What Does the Budget Mean for the Property Industry ?

Last week the Treasurer released the NSW Budget for 2018-19. At the highest possible level this is another surplus budget but with a 30% drop in the surplus compared to the actual results for 2017-18. If you are in the property development sector there are potential tax stings in the tail.

The Government has acknowledged that there risks in the housing market. They have said in the Budget Papers that 2018-19 will see record completions and then it will taper off into a correction. (Urbanised is forecasting that we are already in the tapering off phase). The Treasury has also identified revenue risk in property tax collections (which can fluctuate by 35% year on year).

Again, there is major investment in infrastructure which is welcome news. It is always better to have strong capital outlays because of the higher economic multipliers associated with this activity.

For property, the Housing Acceleration Fund continues to invest  in “transformational” infrastructure in key growth corridors (predominantly in Western Sydney) and $187M in new projects. The Local Growth Infrastructure Scheme (LGIS) is being phased out and new special infrastructure contributions released in new areas across Sydney. LGIS is the fund used to bridge the gap between the Section 7.11 cap and the actual cost of delivering essential local infrastructure.

The Government has said it will invest $235M to create a strong and vibrant NSW through Special Infrastructure Contributions, Voluntary Planning Agreements and LIGS. The interesting thing is that property developers pay the Special Infrastructure Contribution and the Voluntary Planning Agreements not the Government. The only part we do know from the papers that they will be investing $123M from the LGIS during 2018-19. It costs at least $1.07BN to create a vibrant and liveable NSW in the Planning Cluster of which $951M is in recurrent expenditure.

Urbanised has tried to work out the net tax impost on the development industry.  There is not enough information available in these papers to do this quantitatively.  However,  all indications suggest that the net tax take will be substantially on the rise. Where you do your development will make a difference in the amount of tax you pay because the lion's share of the infrastructure spend (through the HAF $187M) goes to Western Sydney.  All developers will pay more tax, it is just if you are a developer in Western Sydney you will get more back than if you developed in the North or the East. The expanded special infrastructure contribution will introduce new taxes in urban renewal areas on top of the existing taxes and once again will be district based. And as the LGIS is phased out and local infrastructure contributions go uncapped this will also rise in most areas as IPART have a generous essential infrastructure list and cost benchmarks. It doesn't take a public accountant to work out that the industry has received a substantial slug in this Budget.

There is merit in the Restart NSW program and we see that as a way to fix the tax and infrastructure issue. The Government should take it a step further. All contributions paid by the property sector should be collected by the State Government and recycled through Restart NSW to forward fund capital works and raise external funds and amortise the repayments over future years. This will take the pressure to raise money to fund all this infrastructure upfront and make housing more affordable.

If they do this it should also be with greater transparency in reporting. These budget papers are particularly opaque. Without transparency why would a company invest billions in housing projects to make a 15% return that is subjected to new tax risks? 

It's going to be interesting to see where this all lands over the next 12 months.