Weighing up objectives when it comes to investing

Primary objectives property investors typically weigh up when it comes to investing are yields or capital growth.

Friday, June 09th 2023

A yield-focused investor prioritises regular income from their property investment with the aim of maximising rental returns and cashflow.

A capital growth-focused investor looks at the potential for long-term appreciation in a property’s value.

Definitions aside, CoreLogic chief property economist Kelvin Davidson has looked at how key property investment performance metrics are weighted, particularly in the existing  market.

He took our CoreLogic’s Market Trends dataset  for a spin to analyse what real numbers showed when it comes to yield versus capital growth.

For this exercise he took figures from the Buyer Classification Data, specifically multiple property owners (MPOs) in old Auckland City Council and Manukau.

These two areas stand out because MPOs – that is investors - account for more than 40% of property purchases so far this year. To put that in perspective, says Davidson, MPO activity in Franklin and Rodney is about 30%.

In Auckland City, a two-bedroom apartment has a median value of about $741,000, down roughly 7% in value over the past year. Despite the decline, values are still 17% higher than five years ago.

In Manukau, three-bedroom houses have a median value of about $925,000, down in value about 14% over the past 12 months. Again, despite the downturn, values of three-bedroom houses in Manukau are 23% higher than five years ago.

For rents, a two-bedroom Auckland City apartment is about $620/week and gross rental yields are 4.4%. Manukau three-bedroom houses rent for $670/week at an estimated gross rental yield of 3.8%.

“At this point the example confirms the theory that apartments return a higher rental yield than houses, even if they don’t deliver as much long-term capital gain,” Davidson says.

“But why leave it there? Let’s consider some other metrics.

“Say an investor was to resell down the track. Average days on market – how long a property takes to sell – is an indicator of market demand and competition.

Auckland City two-bedroom apartments are taking an average of 38 days to sell, a week longer than three-bedroom houses in Manukau at 31 days. That is even though fewer two-bed apartments have come on the market in Auckland in the past year (1.5% of available stock) compared to three-bedroom houses in Manukau (2% of available stock).

“What impact does age of property have? Does something shiny and new – favourably treated within existing policy settings – attract a new-build premium?

“It sure does, Davidson says.  Market Trends data show existing two-bedroom apartments in Auckland City have a median sale price of about $652,000 compared to an equivalent new build, which has been selling for a median price of $865,000.”

The premium also exists on houses with established three-bedroom homes in Manukau selling for $960,000 compared to the new build sale price of $1.05 million.

Davidson says while this is only one comparative analysis, there is evidence apartment rental yields outperform that of houses but the reverse can be said for capital gains – particularly over the medium to long-term.

“We’ve also seen evidence of a new-build premium across apartments and houses, and despite preferential treatment from a tax/lending perspective, it costs investors more upfront to purchase them.”

Over the coming months, Davidson says he will be using Market Trends extensively to get new insights into the market, both from a general perspective and some key investment performance measures.


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