North vs South: Battle of the mighty Ws

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A comparison of two similar sized regional cities, Whangarei and Wanganui, highlights some potential drawbacks for property investors of having all their eggs in one basket if they restrict their portfolios to provincial towns, when the market slows and values stabilise. Yet there are opportunities in all phases of the property cycle, and some investors are actively bargain hunting in these areas already.

Tuesday, May 6th 2008, 2:37PM 1 Comment

by The Landlord

It seems investors in the two cities have at least one thing in common: no recent purchases. Some are streamlining their property portfolios, and, to quote one Wanganui investor, “buying back bargains”. The more farsighted report locking in mortgages for longer terms last year and reviewing properties with a view to increasing rents and preventing any crises if times got tough. Others are taking a wait-and-see approach. But the investment opportunities are out there. An informed investor will do well during this phase; the uninformed will buy badly and pay too much.

Whangarei
At a recent meeting of the Northland Property Investors Association, president Roger Raymond asked attendees what time they were reading on the property clock. “It averaged out at 4 o’clock. Another two hours to go before it hits six. But as someone said, if this is 4 o’clock it’s not too bad is it?”

“Things in Whangarei (population approximately 48,000) are going well,” says Raymond. “And if some building companies are slowing down a little, it’s because they were too busy to start with.”

But even Whangarei can’t escape the pressure of interest rates, fixed term mortgage renewals, fuel costs, a volatile sharemarket and a high dollar. “These can mean nervous times for investors across the board,” says Allan Sykes, director at Allens Goode Leith Realty in Whangarei.

The market is now displaying a larger selling pool and the buyer pool has diminished rapidly, says Sykes. “It’s taking longer to sell your property and there are less sales.”

There were 66 houses sold in January this year against 98 in 2007. Median price was $313,500 in January up on the previous month’s $307,050 and well up on January 2007 at $289,500.

But median values can be misleading, says Sykes. “We have found the cheaper bracket and top bracket have slowed more than the middle, thus the results have pushed the median up for some months.”

The latest QV statistics show the Whangarei market has followed a similar pattern to other areas in the country with influences such as affordability and higher interest rates impacting. “Our valuers report that urgency of buyers is reduced and properties are staying on the market longer,” says Auckland region manager Glenda Whitehead.

“The annual growth eased from 7.9% to 7.3% between January and February. The average sale price also eased slightly, down from $350,839 to $348,639, taking it back to a similar level to that reported in December 2007.”

But, it would seem landlords in the north have plenty to be upbeat about. Rents have risen an average of 8% in the last three months and more rental stock is urgently needed to cover current demand, says REINZ Northland branch president, Marilyn Gamman.

Still more will be needed she predicts, if unofficial reports of one large business in the city increasing staff by over 100 this year are confirmed. “Good quality rentals in good locations are in demand, though not to the levels of last year. Where there may have been 10 to 15 applications, there are now three or four,” says RE/MAX Absolute Realty’s Gary Younger.

The key today is the return on the investment. And for one Whangarei investor it was the promise of a good yield that saw him purchase a block of five two-bedroom flats in February last year.

The vendor was not negotiable; the investor paid the asking price of $625,000. It’s a good investment, he says, with a fixed mortgage for five years at 7.8%, purchased at 8.2% yield — based on existing rents. Since purchasing he has increased rents on all flats by approximately 10% (in line with the Whangarei market), barked the garden, and done some improvements to the driveway. Weekly rental is now $1090 per week with a yield of almost 9.1%. Rents will continue to be reviewed every six months — or as tenants leave.

Buying for $84,000 then spending $11,000 on improvements on an early 80s property has seen another Whangarei investor enjoy a gross yield of 10% from the day he finished repairs and redecorating. “Tenants had done a lot of damage; the washing machine had flooded and the floor rotted out leaving a three meter drop to the ground below — it’s a pole house.”

He says maintenance is no great drama, the property has views over the city and it’s in a cul-de-sac so there’s no traffic noise. At $260 per week the rent is currently low, says the landlord. It was kept at that level because of a glut of houses to rent at the time. However, he says, landlords have been selling their rentals, so he believes there will be more upward pressure on rents. He expects a yield of over 15% on purchase price after the next review. And with a drop in the number of building consents issued he says, rents in Whangarei are unlikely to fall.

All good news for investors.

Wanganui
There’s a feeling among the locals in Wanganui that they’re making the news for all the wrong reasons. “The reality is that Wanganui (population approximately 40,000) is an attractive city offering a good, easy-going lifestyle and more parks and sporting grounds than most towns or cities of equivalent size,” says Ross Watson. And, says Watson, MD at Century 21 Hocquard Realty, property in the city is still a good investment.

Phil Sedcole of the Whanganui Property Investors Association sees things in a similar light. “Generally speaking things are going well in Wanganui. People need to just stop jumping up and down and saying the sky is falling.”

As with the rest of the country, sales for the year to date are down. “In January this year there were 68 house sales and two section sales in the city, compared with 102 houses and four sections a year ago,” says Sue Ellis of L. J Hooker, Wanganui. “But the median price has gone from $159,250 a year ago to $179,500.” The median price however eased from December’s $195,000.

Unconfirmed February figures indicate sales somewhere in the vicinity of 80 to 85 says Ellis. “But this includes some portfolio selling at rather low prices.” Approximately 45 of those sales were for houses priced under $200,000 with 24 of the 45 under $150,000. “So it appears some investors are unloading properties. This could be as a result of coming off fixed term mortgages or investors feeling the pinch when it comes to new rates.”

The latest QV stats for Wanganui indicate declining sales volumes, a good supply of properties on the market and the impact of increasing interest rates and decreasing immigration are causing the market to ease. “These are likely to put downward pressure on residential values in the city in the medium term,” says QV’s Richard Allen.

This easing is evidenced, he says by a continued slide. “The property value growth statistic in February decreased to 5% from 7.4% in January, the fifth consecutive month this has occurred. However, the average sale price in the city is showing some resilience and continues to hover around the $200,000 to $210,000 mark.”

The PMI Infometrics outlook report, 2007 to 2010, (Nov ‘07) paints a less than rosy picture of the Wanganui market. An oversupply of housing, a shrinking population and reduced demand from investors given high mortgage rates, will all contribute to a drop in house prices — possibly by around 11% to June 2009, the report says.

But an investor who spoke to the NZ Property Investor, dismisses that as “real doom and gloom stuff”, and not how he reads it. People are moving to Wanganui because housing prices mean they’re able to afford a nice house and a nice car, and enjoy a better lifestyle — particularly if they’re in an employment situation such as teaching, where salaries stay the same.

The town went through a real decline with the departure or downsizing of government departments in the 80s, but there’s now a solid base of smaller industries, which should be able to weather any further economic decline, he says.

And he’s putting his money where his mouth is, with a portfolio that includes 10-plus properties in Wanganui. An experienced investor, who manages his own properties, he’s seen the Wanganui market change radically. “Gone are the days when we could look at a yield of 14% to 18%. We used to buy houses for $40,000 and $60,000 and get $150, $170 a week rent.”

A “pretty basic”, three-bedroom home in central Wanganui, purchased in 2006 for $180,000, is currently let at $190 — an 8% gross return. It needs work he says, and while he could probably raise the rent by $10-$20 dollars a week, that could be regarded as “greedy” and would probably result in tenants looking at similarly priced rentals and realising they could do better elsewhere.

A smaller, two-bedroom house, bought the same year for $90,000, is currently let at $180 per week with a gross yield of 9.85%. Of course he’d like more, he says, but he’s in it for the long haul.

Another investor with a number of Wanganui properties last purchased in May 2007. The property — a three-bedroom with loads of living space — is one the investor regarded as a “good capital gain opportunity, although with the market turning, it hasn’t quite worked out that way.” Originally priced at $330,000, the purchase price was $276,000 and the house is currently rented at $220 per week — a figure which could be increased to $300 were it not for the fact that the house is on the market.

And the yield? “I don’t agree with the interpretation of yield. Are you making money or not? To me it’s about cash flow and tax. Are you making money or having to subsidise? That’s not smart unless you’re in a capital gain situation.”

Wanganui continues to appeal to investors on a regular basis, says Ellis. “Speaking with local lenders, both banks and brokers are dealing on a daily basis. There are bargains out there — you just have to do your homework.”

A local agent indicated recently that investors are “bulk-buying” in Wanganui and Ross Watson says there’s certainly been increased interest by investment buyers in recent times. “Some of the old faithful speculators are starting to come back into the market with one or two placing numerous contracts on properties. Most are hoping to pick up a bargain, although I don’t believe the floodgates have opened at this stage.”

But Watson believes the real interest from investors is because Wanganui property prices are still cheaper than most other centres in New Zealand. “And let’s face it, despite what we read, long term, properties are never going to be cheaper than they are today.”

Watson says the demand for rentals is strong, particularly for good, tidy properties and rents have increased over the last 12 months. “A tidy three-bedroom home in a reasonable location can be expected to achieve rent of between $220 to $260 a week.”

Investor Jenny Duncan also reports a strong demand for quality properties with rental columns “not exactly over-flowing”.

“We have had some rental turnover lately and had a great response to our adverts.”

Duncan says she’s sold three old rentals recently, and did well but didn’t get the premium on the sales she would have a year ago.

“We sold these three so we could keep to better negatively-geared properties we purchased to renovate and sell. Hindsight’s great. I did some numbers and worked out we would be better off letting the three old properties go and reducing debt on the two renovated ones and having a better quality portfolio.”

Towns like Wanganui, says Tim Mordaunt, REINZ district president for Manawatu Wanganui, will look like a better investment option in the next few years than the larger metropolitan areas. “The average sales price is around $180,000 odd dollars — half the price of the Auckland average, and $100,000 less than that in Manawatu. For people wanting a more affordable investment, Wanganui looks ideal.”

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