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What is a better investment? Commercial property vs residential property
Historically, New Zealand investors have favoured residential property as a property investment for retirement. However, as residential property investment has come under the microscope regarding political and tax settings, many investors are reassessing whether commercial property may be a better option in relation to certainty and long-term returns. Below is a balanced look at the pros and cons of owning commercial versus residential property.
Why should you invest in residential property?
- Price point
Residential properties are often cheaper than commercial assets, making investment in them more achievable for first‑time investors. - Large tenant pool
There is still a large number of people needing a rental property which has given investors comfort in lower vacancy rates and supported resale demand. - Easier lending
New Zealand banks are comfortable lending on residential property investments and often offer investors lower interest rates on residential investments as opposed to the higher commercial rates. - Ease of adding value
Investors have often been able to increase the value of a residential property through basic renovations and cost-effective improvements like painting, new flooring, lighting and blinds. - Favourable tax treatment
Historically residential property investors had benefited from been able to claim depreciation and set off the interest paid on their loans against the rental they received in order to reduce their tax liability. This was because the Government wanted to ensure that housing supply came from the private sector as opposed to the government having to do it. This made it attractive from a tax perspective.
Why shouldn’t I invest in residential property?
- Political and legislative intervention
Residential property has become increasingly targeted by politicians. Measures such as the bright‑line test, interest deductibility restrictions, ring‑fencing of losses and the removal of the ability to depreciate residential properties have severely affected investor returns due to the loss of tax efficiencies. - Political uncertainty
Although some restrictions like the length of the bright line test and the ability to offset interest payments against rental have been eased, the uncertainty of the upcoming 2026 election and the potential risk of a Labour/Green government has left many investors concerned that tighter rules could return. - Lower yields
Residential property generally produces lower yields compared to commercial property as the residential property investor has to absorb a large number of outgoings like rates, insurance, maintenance and other outgoings, which reduce their net returns. Commercial property owners can pass these on to tenants.
What are the advantages of investing in commercial property?
- Legislative certainty
The bright‑line test, interest deductibility limits and ring‑fencing of losses do not apply to commercial property so commercial property has remained largely untouched by political reform. - More depreciation opportunities
Owning commercial property allows greater depreciation options. - Higher yields
Commercial properties generally deliver higher yields than residential investments. - Outgoings covered by tenants
Almost all commercial leases are structured so that tenants cover most property expenses, reducing the ongoing cost burden for owners. - Longer lease terms
Commercial leases are often longer, and a quality tenant can provide stable income and predictable cash flow which means higher valuations.
What issues are there with commercial property?
- Higher entry costs
Commercial properties usually require a higher initial investment compared to residential property. - More challenging finance terms
Lending is subject to commercial interest rates and shorter loan terms, which can increase funding complexity. - Vacancy risk
If a tenant leaves or cannot meet lease obligations, commercial properties may remain vacant for longer periods than residential properties. - Perceived higher risk
Commercial property has traditionally been viewed as riskier due to tenant concentration in certain areas and the lease dependency of tenants been tied to economic performance as opposed to residential properties providing shelter which is a necessity of life. - Higher commission rates
Agents often charge large commissions when obtaining a tenant as opposed to the much cheaper cost of simply advertising availability for residential tenancies or engaging a property manager to do it.
So which one do I choose?
Both residential and commercial property investments come with obvious advantages and clear risks. Residential property offers easy accessibility and strong tenant demand but is increasingly exposed to political and legislative change especially if Labour and the Green party come back in to power and make legislative changes. Commercial property can provide higher yields, stronger cash‑flow certainty and more stable tax treatment but requires greater capital investment, will incur high commission rates and has a real risk of vacancy in the current economic climate.
For investors looking to grow or diversify their portfolios, choosing the right asset class should align with financial goals, risk appetite and long‑term strategy. Time in the market will often negate a lot of risk and with current market conditions there will be bargains in both asset classes. Seeking professional advice before purchasing however remains essential to ensure the investment is commercially sound and tax‑efficient.
Haigh Lyon can assist with advice when purchasing a property to make the process simpler. Contact Shaun McGivern on @email or 09 306 0623.