A capital investment

Monday 4 December 2017

Home to a mix of professionals and students, Wellington Central is a vibrant place to live and work but like many main centres across New Zealand, it's facing a chronic shortage of housing stock and rentals, writes Stephen Dickens.

Supply is not keeping up with demand in the creative capital of New Zealand and as a consequence, opportunities for property investors can be hard to find. Stock levels across Wellington continue to remain low with less than nine weeks’ inventory available to the market.

There were 210 sales across the board for Wellington in August. This was up 5% from the month before (199 sales in July) but down a whopping 27% from August 2016, when 290 sales were recorded.

Grant Foggo, Director of property management company Comprende, says his company's occupancy rates are running at greater than 95%. “Wellington’s rental market is strong,” he says. “Studio apartments and one-bedroom units - including those attached to people’s homes - are in hot demand. If a property is priced correctly, it will rent.”

Over the last five years Foggo has seen renters' expectations change, along with a growth in the number of inner-city apartments.

Students rule the roost

“Students, for example, have more choice with a greater number of university hostels in the city centre,” he says. “They quickly become used to living in the heart of Wellington and once they leave the hostels, they want to stay in the CBD.

“We’ve found that parents are more hands-on when it comes to setting their children up in accommodation while studying – and will supplement rents of up to $20/$40 a week to secure somewhere good to live, bypassing the traditional draughty student homes in the suburbs.

“Homes in Brooklyn and Newtown, considered student housing a few years ago, are seen to be too far out of town, creating an opportunity for investors who are keen to upgrade these properties and attract an older professional market.”

Higher yields for investors in Wellington Central are predominantly in the student accommodation sector, according to Quinovic, Lambton Quay principal Alex Khera.

“Currently the city centre has good demand and hence the yield is good, say 6.5% to even 7% on some of the student accommodation,” he says. “And in the near term say next five years I see that demand being there as the new school of design is opening and will attract about 1500 students. Supply is low and demand is high in the city; there is a lot of demand for single bed apartments.”

Andrew Duncan, a real estate blogger based in Wellington, says there are opportunities for investors and developers to look at providing more affordable apartment options.

“Having lived in an apartment myself I can attest to the central city being a truly rewarding location for inner-city dwellers,” he says. “We need to move towards building more affordable owner-occupier suitable apartments, not just student accommodation. This will entice more empty-nesters to move into the city, which should, in turn, free up more affordable housing in the suburbs.

“No-one builds single level two to three-bedroom homes in the suburbs any more so it would help everyone if we could cater to this need in the city.”

Council initiatives

Wellington City Council is looking at redeveloping central area buildings for residential housing, and will initiate a simplified consenting process to help encourage developers and investors to look for new opportunities.

This is part of the council's plan to fix Wellington's housing issues. Other plans include solutions such as increasing building heights and allowing more site coverage, stepping up council-led development and incentivising affordable housing developments.

“Wellington City Council is planning to focus on refurbishing central city buildings into affordable apartments as part of their new 'affordable housing plan',” says Duncan. “Hopefully, this initiative helps.”

Another issue the council is grappling with is the quality of the housing stock in Wellington Central and Grant says the standard of housing in Wellington needs to be urgently addressed.

“Our housing issues are 100 years old, and we have decades of below-standard building to catch up on,” he says. “We think property owners and residents deserve better - putting too much pressure on solving these problems in such a short timeframe will only increase rents.”

Foggo wants to see the council’s consenting process keep pace with criteria in their WOF because currently there is a huge difference between what the council is approving and the standard they are seeking from landlords.

He says it’s important to understand what people are after and what is legally required of property owners. “Renters want to live in warm and dry homes, so insulate, upgrade and invest in your property,” he says. “Be ahead of the curve and legislative requirements and you can attract a higher rent.”

The median price for a one-bedroom apartment in Lambton is $220,000, with a rental of $350 and an 8.3% yield. In Te Aro – where supply is the greatest in Wellington Central - the median price is $313,000, with a rental income of $85, a 6.4% yield.

A two-bedroom apartment in Lambton can be let for an average of $545, a 6.9% yield, based on a median price of $412,000, In Te Aro, a two-bedroom apartment can be rented out for $590 based on a median price of $460,000, a yield of 6.7%.

In contrast, a two-bedroom house in Te Aro has a median price of $689,000 with a rental income of $550, a 4.2% yield. At the moment, apartments are returning higher yields for investors.

Check the fine print

Duncan has some advice for property investors looking for opportunities in Wellington Central: “Renters get nervous about building earthquake ratings just like buyers so it’s worth taking this into account.”

He says investors should always look for sun aspect and size where possible and recommends always checking the body corp history and long-term maintenance plan of any property before buying.

“Some investors focus on rent-by-room strategies and this can increase yields dramatically but it also means a lot more management work,” he says. “I would try and cater to empty-nesters who want to live in town if at all possible, as they are likely to take excellent care of your property. Allowing pets - if your body corp allows it - is also an effective way to secure long-term tenants and a higher rent as well.”

Foggo says while Wellington is known as the creative capital of the world, there is limited land and housing supply alongside growing demand.

“We have a number of professionals arriving each year from overseas to work and live here who are shocked by the standard of housing in New Zealand,” he says. “We encourage property owners to get ahead of the curve – upgrade or buy properties that meet market expectations.”

Duncan says the real estate market in Wellington has been particularly tight leading up to the election. “It will be interesting to see if we get a rush of new listings now that voting has finished.

“The New Zealand Herald stated on September 25 that Winston's 'wish list' could include moving public service jobs out of Wellington,” he says.

“Let's hope that doesn't happen.”

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