 (as of October 2024), and therefore knowing your purchase amounts will help you choose the right platform.
Account Fees: Some brokerage accounts charge monthly or annual fees, while others are free. Sharesies, for example, offers a tiered subscription model.
Fund Management Fees: If you invest in managed funds or ETFs, you’ll pay management fees, which are expressed as a percentage of the fund’s assets under management. These can range from 0.1% to 2% or more per year. Some funds also have hidden fees that need to be considered.
Foreign Exchange Fees: If you invest in international shares, you’ll incur foreign exchange fees when converting NZD to other currencies. These can range from 0.5% to 1% per transaction.
Tax: Dividend income is subject to income tax at your marginal tax rate. However, capital gains are generally not taxed in New Zealand. Some platforms charge fees for tax reporting at the end of the year.
Case Studies: Real-World Examples for Kiwi Investors
Let’s examine a few hypothetical case studies to illustrate the potential outcomes of investing in property and shares in New Zealand.
Case Study 1: Sarah, the Property Investor
Sarah, a 35-year-old professional in Auckland, decides to invest in a rental property. She purchases a two-bedroom apartment for $600,000 with a 20% deposit ($120,000) and a mortgage of $480,000 at a fixed interest rate of 5% per annum. The apartment generates a rental income of $600 per week ($31,200 per year). Her annual expenses include mortgage interest ($24,000), property rates ($3,000), insurance ($1,500), property management fees ($3,120), and repairs ($1,000), totalling $32,620. Sarah’s net rental income is -$1,420. However, after 10 years, the property value increases to $900,000. She sells the property, paying $20,000 in agent fees. Under the current bright-line test, since she owned the property for more than 10 years, no tax is required. Sarah’s capital gain, after deducting selling costs, is $280,000.
Key Takeaways: While the initial cash flow was negative, Sarah achieved significant capital appreciation over the long term. Property investment can be a good option for long-term capital growth, but it requires careful management and a willingness to withstand periods of negative cash flow.
Case Study 2: David, the Share Investor
David, a 40-year-old IT professional in Wellington, invests $120,000 (equivalent to Sarah’s property deposit) in a diversified portfolio of New Zealand and international shares through an online brokerage platform. He allocates 50% to NZX-listed companies, 30% to US stocks, and 20% to global ETFs. Over 10 years, his portfolio generates an average annual return of 8%, including dividends. His yearly brokerage fees are negligible due to the low investment amounts, at around $50 a year due to a monthly subscription. After 10 years, his investment grows to approximately $259,030. As capital gains aren’t taxed, and he only faces income tax on his dividends at his personal tax rate.
Key Takeaways: David achieved substantial capital growth through share investing without the active management required for property. Share investment can be a good option for those seeking diversified, passive income. Shares can also offer diversification without the need to spend hundreds of thousands of dollars and deal with tenants or unexpected maintenance.
Case Study 3: Maria, Combined Investments
Maria, a 45-year-old business owner in Christchurch, splits her investment by placing 60% towards property, and 40% towards shares. The returns she generates from the rental property help further contribute towards the shares investment. Over time she aims to balance the amount and risk in her investment portfolio by slowly increasing the value of her low-risk investments. As her personal income increases, she puts the additional funds towards low-risk ETF investments and government bonds. This helps offset the higher risk of owning a residential property investment. A key focus for Maria is to regularly review the allocation, and move the ratios dependent on her long-term investment goals.
Key Takeaways: Having a diversified portfolio allows Maria to reduce the overall risk of her investments. With regular maintenance and contributions to her portfolio, Maria feels more aligned with her family goals. While there is no guarantee of return, Maria understands the core concepts of a properly managed investment portfolio.
Practical Tips for Kiwi Investors
Here are some actionable tips to help you navigate the property and share investment landscape in New Zealand:
Set Clear Financial Goals: Define your investment goals, such as retirement savings, purchasing a home, or generating passive income. Choose investments that align with your time horizon, risk tolerance, and financial objectives.
Do Your Research: Thoroughly research any property or company you’re considering investing in. Analyze market trends, financial statements, and industry reports. Use resources like the QV (Quotable Value) website for property data and the NZX website for company information. Read the latest news and advice from financial commentators.
Seek Professional Advice: Consult with a financial advisor, mortgage broker, accountant, or property expert to get personalized advice based on your circumstances. A good advisor can provide valuable insights and help you avoid costly mistakes.
Start Small and Diversify: Begin with smaller investments and gradually increase your exposure as you gain experience. Diversify your portfolio across different asset classes, industries, and geographic regions to reduce risk.
Consider Long-Term Investing: Both property and share investment are generally best suited for long-term investors. Avoid making impulsive decisions based on short-term market fluctuations. Be prepared to hold your investments for several years or even decades to maximize returns. Time is your friend, not your enemy.
Stay Informed: Keep up-to-date with market trends, economic news, and regulatory changes that could impact your investments. Subscribe to financial newsletters, attend investment seminars, and follow reputable financial news sources.
Review and Adjust: Regularly review your investment portfolio and make adjustments as needed based on your financial goals, risk tolerance, and market conditions. Rebalance your portfolio periodically to maintain your desired asset allocation.
FAQ Section
What are the main advantages of investing in property in New Zealand?
Property investment can offer potential for long-term capital appreciation, rental income, and the tangible benefit of owning a physical asset. It can also provide a hedge against inflation.
What are the main disadvantages of investing in property in New Zealand?
Property investment requires a significant upfront capital outlay, carries risks such as tenant vacancies and property damage, and requires active management. Property is also less liquid and thus takes weeks or months to sell.
What are the main advantages of investing in shares in New Zealand?
Share investment can be started with smaller amounts, offers greater liquidity, and provides the opportunity to diversify across different companies and industries. Due to the diversified nature of the stock market, it is less intensive to manage a share investment.
What are the main disadvantages of investing in shares in New Zealand?
Share prices can be volatile and subject to market fluctuations and specific company risks. Dividends are generally taxed as income. The volatility and range of options may also seem overwhelming to those new to investing.
How can I minimize the risks of investing in property?
Conduct thorough due diligence before purchasing a property, obtain adequate insurance coverage, and budget for repairs and maintenance. Consider using a property management company to handle tenant management.
How can I minimize the risks of investing in shares?
Diversify your portfolio across different companies, industries, and geographic regions. Invest for the long term and avoid making impulsive decisions based on short-term market fluctuations. The easiest way to start minimizing risk with shares is to invest in ETFs which often comprise of a variety of shares.
Is it better to invest in property or shares in New Zealand?
The best investment depends on your individual financial goals, risk tolerance, and circumstances. Property can be a good option for long-term capital growth and rental income, while shares offer greater liquidity and diversification. Talk to a financial advisor for personalized advice.
What is the Bright-line test in New Zealand?
The Bright-line test is a rule that taxes profits from the sale of residential property as income if the property is sold within a specified period from the date of purchase. The length of the bright-line period depends on when the property was acquired. Check the Inland Revenue Department website for the most up-to-date information.
How do I choose a brokerage platform for investing in shares?
Compare the fees, features, investment options, and user interface offered by different platforms. Consider your trading frequency and investment style to select a platform that meets your needs. Choose a registered New Zealand based broker.
References
Inland Revenue Department (IRD) – New Zealand Tax Laws
Reserve Bank of New Zealand (RBNZ) – Financial Stability Reports
New Zealand Stock Exchange (NZX) – Market Information
Quotable Value (QV) – Property Data
Ready to take control of your financial future? Whether you’re drawn to the stability of property or the agility of shares, understanding your options is the first step. Don’t navigate the complexities of the New Zealand investment landscape alone. Schedule a consultation with a qualified financial advisor today to create a personalized investment strategy tailored to your unique goals and risk tolerance. Invest wisely, invest confidently, and build the financial future you deserve here in Aotearoa!
