Central Auckland: Humming in the hub
When property markets start their downward spiral, no urban centre in New Zealand offers better opportunities than the city of sails.
Tuesday, February 5th 2008, 3:59PM
by The Landlord
Auckland; the city the rest of the country loves to hate – and the butt of all those JAFA jokes – but, to rank fifth on an international quality of living survey, the city obviously has something special going for it. 2007 was Auckland’s second consecutive appearance at number five on the Mercer annual Quality of Living survey and the city’s in good company; Zurich and Geneva rank one and two respectively. Sydney comes in at eight.
“Auckland is a great place to live,” says Mayor John Banks. “It is a very diverse city; home to people from many different nations and cultures. This unique blend of people creates a colourful and rich community.”
The Auckland City Council’s Annual Report for 2006/2007 says the city’s 35 suburbs – which include the Hauraki Gulf islands of Great Barrier, Waiheke and Rakino – are home to 436,600 people from 185 different ethnic groups (38% of Auckland city residents were born outside New Zealand). By 2026 the population will have grown to 559,700 according to council estimates.
Auckland city is the business hub for the greater Auckland area; 15% of all NZ businesses – 56,827 enterprises employing around 306,840 people – are in Auckland city. Property and business services dominate total city employment at 23%. The city is also base for 41% of all ICT jobs in the country and 39% of those in the national creative sector.
Auckland will always be the “core”, says Michael Barnett, chief executive of the Chamber of Commerce and Industry. “It’s the commercial capital, the events destination; if it doesn’t happen here it’s not going to happen in New Zealand. Surveys like the Mercer report, which allow Auckland to benchmark internationally, are important for the growth and development of the city, he says.
“The challenge is to make it all happen. I can see us expanding Aotea centre, our concert and conference facilities; improving things like broadband and security of energy supply. Investment is already taking place in roading and public transport. We’re doing that to ensure Auckland becomes a world class city.”
Being internationally competitive is also important to Mayor Banks. “It is vital to ensure Auckland remains a great place to live for future generations.”
But what does all this mean for the property investor?
An increased demand for housing is the obvious answer. The city already houses the majority of NZ’s renters and, as buying a first home becomes less affordable, demand will increase. The question for investors is what sort of properties promise the best returns? Traditional two or three-bedroom homes or apartments? And what yield should a landlord expect?
As the property market has cooled and flattened, Auckland has consistently led the rest of New Zealand in sales and median prices. And, after a winter of discontent, Auckland city residential sales figures for October 2007 showed an improvement on the previous month, reports Barry Baillie, Auckland district president of the Real Institute.
A total 2240 sales were recorded with a median price of $445,000. The average number of days on the market was 31. Both sales figures and the median price were up on the previous month; 1956 and $441,000 respectively. In comparison, the sales figures for October 2006 were higher at 2991 but the median price was lower at $415,000. “October’s sales included 753 in the $400,000 to $600,000 price bracket and 92 in the $1 million to $1.5 million range.”
To date the REINZ does not separate out apartment sales; these are included when reckoning the median price in the Auckland city market.
Baillie says there are plenty of opportunities for investors in the Auckland market. “They should be increasing their portfolios. The rents are higher and the capital gain will be greater.” The market fluctuations of the past 12 months are just a normal part of the property cycle, he says. “The Auckland property market’s in good health.”
November was much improved on the previous few months with more people motivated to buy, says Bryan Thomson, chief executive, Harcourts New Zealand. He also sees plenty of investor opportunities – but hesitates to pinpoint any one particular area. “What people need to focus on is not so much where they invest, as on their investment strategy and what suits that – proximity to public transport, school zoning, or just the ability to drive past and look at it and say ‘that’s my investment property’.”
Graham Peterson of Strategic Property Management, a Harcourts franchise with five property managers in their Ellerslie office, reports a steady stream of inquiries from prospective tenants. “Demand for rentals is particularly strong in January for the new school year and, with supply limited, demand will definitely drive up prices in 2008.
In its housing report at the beginning of December last year, Westpac economists predicted a rent rise of 6% a year for the next five years. The report stated a 34% rise would be needed to bring rents in line with house prices in terms of landlords’ returns, a process that could take five years. With mortgage interest rates above 9% and an end to sizeable capital gains, landlords will no longer be happy with a 4% yield, said the report.
Indeed, the BNZ Confidence Survey of 5 November noted, “Auckland rents are rising steadily. For investors wanting steady tenancies and rising yields, things are looking very good”. REINZ figures comparing rents across the city in the last quarter of 2007, show average rents for a three-bedroom home ranging from $350 a week in Panmure/Mt Wellington, to $590 in the city bays and $485 in inner city suburbs.
The flood of completed apartment blocks over the past few years has ensured tenants are still controlling the market to some degree, says Michelle Jones, general manager of Crockers Property Management. “Tenants are pressuring landlords to clean up their properties. There are plenty of new apartments to choose from but, to gain a premium rent, a property needs to have a quality kitchen and bathroom and parking.” There’s also increasing pressure for high-end executive homes, says Jones.
“Many investors are renovating properties to make sure they’re in tip-top condition”, says Sue Tierney of the Auckland Property Investors Association, who also reports growing interest in membership of the association. “Many investors didn’t even consider there would be such an association, despite all the publicity out there.”
The apartment market is one of the most diverse residential markets that exist, says property investor and adviser Dick Ayres. He identifies two distinct groups of apartments in inner city Auckland; those built to provide quality residential accommodation for people after a city lifestyle and those built to provide affordable rental accommodation on a less permanent basis.
This latter category, where apartments tend to be small, of average quality and with a lack of car parking facilities, are the true investment properties, says Ayres.
And he says if apartment owners accept less than 15% gross rental return on the price they’ve paid for any CBD investment apartment, they’ve made a poor investment.
“If an apartment is generating $300 a week in rental I would recommend the purchase price be around $100,000. By the time expenses associated with apartments are deducted, body corporate expenses, rates and cleaning, letting and management fees, the return will be in order of 9-10%. Spooky eh!” The August 2007 median rental for a one-bedroom apartment in Auckland was $300; three-bedrooms: $460.
Apartments outside the CBD may increase in value, which may offset any shortfall he says. “Then there are those very desirable apartments that will appeal to the corporate renter and generate rents of more than $1000 a week but, even then, if a 15% gross is not applied when calculating the return, capital gain is the only form of rescue.”
Investors should only consider apartments in Auckland if they can obtain around 15% gross rental and the sector will remain viable as long as this can be achieved, says Ayres.
Ed Meili has been investing in the Auckland city apartment market for 14 years. It’s a market he describes as “competitive, segmented and not the choice for a passive investor”.
“I started with a vision for Auckland city to some day be a place that would be exciting and pleasant to live in. This has happened rapidly; the city has come a long way in the past 10 years.” Unfortunately, he says, some bad development has also taken place.
Meili says he is most interested in owning “the best of the furnished studio apartment” market. “This is a market that will grow tremendously as the price of petrol goes up. Commuting on a motorway is one of the most unproductive, mind-numbing activities possible; it affects people, their quality of work and their happiness. Living in the city, without a car, is the sensible solution for a growing number.” And it’s happening, says Meili. “The changing point of tremendous growth will take place when it becomes cheaper to rent an apartment than commute by car from the suburbs.”
However, with no more than 60% finance being offered for apartments under 40sqm, it’s getting harder to own one, says Ed Meili. “But prices are being driven down by the limited number of people who have 40% of the purchase price. Renting is increasing in popularity due to the difficulty in getting finance for new owners; the fact that they can get 95% finance for a house also influences them away from buying an apartment.”
Meile says he has 22 apartments in his portfolio. “None are vacant. Demand for what I’m renting seems to be at an all time high.”
Martin Dunn, managing director of City Sales Limited sees a lot in the inner city apartment market to excite investors. “Vacancy rates are always near zero and selling rates per square metre are about half of new project selling prices.” ($4000 to $6000sqm as opposed to $8000 to $12,000sqm). Higher rentals also serve to deter less careful tenants, he says and quotes studios at $220 to $260, and two-bedrooms at $280 to $380. “Add $50 for a carpark.”
City Sales reported auction sales in the last week of November ranged from $135,500 for a small two-bedroom apartment with no car parking to $601,000 for a three-bedroom penthouse with tandem parking.
Dunn says returns are generally 7-8%. “But the new market, which is only simmering at the moment, is expensive apartments; 2000sqm suites for $1.5 million to $2 million. I predict an imminent appetite for these.”
But he warns investors against relying on big events attracting tenants to top end properties. “This ‘America’s Cup Market’ is a fantasy and left many dreamer investors hurt when idiotic expectations of rentals were unrealised.” And supply is dwindling with few new projects on the horizon. “There are currently very few cranes on the skyline and supply will be stifled until prices rise sufficiently to make development worthwhile.”
Auckland-based Mike Pero Mortgages broker, Mike Kingston, reports a change in the nature of lending from new property purchase to restructuring and refinancing. “Rental yields are very low at the moment and we’re seeing a number of investors exiting the market. Many of these have been in the market three to six years, have made good capital gain and after weighing up higher interest costs versus rental yields are deciding to sell up as a result.” This, says Kingston, will lead to a shortage of good investment properties driving up rents
And, Kingston says, while population growth in Auckland means it’s in a better position than many other areas to recover from a downturn in the property market, he sees things remaining tight for the next 12 to 15 months. “There are still inflationary pressures which mean there won’t be any sudden changes in interest rates in the short term and I can’t see the government wanting to change things too much leading up to an election. I’m expecting it will be 2009 before we see a real improvement in rates and the housing market.”
The Auckland market is “flat, moving towards a slump”, says investor Ron Hoy Fong. But he says that means better buying opportunities and an impact on rents. “The current rises are only an interim catch-up pressured by increased interest rates over the past two years. I expect rents to plateau in the short term, followed by massive rent rises of up to 30 to 40%, when interest rates start to fall again in the recovery period prior to the next boom.”
So why should out-of-town investors consider the Auckland market? “Investors will find very few positive cash flow properties around the country because of the 9% plus interest rates. My advice is that investors should only buy negative cash flow properties in good capital growth areas, Therefore it makes good sense for everyone to buy only in Auckland where the ripple effect will have an early start in the expected property boom.”
And the best area for investment? “Mt Wellington, Mt Wellington, Mt Wellington – because of the energy created by Sylvia Park shopping centre. I see Mt Wellington changing from what was previously a low socio-economic area to a more middle class home buying area.”
He concedes there are other parts of greater Auckland with similar sized shopping centres but points out land available for expansion in those areas is generally expensive. “Sylvia Park is more central to Auckland. Prices are still below average and probably most economical for young homebuyers looking for their first home. But most of all, there is no empty land left for developing in the Mt Wellington area surrounding Sylvia Park.”
Indeed, ‘empty’ land is a rarity in Auckland city. And as it becomes scarcer it also becomes more expensive. In the four years from January 2002 to December 2006, average section prices in Auckland rose around 96% to $255,000.
The problem is they’re just not making any more.
| « Regional review: Gold on the wild West Coast? | Wairarapa: Our best-kept secret » |
Special Offers
Commenting is closed
|
|
Printable version |
|
Email to a friend |
