For decades, New Zealanders have had a love affair with the “darling “of all New Zealand investments, “residential property”, and why wouldn’t they. Residential property offered favourable taxing outcomes. The entry point to purchase was usually lower than commercial property. Tenants were plentiful, and there was always a demand if you needed to sell. Lending was obtainable at residential rates, and if you were good at DIY, you could add value to your investment.
In comparison, Commercial Property was perceived to be riskier. There were more challenging finance terms to meet with lending being subject to commercial interest rates with shorter loan terms. Plus, the real fear of the property being vacant for a long period of time when the lease ended or if the tenant was unable to meet their obligations under the lease.
Political Interference – Residential Investors Bear the Brunt
Over the past decade, residential property has become more and more a political focus, and residential investors have increasingly felt the financial impact of legislation changes that were created to dampen the appetite for residential investment.
The Brightline Test with its complicated rules for roll over relief, Interest deductibility restrictions, loss ringfencing rules and the removal of depreciation for buildings have all reshaped the residential investment landscape.
Some of these issues have been eased by the Coalition Government, with the Brightline Test being reduced from ten years, back to two and interest deductibility now phased back in over the last three years. However, with an election just around the corner in 2026, many residential investors are understandably apprehensive that these restrictions could be reintroduced.
Certainty with Commercial
In comparison, it could be said that Commercial Property, from a political and taxing, perspective is now becoming the more attractive of the two, given the certainty it provides in terms of the taxing rules applicable to it.
The political tampering in the property tax rules has been mainly limited to residential property, with the Brightline test, interest deductibility limitation and loss ringfencing never being applicable to commercial property.
In addition, there is a larger scope for depreciation with the ability to deprecate commercial fitout. Commercial property has a wider range of chattels and depreciable items that can be depreciated compared to residential properties.
Other benefits of commercial property investment include higher yields compared to residential property. Commercial leases are often “net” of costs, where residential investors have the burden of all expenses. Plus, longer lease terms with a quality tenant provide income stability and predictable cash flow.
The Bottom Line
For investors looking to diversify or grow their property portfolios, understanding these differences and selecting the type of investment that is best suited to your financial goals is essential. Both types of investment, residential or commercial have their own unique risks and benefits. Securing professional advice before your purchase your investment ensures your investment is not only commercially sound, and meets your requirements, but is also tax efficient.
At PKF Withers Tsang we work alongside investors to navigate these differences. Regardless of the challenges, property remains a viable investment option for the building of long-term wealth.