Category Archives: Capital Gains Tax

The new American Dream: rent your home from a hedge fund – Simon Black. 

About a month ago I joined the Board of Directors of a publicly-traded company that invests in US real estate.

The position brings a lot of insight into what’s happening in the US housing market. And from what I’m seeing, the transformation that’s taking place today is extraordinary.

Buying and renting out single-family homes has long been the mainstay investment of small, individual investors.

The big banks and hedge funds pretty much monopolize everything else. They own the stock market. They own the bond market. They own all the commercial real estate. They even own the farmland.

Single-family homes were one of the last bastions of investment freedom for the little guy.

But all that’s changing now.

Last week a huge merger was announced between Invitation Homes (owned by private equity giant Blackstone Group) and Starwood Waypoint Homes (owned by real estate giant Starwood Capital).

If the deal goes through, the combined entity would be the largest owner of single-family homes in the United States with a portfolio worth over $20 billion.

And this is only the latest merger in an ongoing trend.

Three years ago, for example, American Homes 4 Rent bought Beazer Pre-Owned Rental Homes, creating another enormous player. A few months later, Starwood Waypoint bought Colony American Homes.

And of course, Blackstone was one of the first institutional investors to start buying distressed homes, forking over around $10 billion on houses since the Great Financial Crisis.

At one point, Blackstone was reportedly spending $150 million a week on houses.

There are some medium-tier players coming into the market as well. A friend of mine runs a fund that owns about 2,000 rental homes in Texas, and he’s buying every property he can find.

I called him for his perspective on what’s happening in the housing market. Here’s what he told me:

There are lots of little guys assembling portfolios of 10-100 homes. And I like to buy these guys out because they have much higher funding costs than us.

And, eventually, as we get larger, medium-sized funds like mine will get bought out by Blackstone and the other mega players.

In short, medium-sized funds are buying up all the little guys. And mega-funds like Blackstone are buying up all the medium-sized funds.

This means there’s essentially an ‘arms race’ building among the world’s biggest funds to control the market, squeezing small, individual investors out of the housing market.

Then there’s the situation for renters.

US Census Bureau statistics show that, over the past decade, the number of rental households has been rising steadily while the number of homeowner households has been falling.

In other words, the American Dream of owning your own home has been fading.

It’s easy to understand why:

US consumer debt is at an all-time high of over $1 trillion (mostly credit card debt), with an additional $1.3 trillion in federal student loans.

Americans… especially younger people, are far too heavily indebted to be able to save any money for a down payment.

Moreover, despite all the hoopla about the low unemployment rate in the US, wages are totally stagnant.

(Plus bear in mind that most of the jobs created have been for waiters and bartenders!)

So the average guy isn’t making any more money, or able to save anything… all while home prices soar to record levels as major funds gobble up the supply.

This means that the new reality in America, especially for young people, is that if you’re lucky enough to not be living in your parents’ basement, you’ll be relegated to renting your house from Blackstone.

But… there is some interesting opportunity in all of this.

With a supply of more than 17 million rental homes in the United States, there’s a LONG way to go for this trend to play out. We’re still in the early stages of the mega-fund consolidation.

And some savvy little guys are figuring out how to cash in on this trend.

Think about it: mega-funds don’t have the capacity to buy up homes one at a time. They just don’t have the time.

They need to buy homes in big volume… hundreds, even thousands at a time. And they’re willing to pay a premium if they can buy in bulk.

That’s why medium-sized funds like the one my friend runs in Texas are basically assembling large portfolios with the sole purpose of flipping everything to the mega-funds.

But smaller investors can play this game too.

Medium-sized funds need to buy in bulk as well. They don’t have the time or resources to buy up homes one at a time.

This creates a unique, niche opportunity for individual investors to assemble small portfolios, say, 10 properties, with the sole purpose of flipping to medium-sized funds.

We know some people already doing this. They essentially put several single-family homes under contract simultaneously (with only a small deposit on each home).

But, BEFORE they close, they make arrangements to flip the entire package of homes to a medium-sized fund through a double-escrow closing.

This structure guarantees a neat profit to the small investor while requiring limited up-front capital.

And like most great investment opportunities, it’s been very lucrative so far because very few people are doing it.

Why a capital gains tax should capture the family home – Mark Lister. 

A capital gains tax is back on the agenda by the sound of it, if we see a change of government. This should worry property owners more than share investors, as they probably have more to lose.

Shares are misunderstood in New Zealand. Many people think the market is somewhat of a lottery, and the only way to do well is by being lucky enough to pick a few winners that go up in value.

The reality is quite different. Over the past 20 years’ NZ shares have delivered a return of 8.5 per cent per annum. However, most of that return is from boring old dividends rather than capital gains, 71 per cent, to be precise.

That’s important, because it means a capital gains tax would only impact the other bit. The vast bulk of the return already attracts income tax at the investors’ marginal rate. In short, share investors are already paying tax on more than two thirds of their return, which is probably a lot more than many property investors.

It’s harder to quantify how the returns for property are split between rental income and capital gain, but I suspect they are skewed much more toward the latter.

The gross dividend yield for the NZX 50 index is 5.5 per cent, whereas the average rental yield across New Zealand is just 3.8 per cent. In Auckland, it’s even lower at only 2.8 per cent, according to QV.

Contrary to popular belief, it seems shares are often the asset class of choice for investors looking for steady income. Property arguably holds more appeal to those after a quick capital gain and looking to make use of easy leverage.

Most share investors I come across are investing for income, rather than chasing big capital gains. They want a passive earnings stream that will grow steadily and keep pace with the cost of living.

Fortuitously, the local market is quite useful in this regard. It is dominated by predictable businesses that generate strong cash flows and pay a good portion of these out as dividends.

These companies have already paid tax on their profits so rather than be taxed a second time, investors get something called an imputation credit. This means the cash dividend they receive is, for the most part, tax paid. It’s actually a very good system, and we are one of the few countries to do things this way.

A capital gains tax might have some merit. It would certainly force people to focus more on the cash flows an asset generates, which theoretically should mean things are valued more appropriately.

It would need to be implemented sensibly though. That means making it free from exclusions (including the family home), otherwise such loopholes leave it open to exploitation and accounting trickery.

Labour leader Jacinda Arden, however, has ruled out including the family home in any capital gains tax policy.

It should also go hand-in hand with a corresponding decrease in our income tax rates. That’s the whole point right? To tilt things away from the wage and income earners, and shift more of the burden onto those focussing solely on capital gains?

– Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. 

NZ Herald 

New Zealand Capital Gains Lunacy. Ryman Healthcare: $362.9m profit, Zero Tax? – Anne Gibson. 

Ryman Healthcare this morning released its annual report to the NZX, showing it made $362.9 million annual pre-tax profit – but have not paid not a cent in tax.

Notes to the accounts showed New Zealand’s largest listed retirement business, with a market capitalisation of $4.1b, incurred a tiny $6.2m income tax expense.

But even that was deferred, meaning it didn’t need to be paid.

Under the item ‘current tax expense’, there appeared a bar, indicating no tax was paid for the March 31, 2017 year. The company’s statement of cash flows also showed no tax payments.

Yet Ryman’s applicable tax rate is the corporate 28 per cent, the accounts also showed. The accounts filed showed that if Ryman paid tax at the applicable 28 per cent, it would have incurred a $101,637,000 tax bill (last year $86,613,000).

But that was whittled down to zero.

Deborah Russell, Labour’s candidate for New Lynn and a former Massey University senior lecturer in taxation at the accounting school, said Ryman had done nothing wrong because as the notes to the accounts showed, its non-taxable income principally arose from fair value movement in investment property.

“So that’s capital gains. They’re not [so much] in the business of providing retirement accommodation as much as in the business of earning capital gains. Those are not taxed. It’s all perfectly legal and in fact, New Zealand tax law allows this at the moment. The issue is whether we should be taxing capital gains.

Wage earners might find Ryman’s tax situation unpalatable, she indicated.

“For wage and salary earners, all our income gets taxed but capital gains are earned over a time and they don’t get taxed. It’s all perfectly legal but what’s legal is not necessarily fair.”

Gordon MacLeod, Ryman chief executive, appeared in a Herald video at the latest results briefing, talking about the tax issue.

Asked why only an approximately $6m tax sum appeared in the accounts, MacLeod said: “It’s really simple, because we actually invested in so much development, so we have a really strong development pipeline.”

Jeremy Simpson, a senior equities analyst Forsyth Barr who specialises in property, said today the zero tax bill didn’t surprise him, it was known when the annual result was announced a few weeks ago and he also emphasised nothing was wrong.

“Because they’re such a big developer – one of the biggest in New Zealand – there’s a deduction associated with the development. If the Government decided to tax capital gains… but there’s no capital gains tax in New Zealand,” Simpson said.

Ryman was no different to fellow listed retirement businesses Metlifecare or Summerset in deferring its tax, he said, adding that New Zealand would be much the poorer if such big businesses were not developing new aged-care facilities.

The state was certainly not keeping pace with providing facilities for the rapidly ageing population, he said.

Asked of his opinion about Ryman paying no tax, Simpson said: “I’m absolutely OK with the tax situation. They’re been listed since 1999 and that’s the way the model works.

“No one is building new aged care facilities in New Zealand except the retirement village operators and we’re going to have a chronic shortage. If you start reducing the profitability…they’re using the profits from the retirement villages to subsidise building the care. If we didn’t have the retirement village operators building the care beds, we would be in a dire situation in New Zealand with regard to having enough care beds.”

Simpson emphasised that Ryman shareholders were liable to pay tax on the dividends they received.

“We have a situation in New Zealand where you only pay tax once. While Ryman doesn’t pay any tax, the shareholders do pay tax on the dividends so there’s still a tax take. Ryman also pays tax a lot of GST on their development.

“So there’s a bit more to it than the headline ‘they pay no tax’,” Simpson said.

A Ryman spokesman said: “Since listing, Ryman has paid 50 per cent of its underlying profit as dividends to shareholders, and those dividends are subject to resident withholding tax at 33 per cent with no imputation credits.

“In New Zealand, either the company pays tax or its shareholders do – but not at both levels.

“Ryman is currently not paying tax at a company level because of its very significant and growing investment in critical healthcare infrastructure for the elderly. In the last 10 years Ryman has built over 2000 care beds and 1000 assisted living units, providing great care options for thousands of New Zealanders,” the Ryman spokesman said.

“Half of Ryman’s build is centred around care provision and accordingly tax depreciation deductions are greater than what is allowed for accounting, because of the wear and tear in care centres that occurs each day. In addition, Ryman is able to deduct interest costs from bank debt in full – as can all other New Zealand companies. Ryman only incurs bank debt to fund development activities.

“Finally, a significant proportion of Ryman’s reported profits occur from fair value investment property gains, which are not subject to tax. This is because the gain is either unrealised from a paper valuation movement only, or relates to cash flows from resident capital sums – which are not taxable because we have a repayment obligation when the resident vacates their unit.

“On a broader level, Ryman pays significant amounts of GST which cannot be claimed back on the cost of developing independent living units for residents, and also creates an increasing PAYE take by creating additional jobs at the new villages we build every year – in total tens of millions per annum,” the Ryman spokesman said.

NZ Herald