Apartment failures mean investing care needed

Reports that the Flo Apartments development in Avondale, which was touted as being an affordable purchasing option, had been shelved came first.

This was followed quickly by an announcement from Colliers International that 35 multi-residential developments in Auckland have been cancelled over the last year.

A tightening up of bank lending and rising construction costs were cited as the reasons the developments didn’t come to fruition – despite Auckland’s chronic housing supply shortage.

Concerns about the safety of purchasing and investing in off-the-plan apartments have been growing ever since.

Prime Minister John Key, who has long been an advocate of apartments, told media there is always a risk with developments.

But consenting for property development was strong in Auckland and he thinks apartments are “a credible alternative” for people to invest in, he said.

Apartment Specialists director Andrew Murray agreed that there is always going to be a certain percentage of apartment developments that fail.

He said this is usually because of funding issues or because the market simply doesn’t want what the developer is offering.

Bank financing for developers has tightened up recently due to the effects of a glut of apartments in the Melbourne market trickling down to New Zealand banks’ lending policies, Murray said.

“But I’m not convinced that would have caused the failure of all 35 developments. It wouldn’t have had an impact 12 months ago, although it may have in the last couple of months and it might down the track a bit.”

It isn’t just bank finance for apartment developers that is tightening up, it is bank lending on apartments generally and that has an impact on people investing in apartments, he said.

“If there’s any sort of maintenance issue with an apartment - and I don’t mean leaky building issues, just normal maintenance issues – buyers are finding it more difficult to get bank finance.”

Anyone wanting to buy an off-the-plan apartment should make sure they do their homework properly, Murray said.

“Investors know that but, in the current environment, there is extra impetus to do so.”

Meanwhile, City Sales director Martin Dunn said he was sceptical that 35 projects had failed and questioned how realistic the premise of some of them had been in the first place.

In his estimation, about 3,000 apartments are likely to be built over the next two years – which is less than the forecasts of up to 8,000 apartments in the pipeline for the near future.

The reason for the failure of apartment developments tended to be inexperienced developers offering a product that they, ultimately, can’t provide for the costs asked, he said.

“You get developers who may have built small groups of townhouses in the past thinking they can move up to apartment developments.

“But apartment complexes are a whole different game. They are much more complex.”

Bank funding for apartments has been affected because the banks are aligning the Auckland apartment market with the Sydney and Melbourne apartment markets, Dunn said.

“In reality, Auckland’s apartment market is nothing like that of Sydney and Melbourne. Auckland apartment developers have to pre-sell.

“This means that the appetite for apartments tends to precede the supply. It is a very useful safety valve and it prevents Auckland experiencing a glut of apartments.”

He said the failure of the touted apartment developments would lead to increased interest in existing apartments and apartments soon to come on stream.

It could also lead to a price surge in the apartment market as supply has been impacted at a time when demand is high.

“People looking to invest in apartments are best advised to opt for cheaper or more modest freehold apartments in the Auckland CBD as they offer the best returns,” he said.

“If you are looking to buy off-the-plan, make sure you do comprehensive due diligence and invest in something where everything points to the development actually going ahead. Don’t be fooled by flashy, expensive marketing.”