Time for a sea change

Monday 7 January 2019

Nelson-Tasman is famed for its lifestyle attractions but its solid price growth and tight rental market make it a good option for investors too, writes Miriam Bell.

Proudly staking its claim to being the sunshine capital of New Zealand, the Nelson-Tasman region has a very particular set of attractions. Sitting at the geographic centre of the country, the region is blessed with significant natural bounty – including stunning beaches and the Abel Tasman and Kahurangi National Parks.

Nelson itself is one of New Zealand’s oldest settlements and is a solid economic performer. It has the largest fishing port in Australasia, a range of industries in established areas like forestry and tourism and new, exciting ones like aquaculture and boutique brewing. Thanks to a thriving arts scene, it has also become known for its lively city centre and an alternative, creative vibe.

That all means the region has become popular with both those seeking a sea change and those looking to retire for a gentler pace of life. As a result, it has one of the fastest growing populations in the country. And that has led to a strong, healthy housing market.

In recent years, the Nelson-Tasman region has seen good price growth and an increasingly tight rental market. Experts say a slow-down of sorts is likely and, further, that there are some unique issues impacting on the market. But they also continue to predict a rosy outlook, with options for investors, going forward.

Price performer

Unlike many other regions, Nelson-Tasman has long seen decent house price growth. It is estimated that over the last 10 years Nelson’s house prices have gone up by an average of 78% while Tasman’s have risen by 66%.

One of the main reasons for this is the strong demand generated by the growing population. But the latest data highlights just how strong the region’s market continues to be.

The latest QV House Price Index shows that Nelson values rose by 7.7% in the year to October and by 1.7% over the past quarter. This leaves the average value in the city at $593,947. Likewise, values in the Tasman District have also continued to rise. They were up 7.2% year-on-year and 1.0% over the past three months, leaving the district’s average value at $586,219.

QV’s Nelson property consultant, Craig Russell, says land values have significantly increased in the city centre, mostly due to its lifestyle appeal and the limited supply of properties. “But investor activity has been quieter than usual. This is a likely result of more modest returns, a limited prospect of strong capital growth in the short to medium term and increased compliance costs on the horizon.”

The October data from REINZ also points to a healthy market. It has Nelson’s median price up by 15.8% year-on-year to $518,000. The wider Nelson/Tasman/Marlborough region saw median prices up by 10.5% and sales volumes up by 16.9%, once seasonally adjusted.

REINZ chief executive Bindi Norwell says the market remains positive across the board and there are still buyers that are relocating from Auckland and other regions. “This suggests that the region continues to be seen as affordable. The Nelson area is seeing the majority of relocated buyers.”

However, the REINZ data suggests the market is slowing down. Norwell says that when looking at September compared to October in the region, the increase in median price was smaller than expected. At the same time, a decrease in the sales count was fractionally greater than expected.

First National Real Estate’s Martin Wilkie agrees that buying demand has gone down a little of late. But not prices, which continue to tick over well, he says. “We don’t tend to see the troughs that you do in other markets. Still, I see prices plateauing a bit and cooling over the short to medium term. They won’t be like they have been over the last 18 months or so.”

He is still seeing a fair amount of out of town investors active in the market. “But Mum and Dad type investors are starting to get out a bit because the market is getting so much tougher for them.”

Supply constraints

There may have been a decrease in investor activity, but prices are staying put. That’s not just because of population growth. The Nelson-Tasman region’s unique supply constraints have contributed too.

Nelson City, which is surrounded by hills and the sea, has run out of flat land to build on, Nelson Property Investors’ Association secretary Glenn Morris explains. While building can be done on the hills, it is more difficult and the land available is constrained.

The surrounding Tasman District which has lots of flat, rural land is the obvious solution. But the Tasman District Council (TDC) has long tried to restrict such growth and it’s only recently that developers have managed to push through, he says.

As a result, there’s a major shortage of housing. Morris says there is intense competition for properties on sale as well as strong demand from people with deep pockets. “But the number of properties available in Nelson is very low and that is keeping the prices up.”

Supply pressures do look set to alleviate going forward. Some relenting on the part of the TDC means some major developments are set to go ahead. One of these, the Richmond West subdivision, will create 1,500 new dwellings plus two retirement villages.

Additionally, REINZ reports a recent increase in the amount of properties available for sale. The region’s inventory was up by 8.3% in October as compared to October 2017. Morris puts this down to a spring lift. “Only time will tell if these new listings will impact on current record high house sale prices.”

Rental squeeze

It is not just Nelson-Tasman’s sales market that is affected by the shortage of housing. The region’s rental market is extremely tight. Tenant demand is high but there’s limited stock and rental vacancies are very low.

This state of affairs is good for investors as it makes for strong rent growth. Summit Real Estate property management GM Stewart Henry says they have seen rent increases in Nelson of up to 10% and in Tasman of 7% over the last year and of 3% per year over the last 10 years.

It has left rents at record levels. Realestate.co.nz has the region’s average weekly rent at $437 in October, up from $430 in September. And all our interviewees believe they are still rising due to the ongoing rental pressures.

Despite this, returns are not as high as in some other regions, with Realestate.co.nz putting the average rental yield at 3.39%.

Looking at three-bedroom houses, Henry says the average in Nelson is 3.9% and 4% in Tasman. “I’d say the hot spots for investors are Nelson City two-bedroom flats and units which have returns averaging 4.6% and Tahunanui Stoke for two-bedroom flats and units returning 4.8%.”

However, the region’s tenant pool is generally considered to be good quality and it benefits from seasonal workers who come to work in the fishing, forestry and fruit industries. The region’s tenants also have a preference for long term tenancies.

Henry says properties don’t sit around empty for long. “There is always a choice of tenants and if tenants are looked after well they tend to stay in the properties. If you look at websites like Realestate.co.nz you will see that Nelson has far fewer vacant rentals than other cities like Auckland.”

Top spots

Investors looking to buy do need to think about where they are buying, even though the supply shortage means there is demand for property throughout the region.

Morris says it pays for investors to remember that rental demand is actually highest in the Tasman district due to the very low number of vacancies there. “But in a number of urban areas – Richmond, Golden Bay, Wakefield, Motueka – there is also huge demand for rentals and good rates of capital growth.”

Some of the suburbs with older housing stock are more affordable but they don’t offer the same quality, he adds. This is backed up by QV’s Russell who says properties that are mostly in original condition, or have significant deferred maintenance evident, have proven difficult to sell or have sold at more modest levels, particularly in the Port Hills.

“In contrast, the College and Cathedral area, in particular, has proven popular given its proximity to good schooling and central city amenities. Modernised character homes in this area are generally selling in excess of $900,000.”
 
Wilkie also picks Richmond as a suburb with potential as it is popular with families and, therefore, good for long term tenants and solid returns all year round. It’s also set to expand due to the planned developments.

“But Motueka is coming into its own while Moutere is a bit of a jewel in the crown. It’s a lovely village which is great for short-term, holiday type rental properties.”

But investor Harry Pearson, who owns four properties in Nelson, believes properties in areas close to the city centre are winners. He also says that if an investor can make the numbers work, high demand for one or two-bedroom flats makes them an attractive option.

“Most importantly though, buy a place with all day sun. They are warmer and drier so they have less problems with damp. You can get houses that are cheaper because they get less sun but you will struggle to find good tenants for them.”

Words of wisdom

All our interviewees say the fact that being a rental property owner has got a lot harder means investing has become less attractive. But they also all still see opportunities in the Nelson-Tasman market.

The planned developments means new builds are an option for investors, while the region’s ageing population means there are growing numbers of older houses ripe for value-adding renovation coming on to the market.

There’s also plenty of activity in the holiday rental, Airbnb market – although it is competitive. Pearson thinks there is opportunity for investors in short-term accommodation for seasonal workers and students. “For those starting out, maybe younger investors, there is scope in the rent-by-room option, which would also help the rental shortage.”

Overall, the market’s outlook is healthy, Wilkie says. “When it comes to financial returns for investors, I don’t see price growth just finishing. More people are seeing what the region has to offer. It’s a lifestyle destination for people. They are going to keep coming so prices will remain strong and the area will keep going up.”

Comments from our readers

On 7 January 2019 at 8:32 pm John Butt said:
Comparing rental vacancies on Realestate.co.nz has the potential to go very wrong. That website is limited in the number of vacancies possible, since they do not accept private landlord advertising. Trademe is the only site with complete data on rental vacancies, however I suspect some comments effectively come from there via my site comparison of Nelson, where I compare Nelson listings over 10 years: http://listings.jonette.co.nz/listings-on-trademe/nelsontasman.html You will see comments there from one of your interviewees

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