Commercial

Raid on commercial investors depreciation of assets detrimental

The commercial property sector is deeply concerned about Labour and National policies to remove depreciation for commercial and industrial buildings.

Friday, September 08th 2023

“Depreciation of commercial and industrial properties is critical for the future health of New Zealand’s built environment,” Leonie Freeman, Property Council chief executive says.

She says the proposed policies to remove depreciation are a raid on long-term maintenance funds for New Zealand’s buildings, running the risk of rundown or even derelict buildings across the country.

“If depreciation is removed, property owners tell us they will have to reprioritise expenditure, which when added to rising costs such as insurance, mortgage and property rate rises, will likely cause rent rises for businesses” Freeman says.

“Both parties have been inconsistent on depreciation of commercial buildings.”

Previous indications from the Government were that depreciation was introduced as a permanent measure, and the property sector planned future developments based on this premise.

The National Party has also announced that depreciation will be extended to residential properties, such as build-to-rent, if elected. “These inconsistencies create uncertainty in a market that is already facing significant challenges.”

Freeman says there are multiple challenges facing the property sector – from interest rates and inflation to a reduced construction pipeline which affects jobs for Kiwis. Removing access to depreciation will place another challenge on our road to sustainability by making it much harder to maintain and upgrade buildings, she says.

The proposed policies will come with a price tag of half a billion dollars for the property sector. However, Freeman says that both Labour and National have failed to see the consequential impacts.

“Removing depreciation will have flow on effects of aging buildings, a reduction of new projects in the development pipeline, and increased costs to businesses who occupy buildings. Without commercial and industrial buildings having access to depreciation, there is significant risk to forward investment. Put simply, less development in the pipeline.”

Property Council members have given examples where they have paid more than half of a building’s value for seismic strengthening upgrades. “The last thing we want to see is deprivation of investment in important seismic strengthening upgrades” says Freeman.

The economic evidence from Inland Revenue indicates commercial and industrial buildings do depreciate in value.

“Our members are concerned this will cause the commercial property sector to lose its competitive edge from an investor standpoint against other developed countries, in which property owners are able to depreciate their buildings.”

She says it is disappointing both Labour and National have gone for a quick cash injection, rather than thinking through the consequences of removing depreciation. Access to depreciation allows for investment in the long-term maintenance and safety of our buildings. For New Zealand to have a sustainable and resilient built environment, it is critical that depreciation remains.

Comments

On Thursday, September 07th 2023 11:17 pm Krish Krishna said:

As a former Corporate banker and Mortgage Adviser of 40 yrs, i have seen thousands of property accounts but i don't recall seeing investor keeping the depreciation deduction (long term maintenance fund) in a separate funding account. Generally there is a case of applying for top up loans to do that. But I do see that there will be collateral damages in lessee costs at renewal times.

On Sunday, September 10th 2023 3:16 am Ralph Ede said:

Leonie Freeman and the Property Council must have sensed that when depreciation was removed from residential buildings that commercial would also be targeted. After all, residential buildings wear out to. New home owners are often shocked to find that construction materials such as cladding and windows are only required to last for 15 years and roofs only 20-25 years.

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