An Auckland developer says he may be forced to sell 85 city apartments due to tax changes axing interest cost deductibility on loans for existing or built residential property investments.
Mark Todd, co-founder of Ockham Residential, said the changes announced by Finance Minister Grant Robertson and Revenue Minister David Parker did not recognise that the build to rent sector already existed.
"It is odd that [Housing Minister] Megan Woods supports the BTR sector to provide more new, warm, secure tenure properties but Parker is happy to kill off providers already delivering on Government policy," Todd complained.
"I may be forced to sell 85 rental places worth $60 million to $80m if interest which is the main cost of owning these buildings becomes non-deductible," said Todd referring to apartments the company owns in Sandringham, Grey Lynn, Ellerslie and Mt Albert.
But Parker and Woods reiterated how changes did not affect new builds.
"The Government has recently confirmed that new builds are exempt from the new interest deductibility rules to encourage new supply including new purpose-built rentals," their joint statement in response to Todd said.
"We know this sector has potential to meet gaps in our rental market and further advice will be taken to Cabinet in the next few weeks on whether there should be an extension beyond the 20 year period for some or all of this sector," Woods and Parker said in response.
The Herald has reported how Woods is seeking policy advice about encouraging the build to rent market.
Todd said the Government wanted to eliminate mortgage interest deductions on loans for existing purpose-built rental properties which would hugely disadvantage Ockham's existing build to rent city properties.
Teachers and emergency service workers were among long-term tenants in those buildings but may have to find new homes if Ockham sells, he said.
The sales could become financially necessary when tax breaks are lost, he said.
On one project alone, Ockham could lose a $500,000 mortgage interest tax deduction, he said. He cited a $22m development 50 per cent geared via an $11m loan, incurring a $500,000 annually interest rate charge.
If that project was new, the entire $500,000 could be claimed back, he said.
But if it was existing - as with the four Auckland blocks - no interest rate deductibility could be claimed, he complained. Ockham has loans on projects it developed but stands to lose the tax advantages it holds there.
Mortgage interest deductions will still be allowed on new builds to create more housing.
Todd said reforms announced by Robertson and Parker delivered a strong message that Ockham shouldn't consider retaining existing rental properties. It might well not be in its financial interests to do so, Todd said.
Ockham's projects feature in Auckland Council's urban design manual and it has deep iwi links. In July, the Ockham-Marutūāhu Partnership opened Kōkihi, the second apartment block in a 541-unit scheme.
But Todd said: "Removing interest deductibility for property investors is going to accidentally smother the build to rent sector which Labour says it supports.
"The basic policy is good but there should be exemptions for build to rent, the same as rest homes because they're not competing against homebuyers. If this doesn't happen, existing tenants will lose their homes because the owners will have to sell."
The Government said it was working on a policy to support build to rent to provide modern, warm secure tenure homes for the 40 per cent of Kiwis who rent, he said.
"The most important thing they can do is fix this bill that does not recognise the sector exists."
Projects by Ockham, which sponsors New Zealand's annual book awards, were in July described by Woods as "exemplary".
The new Auckland apartment building Kōkihi was delivered ahead of schedule and an example of how to do great development, she said.
"Exemplary developments" from the partnership were "instantly recognisable with their brick facades and motifs and the next two will be equally impressive", she said of the under-construction Aroha at 1817 Great North Rd, Avondale and Manaaki at 9 Jordan Ave, Onehunga.
Todd said the four Ockham buildings with build to rent apartments are The Ockham on Sandringham Rd, The Isaac Buildings in Grey Lynn, Wamaka Buildings on Wilkinson Rd at Ellerslie and Modal in Mt Albert.
In March, the Government announced new measures to try to bring down property prices including tax deduction changes.
In September, it released draft legislation on the policy proposing to limit the deductibility of interest costs on residential property investments.
Robertson said the interest limitation proposals aimed to stem investor demand for existing residential properties. They don't affect the main family home or new builds.
"Earlier this year we extended the bright-line test from five years to 10 to help reduce the incentive to invest in housing over other types of assets," Robertson said in September.
"Tax is neither the cause nor the solution to the housing problem, but it does have an influence, and this is part of the Government's overall response."
Parker said the proposals, including the way the new build exemption would be applied, had been subject to public consultation. The proposals would limit the availability of deductions for interest expenses incurred by landlords from October 1.
The legislation came into effect from then but is phased in during four years. The legislation is due to be passed early next year in time to be reflected in end of year tax returns.
Shane Brealey of NZ Living, which also develops build to rent places, said it wouldn't be right for corporates to keep the tax break but smaller investors not to.
He understood why the Government was eliminating those tax breaks to try to encourage more first-time buyers to be able to afford homes and discourage landlord investors from buying.