Budget 2010: Axing of depreciation upsets developers

Sixty to 70 per cent of depreciation claimed is for non-residential property. Photo / Supplied

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John Dakin, head of one of the country's biggest real estate developers says the Budget's depreciation loss will damage his sector.

John Dakin, chief executive of the NZX-listed Goodman Property Trust's manager, said his sector calculated a 5-10 per cent impact on earnings.

"It's a disappointing outcome and it will affect our investors. There's no question it's negative if we can no longer claim depreciation."

Goodman, which claims millions in depreciation annually, owns real estate valued at $1.3 billion and has a market capitalisation of $815.7 million.

"It's pretty obvious to us that buildings do depreciate because we are spending millions every year just maintaining them," said Dakin. Goodman has three big new Auckland developments on worth about $40 million.

Cutting the top tax rate for portfolio investment entities from 30 per cent to28 per cent from October 1 would notbe enough of a gain to offset the depreciation regime loss, Dakin said.

Deductions will no longer be allowed for buildings with an estimated useful life of 50 years or more from April 1.

John Shewan - chairman of PricewaterhouseCoopers, a residential landlord and a member of the Tax Working Group which recommended the changes - said he could understand this sector would feel sore.

But the situation would have been worse if the Government had gone with other harsher options like a land tax or the risk-free rate of return system, he said.

Changes had already been factored into the operations and projections of NZX-listed real estate trusts and companies and analysts had mentioned the shift in their outlooks too.

A KPMG report for the Property Council earlier this year found non-residential landlords would pay most of an expected $1.3 billion netted by changes to the tax rules.

About 60 to 70 per cent of depreciation claimed in New Zealand is for non-residential property.

Buffy Gill, Goldman Sachs JBWere research analyst, said ending the regime would lower listed property trusts' distributable profits across the sector by 6 per cent.

"The most likely class of assets which could receive exemption is industrial, however we would not take this for granted at this stage. This overall impact could be greater if the review being undertaken by the Government concludes that some building fit-out should be treated as building structure. This could increase the impact on distributions to up to 8 per cent," she said yesterday.

"Current IRD guidelines suggest that all commercial property buildings (including industrial) have an estimated useful life of 50 years or over. This would imply that all buildings owned by the listed property trusts will be caught under the removal of depreciation on building shell, unless they are able to receive an exemption from the IRD," she said.

But the impacts would be modestly offset by the 30-28 per cent PIE rate reduction.

Chris Gudgeon, Property Council national president, said the changes were a blatant tax grab which could create a significant disincentive to reinvest in commercial buildings.

Connal Townsend, council chief executive, said the tax cuts were good news but commercial landlords were helping to fund these changes.

Bold changes would primarily be funded through a tax increase for property owners, the council said.