Nelson: Getting it right

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Housing demand is far outstripping supply in this quality lifestyle region, Karen Clark discovers.

Monday, August 6th 2007, 12:00AM

by The Landlord

Mix plenty of sunshine with a pleasant lifestyle and the result is a potent lure, as growth in the Nelson-Tasman region shows. Nelson-based property investor Lynnette Butler has only been investing in residential property for four years, but it’s been a profitable experience so far.

Butler has nine investment properties, most in Nelson and all positive cash flow. She’s pursued a simple strategy: buy a property she can add value to, and raise the rent to a level that’s sufficient to cover the mortgage. It’s a strategy that has worked well, thanks to rising property values and rents in Nelson in recent years.

For example, two neighbouring two-bedroom houses she bought in late 2004 close to the port – an older area of town – were previously rented for $170 and $190 a week and are now fetching $240 a week each. She made a few improvements, such as sealing the driveway, patching holes in carpet and replacing curtains, but didn’t spend a lot, she says.

The houses were bought for a total of $246,000 and are now worth a combined $360,000, according to a recent valuation. “That investment was one out of the box. Those houses don’t owe us anything,” she says.
Then there’s the four-bedroom house she bought in Washington Valley – a Nelson suburb that traditionally was less desirable but in recent years has become increasingly popular because it is close to the central city.

Originally bought as a family home, it cost her $147,500 in 2002. It’s now a rental property earning $330 a week and valued at more than $300,000. Butler has been fortunate in that her foray into property investment has coincided with a dramatic rise in residential property values in the Nelson-Tasman region over the past five years, as a result of a steady influx of migrants from other parts of New Zealand and overseas.

QV Valuations central manager, Blue Hancock, says in the seven years prior to 2002 there was very little movement in property values, but between late 2002 and mid-2003 values jumped a massive 85%. “They’ve lifted another 15% since then so that’s a 100% lift in value over five years. Usually you expect values to double over 10 years,” he says.

Hancock says a major catalyst for the sudden rise was the 11 September bombings in the United States in 2001, which prompted many expatriate New Zealanders and foreigners to settle in the region.
They were prepared to pay more for property since the New Zealand dollar was relatively low at that stage and they perceived prices as being low compared with overseas. While property values fell in 2004 “because the market had just got so hot”, they have risen again since then, he says.

QV statistics show that values grew 12.3% in Nelson city between May last year and this year, and 8.6% in Tasman district.

The main attractions of the Nelson-Tasman region are climate and lifestyle: it has the highest number of sunshine hours nationally and offers plenty of recreational opportunities with numerous beaches and three national parks (Abel Tasman, Nelson Lakes and Kahurangi). It is also known for its thriving arts community.

Between 2001 and 2006 the region’s population grew 5.5%, to 87,516.

Nelson city, the biggest urban centre, grew 3.2% to 42,891 while the Tasman district, which encompasses a much bigger area, grew 7.9%.

The main urban centres in Tasman are Richmond, which borders Nelson city; Motueka, 50km west of Nelson; and Takaka, further west again.

According to real estate agents in the region, the demand for residential properties is currently strong, and in Nelson, Richmond and Motueka is particularly evident in the lower end of the market. LJ Hooker Nelson manager, John Reid, says relatively high employment levels are likely to be encouraging first homebuyers to commit to a mortgage, while investors appear to be optimistic about future capital and rental growth and wanting a secure investment.

First National Richmond sales consultant, Mike Murphy, says ready access to finance is another factor, and suggests that the Reserve Bank’s move to dampen buyers’ enthusiasm by lifting the official cash rate has had the opposite effect. “It sends a loud and clear message to the public that if they don’t own a house they’re missing out,” he says.

Reid notes that the volume of residential property sales has dropped in Nelson city in recent years – 88 houses were sold there in April this year compared with 126 in April 2003 – but says that’s due to a shortage of listings. “At the moment supply is way below demand,” he says.

“Where the demand has tapered off is at the top end of the market, that is, anything above half a million dollars. While the buyers from the United States and United Kingdom are there, they are not as aggressive as they used to be, possibly because of the exchange rate.” He says popular Nelson suburbs for buyers in the low to mid price range include The Wood, because of its proximity to the central city, and Stoke and Tahunanui because of easy access to schools.

Real estate institute figures show the median house sale price in Nelson city in April this year was $312,000 and houses took a median 24 days to sell. In Richmond, the median house sale price was $408,500 and houses took a median 22 days to sell. Murphy, who specialises in the Richmond area, says it’s very difficult for first homebuyers to buy in Richmond, which evolved more recently than Nelson and has never had a “cheap” area.

“At the moment anything that comes on to the market in Richmond in the $300,000s is snapped up quickly,” he says. A particularly popular area is around Waimea College, on the northern side of Richmond, he says.

In Motueka prices are fractionally lower than in Nelson and Richmond.

Ray White Motueka manager, David Ogilvie, says a 20-year-old three-bedroom home close to the town centre is likely to cost around $300,000 to $350,000, while a section will cost $140,000 to $170,000. Prices are higher for properties on the northern edge of town near the sea.

Ogilvie says there are a significant number of leasehold properties in Motueka, owned by organisations such as Wakatu Incorporation, the business arm of local iwi. However, the number of leasehold properties is dropping, as lessees are offered the opportunity to freehold their properties.

He estimates that about 15-20% of properties in Motueka township are currently leasehold, with leasehold houses generally selling for about $100,000 to $135,000.
Ogilvie adds that while there’s plenty of demand for properties in town, the demand for properties in the nearby seaside holiday settlement of Kaiteriteri, which is pricier, appears to have waned in the past year.

However, in the area known as Golden Bay, which includes Takaka and surrounding beachside settlements, there is still steady demand for holiday homes, according to Harcourts Golden Bay manager Brian Devonshire.

Devonshire says Golden Bay is also popular with retirees and overseas buyers, with about 30% of the inquiries fielded by his agency coming from Britons and 20% from Americans.

He says a three-bedroom home in a desirable beachside location costs at least $400,000 and up to $600,000 if it’s on the waterfront. Desirable locations include Tata Beach, Ligar Bay, Pohara and Patons Rock. Prices are lower in Takaka, where a family home is likely to cost about $300,000 to $350,000.

Population projections for the Nelson-Tasman region indicate continued steady growth. Figures prepared for the Nelson Regional Economic Development Agency estimate that by 2026 the region’s population will be at least 110,000 and potentially as high as 131,000.

The population is expected to continue growing faster in Tasman district than in Nelson city, because of the limited amount of flat land available for development in Nelson.

To cater for expected growth in Richmond, the Tasman District Council has proposed rezoning 125ha of land south of Richmond from rural to residential, and allowing for a mix of medium and higher density development there.

However, there is pressure on it to open up other areas for residential development: the Richmond West Group has applied for resource consent to develop an 893-lot subdivision covering 103ha on the western outskirts of Richmond.

The land, currently zoned rural, has already been earmarked by the council as a suitable site for a business park, although it has yet to make a decision on its future zoning.

The Tasman council and the Nelson City Council are also exploring options for providing for further higher density development in Richmond and Nelson. The areas being considered are central Richmond, part of eastern Richmond, central Nelson, Stoke, Tahunanui and the area around Nelson Hospital.

As for future prospects for property investors, Haven Realty Nelson principal Darryl Marshall believes the region’s appeal as a place to live will ensure that residential property values are preserved.

Nelson Property Investors’Association president, Terry Bolitho, says he can’t see values falling in the next few years either – although he’s picking a more modest growth rate than that of recent years, in the order of 3-4% a year.

Bolitho says there are good opportunities for capital growth in areas where the supply of land is limited, such as The Wood.

“But you’ve got to be committed for the long term,” he says.

Marshall sees capital gain opportunities on the fringes of traditionally desirable suburbs in Nelson, such as the Port Hills and Tahunanui Hills.

Butler believes areas such as Washington Valley and around Victory Square, which have been less desirable in the past but which have recently gained in popularity, offer potential too.

However, Bolitho warns that with interest rates at current levels, those investing in a residential rental need to be in a position to pay a significant deposit on it.

“Unless you can do that, interest rates are such that they will cut into your cash flow,” he says.

Irene Steele, director of rental listing agency Homefind Nelson, says investors also need to have realistic expectations.

“If you buy a rental in Nelson you may not get the returns you would like, but there will be capital gain further down the track,” she says.

She adds that rents have risen steadily in recent years.

As at April this year, the median rent for a three-bedroom house in central Nelson was $295 a week, up 9% on April 2004, according to Department of Building and Housing statistics.

In Richmond, the median rent for a three-bedroom house was $320 a week, up 14% on April 2004. The national median was $300 a week.

Steele says there’s a steady supply of tenants in the region, due to factors such as migration and rising house prices.

“It’s becoming less affordable for people to own their own home, so more and more people are renting,” she says.

Popular areas to rent in include Richmond, Stoke, Tahunanui and Nelson city, she says.

Ogilvie says there’s a shortage of rental accommodation in Motueka, while Devonshire says there’s a gap in the market in Takaka for long-term rentals priced at $200 to $300 a week.

Butler believes the steady demand from tenants will continue, simply because people like living in the Nelson-Tasman region, and employment levels are strong.

But she says investors now have less room for error than when she started investing four years ago.

“In 2003, if you made a mistake you could get away with it because property values and rentals were going up so much. Now they’re more static, so you’ve got to get the numbers right.”

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