Regional Review - Dunedin

It’s no surprise the education and research sector is Dunedin’s most significant employer, generating $351 million in GDP in 2012. More than 20,000 students are enrolled in the University of Otago, a significant percentage of the city’s total population, at 130,000.  Of those students, 70% come to study from outside the city, drawn by such specialist subjects on offer as the School of Medicine, or the promise of the legendary Scarfie lifestyle.  The structure of the university, with its buildings ringed by halls of residence, and interspersed with the villas and older houses which make up the rest of student living, create a true university quarter unique in New Zealand.

Conventional tenancy
For landlords, the structure of the student rentals is quite different from a conventional tenancy. The flats are rented on a per room basis, and signed up for a 12-month lease, from January 1 to December 31 each year.

Wayne Graham, managing director of LJ Hooker in Dunedin, says the process usually starts in July and August for the following year.  “The students know which flats are going to be vacated, and they start to organise their groups,” Graham says. “It’s all about location. Students generally do not want to be more than a 10- to 15-minute walk from their flats to lectures. The most desirable properties are those closest to the university buildings and heading north, which would rent for $140 to 150 per room per week.  Once you go past The Gardens and into North East Valley, rents tend to decrease and, correspondingly, the value of rentals.”

Property condition comes second to location in desirability, but Graham believes the student culture is slowly changing. ‘The days of the guys finding something really rough, because that’s how they want to live, are coming to an end,” he says. “If you don’t keep up the maintenance on your flat, you’ll be left with a vacancy at the start of the year. The best [flats] get picked up first. If you haven’t rented your flat out by the start of the university year, you’re going to need to drop your rent, and try to get a 10-month lease signed up.”

Michael Van Aart, a property and commercial lawyer based in Dunedin who works with investors, said the difference in setting rent in the university sector was that accommodation costs could be compared with such other student New Zealand cities as Victoria [Wellington], Christchurch or Auckland.

In his experience, the Botanical Gardens area is popular with second year students, and tends to be party central. “In the other direction, from the university back towards the city, to the top of London St, is more popular with the third and fourth year students, who are becoming aware that they are coming to the end of their time, and need to start thinking about jobs.”

The draw of the student market is the increased capital growth, comparative to the rest of the city, as rents rise each year, and the yields are attractive. A flat in good condition in the most popular streets would run at a seven to 7.5% gross return.

Self-contained

Another living arrangement is studio rooms, large houses divided into one-bedroom flats. They can be completely self-contained, including kitchenettes and bathrooms, with a communal lounge, or have been developed in a more ad hoc style with shared bathrooms and kitchen. They have the potential for high gross yields, up to 12%, but landlords’ costs vary, depending on the arrangements.

During ‘O’ week this year, (‘O’ for orientation) studio vacancies were still listed on Trade Me. A typical example was in North Dunedin, one of seven studios in a grand mansion. It was furnished, with its own bathroom, kitchen and laundry facilities, with the landlord paying for power, phone and broadband, and rented for $260 per week.

Wendy Bowman, president of Otago Property Investors’ Association, is a sales consultant for Harcourts in Dunedin, and an investor. Studio rooms are her investment of choice. “My complex has six bedrooms, three with en suites, and the other three have a bathroom each,” Bowman says. “Every unit has a kitchenette, and there is a communal kitchen if tenants want to use the stove. I pay for their power, phone, gas and broadband.”

She sees studio rooms as a way to tap into the student market, without the high maintenance downsides. “They appeal to foreign students, as they are provided with everything down to a toaster and kettle. I get the best tenants, usually dental or medical students, who are in Dunedin to seriously study.”
Elsewhere in Dunedin, the age of houses adds to maintenance bills. South Dunedin has traditionally been a rental property stronghold, but renters’ expectations are starting to catch up with the quality of housing stock there.

Sonia Thom, managing director at Otago Property Manager who is passionate about improving rental conditions, supports introducing a voluntary WOF for rental properties. She says this would give landlords a strong guideline to improve conditions for renters in South Dunedin where the houses are cheaper than elsewhere in the city, and have often been lived in by elderly people. They are mostly wooden, and built low to the ground, making them hard to insulate.

Character homes

She is seeing a big rise in renters’ expectations, as many face renting for longer than previous generations. Correspondingly there’s been a swing away from the original character homes of Dunedin, with their inherent maintenance and warmth issues, to the modern new builds in Mosgiel.

“At the moment, I just can’t keep up with demand,” Thom says. “As soon as I list a house to rent in Mosgiel, it just goes flying out the door.” Mosgiel is one of the few places in Dunedin where flat land can mean new housing is possible and affordable. It has a family friendly atmosphere, with an abundance of leisure space and sports fields, and is just a 15-minute drive back to the city centre.

The housing stock ranges from 1960s construction, to brand new executive homes, with four bedrooms, double garages and en suite bathrooms. Here, a three bedroom, single bathroom home would have a purchase price of around $320,000 with a rental expectation of $350 to $380 per week. Those high end houses still have affordable entry prices at around $380,000 to $420,000, and could rent for $450 to $500 a week. Thom is not just fielding enquiries from families for Mosgiel, but also groups of two couples who can live very affordably in modern houses there with plenty of room for privacy. 

Thom has a different strategy for student rentals. “I like to deal with them when they are working on their PhDs,” she says. “By then, they head for the hills, and rent nice houses on Maori Hill or Mornington. Usually, the groups include a couple, and maybe one or two singles.”

Michael Van Aart is passionate about Dunedin’s potential and future. His company has just restored a 130-year-old bank to be their office in Dunedin’s regenerating Warehouse Precinct. This area is south of the Octagon. Many heritage buildings here had been abandoned, as victims of the global financial crisis. “Ours had been empty for 15 years,” Van Aart says.

Dunedin City Council is helping the initiative, with funds available to help the restoration projects. Another building, the former chief post office, which takes up a whole block, is now headquarters for Silver Fern Farms.
 

Heritage buildings

“It’s improved the whole townscape,” Van Aart enthuses. “With the loss of so many heritage buildings in Christchurch, it makes it more important to restore these buildings here in Dunedin.”  Another significant boost for Dunedin is being named as New Zealand’s first Gigatown, a city-wide ultrafast broadband connectivity project, with business mentoring and start-up assistance.

“It’s bringing new people to the city,” Wendy Bowman says. “To take advantage of the low charges for business start-up, they must be based in Dunedin. We know of one small business relocating three families, and employing 15 people.”

Wayne Graham’s advice for those tempted by Dunedin is to learn the market. In understated Southern style, his advice is: “I believe that Dunedin property is currently undervalued. Buying a residential property here needs to be a 10- to 15-year strategy. If you get into a university flat, you’ve got a chance of capital gain, but the risk of high maintenance costs.

“If you buy elsewhere in the city, you can gradually increase your equity, ending up with a freehold house that hasn’t cost you a lot. If you are sensible and cautious and come in with an educated approach, you’ll probably do alright in Dunedin.”

Looking to invest in this unique market? Contact Lane and Clayton at Edinburgh Realty