Wellington, May 20 NZPA - The Government was both condemned and praised for finally tackling the issue of tax-driven property investment as industry participants warned that rents will rise and property prices will fall.

A surprise in the budget was that a move to stop depreciation on buildings extended to commercial buildings with a life of 50 years or more as well as rented houses. It has not stopped investors offsetting losses from investment properties against personal income, but will make them include profits as well.

Michael Shaw, a tax partner at Deloitte, said some owners of industrial properties would feel hard done by as properties like meat works did depreciate in value. The Government argued that it should no longer allow depreciation on buildings because they appreciate in value.

Mr Shaw said it was hard to tell if rents would rise as investors tried to make up for the extra tax they had to pay. But he said big landlords included councils and charities, which were not taxed. Also, the Government was a large landlord.

"If a landlord could put up a rent, wouldn't they put it up now?" he said.

Real estate firm Bayleys said watch out for rising rents in coming months.

"I believe that property investors will not be happy to, or indeed in many cases be able to, absorb the changes in depreciation expenses claims on their properties," said John Freeman from Bayleys Valuations Ltd.

The Real Estate Institute of New Zealand (Reinz) said it did not expect the budget to have a significant long term effect on house prices or rents.

Reinz supported the budget moves to make the taxation system fairer and close loopholes.

"What people can afford for their accommodation determines the market value of rental properties," said Reinz president Peter McDonald.

Deloitte's Mr Shaw said the more interesting question was would property prices fall as investors off-loaded rental properties.

There could be more properties put on the market that have to be sold quickly.

"That may reduce prices."

Listed property trusts were also affected by the removal of depreciation on buildings but many trusts were portfolio investment entities (PIEs), and would enjoy a drop in the PIE tax rate from 30 percent to 28 percent on October 1, Mr Shaw said. The corporate tax rate also drops from 30 percent to 28 percent on April 1 next year.

AMP Capital Investors head of investment strategy, Jason Wong, also expected the price of property to fall, but said it was difficult to estimate how much.

New developments may not go ahead, he said.

Home builder Milestone Homes said it was grateful for clarity provided by the budget but said residential property was one of the few sectors driving the economy.

"If the government is serious about boosting productivity and prosperity, curtailing property investment is not the answer."

The Government said people with one investment property would better off in the budget, which also reduced income tax. But people with two, three or four properties would not be better off.

Mr Shaw did not expect changes to loss attributing companies to work and said ultimately the Government may end up stopping losses from property investments being applied to personal income.