Dunedin: Great Southern land

Sam the odd-job man is trying to hitch a ride with a wholesome-looking family that is moving to Dunedin – the cheeky devil.

All right, he’s not – it’s just a fictional scenario in Work Otago’s current advertising campaign. “If you want to move to Dunedin,” they say, “just call us”.

The campaign must be working. The latest Census revealed that, in the five years to 2006, Dunedin’s population had risen 3% to 122,900. And Statistics NZ predicts that in the next 20 years it will rise 6% more. All this bodes well for investors looking to spread their reach further – perhaps as far as the Deep South.

Dunedin is located on the South Island’s southeast coast, nestled in tree-clad hills at the head of a harbour. At 3350 square kilometres, the city of Dunedin is geographically the largest in New Zealand. Its geographic boundaries extend to Lake Waihola in the south, Waikouaiti in the north, Middlemarch in the west and Taiaroa Head on Otago Peninsula in the east. Dunedin is the centre of and gateway to the Otago region.

Dunedin real estate has not had the same explosive gains as seen in other centres, most notably Queenstown to the west and Nelson to the north. But the gains that have been seen have been strong and steady. The latest figures from Quotable Value put the increase in Dunedin property values over the three months ending April at 7.6%, 3% lower than the national average but still solid, and an increase on the 7.3% rise recorded in the previous quarter. That pushed the average house price in Dunedin to $262,337, more than $100,000 less than the national average. However, sales volume in the city declined with 201 houses sold during April, down on the 311 sold in March. In April 2006, 218 houses sold in Dunedin with a median sale price of $234,000.

Overall, news of the ongoing strength of the property market was a headache for Reserve Bank governor Alan Bollard who had hoped to cool it by hiking official interest rates in March and April. But though the resulting rise in mortgage interest rates failed to stop the property market march, that may change, QV spokesman Blue Hancock said when releasing the latest figures. He believed that the higher interest rates, combined with the start of winter, would soon start to have an impact.

The gentle gradient of gains made in Dunedin means that, for many investors, the residential market in particular is still more accessible than in most other centres.
The median house price of $262,337 is most closely matched by the $261,544 recorded in Rotorua in the central North Island. It is way below the $346,446 in Nelson, and a country mile from the average of $575,522 in Queenstown, but still higher than the $177,202 in nearby Invercargill.

Those entering the market are likely to find reasonable quality homes in a community vibrant enough to ensure they don’t remain empty. And rent returns are sufficient to make it worth doing a few sums. Dunedin rather fancies itself as the creative capital of the south. In addition to its famous music scene, it is home to the annual cutting-edge ID fashion event, and last November hosted the country’s first Designer’s Saturday, “celebrating New Zealand’s innovative design and design culture”. Events like that have the potential to attract to the city just the kind of smart, creative people who often have to shift for work – that is, they are often renters.

And that’s not forgetting the city’s 23,000 students – most enrolled at the highly-regarded Otago University – the university’s phalanx of teaching and supporting staff, or the thousands working in resident industries, from those that generate the country’s power generators to those that manufacture everything from chocolate and whiteware to fertiliser and cement.

The population is never stagnant. When the NZ Property Magazine last looked, Work Otago – a joint initiative between Dunedin City Council and the Otago Daily Times – had nearly 500 jobs listed, and close to 300 of those were new just that week. It’s a job market supported by an active arm of the Chamber of Commerce and the council’s economic development unit, which has clear plans to help continue the city’s economic success.

Smart investors, though, may want to steer clear of the many old wooden villas in this picturesque historic city. There’s no getting around it – it gets mighty chilly down south. In June and July average highs can be under 10 degrees, and even in December the mean recorded temperature is likely to be a whisker under 20 degrees, though it can get much warmer. All that means is that investors have to be canny. There are plenty of homes – both historic and more modern – that have been built to meet the climate, making for happy tenants who want to stay put.

In its residential market summary for autumn 2007, independent valuers association ValGroup said that from mid-2002, there had been high demand for houses in Dunedin.
“The residential market outperformed most expectations and consistently set new levels for the city.” However, the median house price had fluctuated considerably and the market remained a little uncertain. “But the industry still remains positive when compared nationally. It is expected that well maintained or modernised properties – especially those in more desirable locations – will lead the way for future growth.”

In the commercial and industrial arenas, there had been considerable activity but yields were down, ValGroup said. “It will be interesting to see whether expected rental increases are obtained as reviews become due.” In the office market, however, the pressure was on as the conversion of former offices into residential accommodation put space at a premium. “Vacancy rates for buildings through Dunedin city are at the lowest levels they have been for years. This market demand has led to an upward alignment in rental levels which appears to be continuing.”

It is the residential market, however, that Lane Sievwright knows best and he learned about it close to home. His father, Barclay Sievwright, is also an agent – both are based at city firm Edinburgh Realty. And both have invested in Dunedin property – Barclay for more than two decades, his son for the past six years. The area dearest to Lane Sievwright’s heart is that around the university – he’s managed properties there, he owns property there and, as a former police officer, he once patrolled its streets. It is somewhat of a sentimental attachment – Sievwright spent four years at the university earning his Bachelor of Commerce. But it is also a practical one. Getting to know the area so well showed him that there was high demand for student accommodation. High demand equates to increased rents and, with that, capital gain, he says.

“Also, Barclay had already been investing in the area for some time so it seemed like a logical progression. For us, knowing the market you invest in is the most important thing.” As both agent and investor he had watched the market gains made in the 2000-2005 period, and then the subsequent slowdown. “But investors are still realising gains each year by making improvements to the properties, then increasing the rents,” he says. “Students are demanding better quality and are prepared to pay slightly higher rents to get it. There are still more students than beds available in the central campus area, thus good demand.”

Overall, he says his clients are looking for the same things most investors want – quality properties, with the potential for improvement and, perhaps, potential for development.
That applies all over the city but for Lane Sievwright, investors have the university to thank for the security of their investments. “The University of Otago, its medical, dental and physical education schools, Otago Polytechnic and Dunedin Teachers’ College are all around the same location,” he says. “Because of that, I believe Dunedin – and those areas in particular – offers a safe long-term prospect for investors.”

The Otago Property Investors’ Association holds bi-monthly meetings and addresses a wide range of topics “which will suit all property investors”. It also has a freshly established new and young investors’ group, allowing those members to learn about property investing in a casual environment while gaining confidence and knowledge.

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Dunedin serves out-of-town investors well
For someone who moved into property investing because he “didn’t want a real job”, Simon Shreeve works like a madman. The energetic entrepreneur has three businesses – all based around property or inspiring others to do well in business. And it was investing in the Dunedin property market that helped him get there.

Originally from the United Kingdom, Shreeve was backpacking in Australia when he decided he did not want to return to the dreary weather and the demands of corporate life.
In 1994 he headed over to New Zealand, liked it and decided to stay. He and wife Anthea settled in Auckland and, keen to establish cash flow without getting back into the rat race, began investing in property. It wasn’t long before they began looking elsewhere for investment opportunities and in 2001 they cast their eyes south.

“Our strategy was always to generate cash flow by purchasing high yielding properties and there weren’t many opportunities to do that in Auckland,” says the genial Shreeve in a still strong English accent. “We didn’t want to go to the small towns. You can get better cash flow there but there can be compromises with capital gain and you are vulnerable to shifts in the community.” So Dunedin it was. “We looked into it very thoroughly and saw that there was a place that could offer us the cash flow we needed. There was a lot to like about it. It is a university city and, as well as that, has some incredible industries going ahead in areas like biotech and fashion. It’s very entrepreneurial.”

Another thing that attracted the Shreeves was the defined nature of the city. Bordered by the harbour on one side and the town belt on the other, there was limited potential for urban sprawl, thus ensuring properties would hold their value. The couple has a small number of commercial properties but focused mainly on residential, particularly multi-tenanted sites like apartment buildings or large homes that could be rented on a room-by-room basis. The more properties they accumulated, the more difficult managing from Auckland became. So the couple looked around for a property manager. When they couldn’t find one to suit their needs, they decided to set up their own Dunedin-based property management business. Platinum Properties has thrived and will soon spread into Queenstown, Wanaka and Central Otago.

And with their other businesses also growing, Anthea and Simon Shreeve have decided to shed some of their portfolio. “We are always updating our strategy and decided that it was a good time to consolidate,” Simon Shreeve says, “though we will be holding onto a fair bit as well. Dunedin has been good to us and we are optimistic that it will continue to be a good place for our investments”. Shreeve’s faith in Dunedin is based on what prompted him to invest there in the first place – research. “One of the things we look for is societal trends and one of those is an increase in need for education – more people are getting educated and they are staying in education for longer. Dunedin has a lot to offer in that area.”

Those students heading south for their educations, however, are a different breed to the stereotypical hairy bunch content to bed down in any old dive. “They’ve gone soft,” Shreeve laughs. “They want nice, warm homes and with student loans, they have got the money to pay for them. We have noticed a big shift in the standard of accommodation the market demands and anybody investing in Dunedin these days would do well to consider that.”

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It's not what you buy; it’s where you buy
Rental figures from Tenancy Services to April 2007 show what every property investor knows – the better the area, the better the return. In Dunedin, the Maori Hill/University/Roslyn areas are considered desirable by renters. There, the average rent for a four-bedroom house is $349 and a tenant in a three-bedroom house will pay an average of $289, while $219 is considered the norm for a two-bedroom flat. In Dunedin, the nature of some of the properties – and of the students who may occupy them – means that five-bedroom properties are more common than in some other areas. At that size, a landlord would charge an average of $495 for an apartment and $490 for a house.

In slightly less desirable Mornington/Caversham/Green Island, the average rent for a four-bedroom house is $287; a tenant in a three-bedroom house will pay an average of $257, and $191 is considered the norm for a two-bedroom flat. An average of $353 is the rent charged for a five-bedroom house. In outlying areas and nearby towns like Mosgiel, Outram, Middlemarch, Port Chalmers and Aramoana, rental returns are not much lower and there are likely more bargains for investors looking to buy. Properties in those areas, however, might not offer the same potential for capital gain as there is in Dunedin city proper.

Who wants to live where?
For investors considering dipping their toes into the southern market, Dunedin City Council has done some of the research for them. The council’s 2006 Dunedin Housing Choice study showed some key trends in preferred dwellings with respondents citing sun as the most important attribute influencing housing choice among all age groups, with dwelling condition and dwelling type next. So it’s not rocket science, but the survey does get a little more specific.It also revealed that a large section was of little importance, especially to those aged 65 and over.

“Given predictions of a significant increase in this age group, together with their greater demand for more varied dwelling types, this indicates a future demand for infill or medium density housing,” the council’s planning department said. “This complements any possible strategies for concentrating urban development within existing areas and minimising sprawl, creating a more sustainable approach to accommodating growth.”
They’re not, however, intimating that the good people of Dunedin want tiny boxes, shoehorned in side by side. The survey report suggests that, to increase the acceptability of medium density housing, development designs should mimic certain features of stand-alone housing such as privacy, open space, solar orientation and garaging.

Some key points in the findings were:
· There was an overwhelming preference for stand-alone housing
· Three-bedroom dwellings were the most popular future choice (45%) with two-bedroom (24%) and four-bedroom (22%) dwellings also being popular. Three- and four-bedroom dwellings were most popular for 25-44 year olds, three-bedroom dwellings for 45-64 year olds, and two-bedroom dwellings for those aged 65 and over
· Future dwelling size preferences indicate a shortage of two- and three-bedroom homes if current trends in building activity continue.