Weighing up apartments

Friday 26 May 2017

Protests over the intensification of New Zealand’s bigger cities continue but the march of apartments is unstoppable – and that opens up opportunities for investors.

By Miriam Bell

It is no longer just Auckland that is moving towards a future where apartments play a key role in meeting housing needs.

Post-earthquake Christchurch is seeing steady growth in demand for and supply of apartments, while a recent Housing Forum report said Wellington needs to grow up if it wants to solve its housing crisis.

Apartments have long been popular with investors as they cost less and generate higher returns but shifting dynamics mean the apartment market has changed in recent years.

So we have put together a list of five good reasons for investing in apartments for those who might be considering such a move.

Cheaper entry point price

Traditionally, apartments have cost a lot less than standalone houses. Most still do, but there can be little doubt that apartment prices are on the rise.

Just a few years ago, the average price for an Auckland apartment was around $300,000 – and there were many available for much less. Now, Trade Me Property’s April data has the average asking price for an Auckland apartment at $675,750, which is a 17.3% year-on-year increase.

Average asking prices for apartments in Wellington and Christchurch have also gone up. In Wellington, the average price is now $466,750 (up 4.0% year-on-year), while in Christchurch it is $479,150 (up 17.4% year-on-year).

But Head of Trade Me Property Nigel Jeffries said these prices might be an expensive entry into the property market, but they are still cheaper than houses in similar areas.

Higher yields

In the past, apartments’ major drawcard for investors was the considerably higher returns available. As prices have crept up, those returns have diminished – comparatively.

Back in 2010, net apartment yields in Auckland came in at around 8%. Now, net yields are around 5% to 6%. But compare those yields to the yields available for standalone houses in Auckland.

Barfoot & Thompson’s latest rental yield data has the yield on an average (three bedroom) Auckland house at 2.99%. Yields vary across Super City suburbs but no suburb offers yields approaching those on an apartment.

The national pattern is likely to be similar. As house prices have increased, yields have generally fallen but apartment yields remain stronger.

Apartment Specialists director Andrew Murray said the returns on apartments have always been better and will continue to be so “For investors, looking for cash flow apartments make sense.”

Rental demand

There has always been a strong, loyal tenant base in the apartment sector. Many people prefer to live in apartments, including small studio apartments. And that tenant pool is growing as the baby boomer downsizing movement grows along with corporate demand.

Further, the growing trend for owner-occupiers to buy apartments means there are less apartments in the rental market pool. This has made for increasing demand for rental apartments and that pays off for investors.

In line with the increased rental demand, average apartment rents have also been on the rise. Trade Me Property’s latest rental data shows that, in Auckland, the average rent is now $475 per week. In Wellington, it is $450 and in Christchurch it is $350.

The strong demand runs across property types in the apartment sector too. For example, in the Auckland inner city the most in demand are one and two bedroom apartments with a car park, according to Barfoot & Thompson’s Sandra Forrester.

Capital gain prospects

Over the course of the current boom, apartment agents have started touting the prospect of capital gain on apartments. In the past, that was never done: apartments were sold on returns.

But City Sales founder Martin Dunn said the situation is very different now. “The sector has been experiencing unprecedented capital gain because of land and building values going up so fast.”

The Trade Me Property asking price data cited above, which shows strong year-on-year growth, is one example of this. So too is City Sales data which shows that the average cost per square metre for an apartment has gone up from $6,000 to nearly $9,000 in the last few years.

In Dunne’s view, Auckland’s ongoing housing supply shortage means the prospects for capital growth in the apartment market are unlikely to change any time soon.

Additional benefits

Another attractive apartment feature is that there is generally much less maintenance and repair work to carry out. For investors this means reduced maintenance costs and time.

Apartments also tend to offer greater security, which is attractive to many tenants.

And, depending on the location of an apartment, there is the possibility of boosting rental returns further via Airbnb. Murray said that central city Auckland apartments can earn up to $1,000 per week through Airbnb at the moment.

Cautionary words

But there are a number of things for investors to watch out for when buying an apartment.

These include the legacy of the leaky homes debacle, body corporate management issues, tighter lending criteria and the risks in buying off the plan as apartment developments can fall over.

Dunn said apartment investors need to do comprehensive due diligence and not be fooled by the flashy, expensive marketing that comes with many developments. “It can be best to opt for cheaper or more modest freehold apartments in CBD areas as they offer the best returns.”

Read more:

Apartment failures mean investing care needed 

Super City apartments winners for investors 

Apartment size key to future lending 

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