Auckland central: Money in metropolis

Thursday 8 April 2010

After a tumultuous few years, the Auckland central business district apartment market is finally regaining lost ground. Vicki Holder explores the concrete jungle for investment potential

By Vicki Holder

After two decades of massive growth in the Auckland CBD population, the boom in residential apartments has changed the character of the city immeasurably.

And, after a two-year rollercoaster ride, the market is looking healthier. Best of all, the opportunities for investors in 2010 look distinctly exciting.

Strong immigration levels in 2009 remained well above forecasts and there's little to suggest this influx will abate in 2010.

Due to increasing employment opportunities and existing ethnic-based social networks, this will ensure the CBD market will have a steady supply of new buyers and tenants, says Mike Bayley, managing director of Bayleys Real Estate.

The key factor that drove residential development in the CBD was immigration, particularly from Asia. Together with students wanting to live centrally, the population of CBD residents has increased to around 18,000 today, according to Auckland City Council data, compared to around 1,400 in 1991.

People have flocked to the vibrant culture, the cafes, bars and restaurants. They come to live in the CBD for the proximity to work (78,000 people now work in the city) and tertiary institutes - without transport hassles or high petrol costs.

After investment took a dive in 2000 when interest rates rose, property took off again and building in the CBD reached a peak mid 2007. Several months later in 2008, it came to a standstill.

Glenda Whitehead of Quotable Value points out the CBD apartment market is strongly influenced by interest rates, exchange rates, bank lending policy, tax outcomes and immigration.

"It's just a young market in New Zealand. The CBD has gone up and down more than the general market. A lot comes down to market perception."

People started turning off city apartments when the extent of the leaky building crisis was revealed. Then came the collapse of the finance markets, the Blue Chip fiasco and finally the global recession.

Banks tightened their lending policies, particularly for smaller apartments, which made it difficult for investors to borrow. Many existing apartment owners tried to sell. With the high number of mortgagee sales, some lost up to 40% of their purchase price.

"At the beginning of 2009, lots of people jumped in as there was a perception we were at the bottom of the market," says Whitehead.

In 2009, there were only 120 consents issued. Almost no buildings have gone ahead since then.

The market now
Seagar's registered valuer Stephen MacKisack says it's been a very flat market in the CBD.

"Since half way through 2009, we've seen a slight upward trend. But there are still relatively low volumes of sales. It's quite a fragile upturn as it's still being countered by the mortgagee and distressed sales coming through."

Freehold apartment values declined from late 2007 to early 2008, adds Quotable Value's Sulanja Kottege.

"Some were selling for half the original prices. Towards the end of 2009 and in the last couple of months, we're seeing mid $140,000 to $150,000 prices for typical two-bedroom, 36 square metre investment apartments returning 10-11% gross yields."

Affordable, small freehold apartments account for the majority of apartments in Auckland's CBD.

While values are holding, rentals have also stabilised. Crockers' four-year comparison released in January 2009, showed consistent rental increases in the central city area from 7% growth in one bedrooms; 9% growth in the two and three-bedroom market and a hefty 32% growth in the four-bedroom market.

Values flat
A major cloud on the horizon for values, says MacKisack, is the number of Blue Chip apartments about to hit the market. "They've been through the legal process to try to sort it. Now their time is up and they have to sell. This will keep the market pretty flat in the short term."

When there are several distressed sales in the same block it influences values, says Whitehead.

"If you're selling, you're going to have to lower your price."

She adds that once an apartment is diagnosed as leaky, sales in that building tend to cease.

Then there are the leasehold issues.

Valuers made mistakes, says Whitehead. "There have been a lot of lessons learnt."

Ground rents for a lot of apartments on leasehold land owned by the Ngati Whatua in the Quay Park area around Auckland's docks come up for review next year after a rent-free period. As leasehold complexes get closer to ground rent reviews, values decline. Some apartments have sold for a fifth of their initial purchase price. This will continue to be an issue.

There's a focus on remedial work in CBD developments right now. A large number have remedial work of some kind due to a wide range of factors, says MacKisack.

With all its issues, Whitehead points out, there are many opportunities in the CBD.

"We don't have a crystal ball, but wherever there are losers there are winners. It depends on your level of access to information." And information is key to CBD investment.

Getting hold of the Body Corporate, AGM, EGM or sub-committee meeting minutes that have taken place is essential, says MacKisack. "Any bit of information you can get to gain an overview of what's going on. Go in with your eyes open."

Investors should also be aware of a two-tiered market for some apartments. Agents continue to mount overseas campaigns for complexes with much-inflated prices compared to what they are selling for in New Zealand.

Low supply, strong demand = capital gains
Now the supply side has dried up, people who have already bought apartments, says Kottege, may feel safe about values as there are no new blocks coming up next door.

Bayleys residential manager Rachel Dovey explains people often start with a two-bedroom apartment, like it, and just keep moving up. "Where there's not a lot of construction, nobody's moving because there's not a better proposition. That's having a real affect on volume of sales."

Martin Dunn of City Sales says he doesn't expect the supply side to come back for at least five years "until everyone gets over the recession and finance companies are forgiven by mum and dad investors - and when they've started to accrue capital again".

Compared to the cost of building new, existing buildings offer particularly good value.

"We're selling apartments at around half replacement cost."

Other positives
Dunn believes with the pendulum of favour swinging away from leasehold, it's well-worth considering today.

"People are in pain and virtually giving away apartments on leasehold land."

The Blue Chip scenario, he says, "is another opportunity for investors to wade in and start picking up stock. People will be buying way under half the replacement cost".

He also cites Beaumont Quarter by Victoria Park, where ground rents rose for some apartments rose up to 400% in 2008.

Last year, there was hardly any turnover at Beaumont Quarter, but the dynamics are about to change as the development is freeholded.

Because of the negative sentiment, buyers will be able to buy this freehold land for much less than it's worth.

Dovey says it's definitely good buying now. "We only need to see more people in the CBD. Immigration will put pressure on prices. It will be gradual until there's more competition. I think we need some more really good apartments to be built. Sales are quite low in the CBD, but there are good rental returns."

The good thing about the CBD market, she says, is the fact most apartments have a history now. "They're tried and true. People get to know the buildings, the type of tenant they attract, the amenities, their reputations. That's huge for investors."

One investor who has continued to buy right through the downturn is Paul Reid. He thinks the market looks pretty healthy right now and says shoebox apartments have gone up by about 20% since last year, but still represent bargain basement buying.

"You can still get a 9% net return if you look hard and do your sums. I believe it's set for reasonable capital growth in the not too distant future."

Reid's latest purchase was a 30 square metre, one-bedroom apartment with carpark at Citta on the corner of Symonds St and Khyber Pass, which he bought for $142,000 off TradeMe. He has already bought and sold property at Citta so he's confident it's a good buy. Once it's furnished, he says, he'll get $310 a week, generating a 9% net return.

Niche markets
There are several niches within the apartment market in which to specialise. Edward Meili buys hotel apartments, taking them off the hotel to rent "for fantastic returns".

"My strategy is to buy and do up. Often the vendors are overseas and have a hands-off investment approach. They don't know what to do with it. I bought most of mine in the good old days when 13 to 17% yields weren't uncommon. That's harder to do now. But I like to think capital gains are on the horizon because there's a shortage coming up. Immigration plays a key role."

Meili says there's still good potential for buying run-down hotel apartments that are 10 to 15 years old and haven't been renovated.

"It doesn't take a lot to make them flash."

He recently bought a city hotel apartment (he won't reveal which) that was earning $550 per month. Just by tidying it up and adding an LCD television and a new sofa, he's now getting $440 a week.

Then there are the older character apartments with stable rents that have shown good capital gains between 2008 and 2010.

"They're not as affected as the purpose-built market," says MacKisack. "Parts of that market have done well. But buyers may have to fork out for maintenance in the future. The character market is quite varied."

The short-term stay and serviced apartment market is a difficult one, notes MacKisack. "They're quite sensitive to change. I know an owner who was getting a good rental and it was effectively halved when the hotel made a reduced rate offer."

He says to be wary, as there are other issues associated with them like GST and payments that make them a difficult product to understand.

The future
Looking towards the future, rising interest rates will no doubt have an impact, as many people compare the returns they can get from property and if it doesn't stack up, they'll put their money in the bank.

The Rugby World Cup is not thought to have much of an impact on the CBD market.

"It might influence the market temporarily in a speculative way but it's not a fundamental reason for prices to skyrocket. If it did, it would only speed up a natural recovery," Reid says.

Only time will tell. But there are certainly many good reasons to buy right now.

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