Evolving CBD makes for investor opportunities

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Monday, September 28th 2015, 9:35PM

by Miriam Bell

Nestled into the nooks and crannies of Auckland’s Waitemata Harbour, the city’s CBD boasts a spectacular site. Blessed by its proximity to natural beauty, it has always been home to local government and a business focal point.

Yet, despite its prestigious heritage, in the early 2000s the Auckland CBD had fallen on hard times. The streets seemed shabby, run-down and semi-deserted, while the atmosphere was that of somewhere which had seen better days.

Fast forward to 2015 – how things have changed!

Over the last 10 years, Auckland’s CBD has been the beneficiary of significant public and private investment. The area’s ongoing regeneration has transformed it into a vibrant city centre, which is attracting growing numbers of residents.

Savvy investors have always been aware of the opportunities within the CBD. In the past, those opportunities revolved around reaping high returns. But now, in line with the area’s rapidly changing dynamics, there is the potential for capital gains, too.

UNIQUE CHARACTER

Auckland’s CBD is a unique residential area. Nowhere else in Auckland, let alone New Zealand, is there such a high concentration of businesses and residents existing side-by-side.
However, it’s highly urbanised character is a relatively new one. Today, approximately 30,000 people reside in the CBD. Just 12 years ago, the total was 10,000. It’s a huge population increase - and one that appears to have been driven by growing numbers of CBD jobs and changing lifestyle attitudes.

Growing numbers of companies are choosing to base their head offices in the CBD, creating many more CBD-based jobs. Auckland Council city centre integration spokesman Oliver Roberts says there are about 95,500 jobs in the city centre. “We estimate that, in recent years, about 1.5 thousand jobs on average have been created each year,” Roberts says. “We expect that rate to increase as more commercial space comes online.”

In fact, CBD business association Heart of the City figures estimate there will be 128,000 to 140,000 workers by 2032. Many of these people will want to work and live in the CBD.

The council wants to provide opportunities for people to do just that, Roberts continues. As a result, there are currently 3,000 new apartments in the pipeline. Overall, there are 30 new private sector developments - encompassing commercial, residential, retail, and a mix - underway. This amounts to around $10 billion of private investment in the CBD.

Roberts says the figure is a big vote of confidence in the CBD. “It indicates the scale of belief and excitement about the Auckland central area, what it offers and the way it is developing,” she says.

BUILDING LIVEABLE CBD

In conjunction with the central city development, the council is focused on improving transport connections to the rest of Auckland. Work underway includes the City Rail Link project, along with upgrades to the bus and cycle networks and, potentially, a light rail system.
This is to ensure the rest of the city has good access to the CBD and can benefit from the jobs, opportunities and options available there, Roberts says. “We are all about supporting and encouraging Auckland’s ability to grow. To that end, we want to provide choices for people in terms of living and working in the CBD, as well as accessing it.”

CBD investment is not confined to buildings and transport. Heart of the City centre manager Tanya Loveridge says making the area a more liveable city centre a focus.
Over the next 10 years, $500 million will be spent on public space upgrades to provide higher quality environments and experiences for people. This will include further development of the waterfront, Aotea Square and urban precincts like Federal St and O’Connell St.
Loveridge says all the new residential and commercial developments underway reflect increasing demand. “Working and living in the city centre is an increasingly attractive proposition, and people now understand that this can deliver a quality living experience with diverse choice.”

INVESTOR’S MARKET

Much like the CBD itself, the CBD’s residential property market is unique. Primarily made up of apartments, it has long been the province of investors and their tenants rather than owner-occupiers.
Traditionally, investors have dominated the market. Ray White apartment specialist Krister Samuel says that, until recently, the investor v. owner occupier split was 80/20 to investors. This is changing, but investors still make up about 60% of the market.

Part of the reason for this is the type of available apartments. There are 18,500 apartments in the CBD proper and 25,000 apartments in the broader CBD, when such fringe areas as Newton and Eden Tce are included. Of the 18,500 CBD apartments, a large amount are small and of the “shoebox” style.
Many of these apartments were built in the 1990s and, in terms of minimum size, the developers built them as tightly as they could to fit the requirements. This means some studio apartments can be as small as 20 metre square. Banks don’t like to lend for such apartments: they require a 50% deposit for anything under 40 square metres.

Such apartments are not appealing to owner-occupiers. But they are appealing to investors because they are cheap and they bring in good returns.
Zest Apartments on Nelson Street epitomise this type of apartments. It is possible to pick up an apartment in the building for under $200,000. At the same time, Samuel says the average CBD rent for a studio apartment is now between $370 to $400 a week and up to $500 a week for a two bedroom apartment.

OPPORTUNITIES ABOUND

APIA president Andrew Bruce is a big proponent of CBD apartments. He owns a number himself and sings their praises as an investment opportunity.
Not only do they mean fledgling investors don’t have to spend $800,000 to get into the Auckland market, but there is more scope for decent returns, he says. One of his small studio apartments cost $122,000 and it brings in $290 a week in rent.

“People get wrapped up in capital growth but, as an investor, you need cash flow,” Bruce says. “My CBD apartments are good for this. Plus I’ve never had a vacancy and I’ve never had a problem finding a tenant.”

Thinking about potential tenants is important, but Bruce says the tenant pool in the CBD is largely made up of young professionals and students. Most of his tenants are young professionals with disposable incomes who have made his apartments into their long-term homes.
In his view, capital growth is possible in traditional investor apartments – particularly because of the growing interest in the market from owner-occupiers. “This is a market where values are just going to go up.”

RISING PRICES

Samuel agrees, describing the prices that are now being achieved as staggering.

Owner-occupiers have started to wake up to the fact that the Auckland CBD is a viable suburb to live in, he says. And owner-occupiers moving in means that prices are being pushed up.

Apartment prices are starting to reflect the housing market and going crazy, City Sales director Martin Dunn says. His agency’s latest data shows that the average apartment cost is rapidly approaching $6,000 per square metre. The average sale price for an apartment was verging on $300,000.
However, many apartments cost considerably more. Dunn says the new breed of higher end apartments, in developments like Sugar Tree Apartments in Union St, are selling for around $10,000m2. Such luxury apartments as those being built in Wynyard Quarter are dearer.

In 20 years of selling apartments, Dunn has never touted capital gain for them – but he is now. This is because the sector is currently experiencing unprecedented capital gain, he says.

“In the past, CBD apartments have had a 5% to 7% net return but no growth. These days returns are down to 4.5% to 6% net return but there is dramatic gain, because of land and building values going up so fast,” Dunn says.
Auckland’s housing supply shortage means this situation is unlikely to change any time soon, he adds.

AUCKLAND MARKET ENTRY POINT

Although prices are going up, the market continues to offer good opportunities for investors.

Samuel says the more owner-occupiers snap up available apartments, the less rental stock there is on the market. Because of the nature of the area, rental demand is not going to drop; in fact, the reverse is true.

“So there is a squeeze on rental values and asking rents per week are going up. Which is good on the returns front – especially if you have bought for a cheaper price,” he says. “Unlike other parts of Auckland, decent returns are still possible and now there is capital gain too.”
This makes the CBD market a great option for people wanting to get on to the property ladder. Apartment Specialists director Andrew Murray says that rather than purchasing an expensive, standalone house in a far flung suburb, people making their first investments should opt for a central city apartment.

“While returns are now down to around 5% to 6%, compared with 8% to 9% just a few years ago, investing in an apartment is the best way to get some decent returns. Plus there is potentially some capital gain, too.”
Murray has CBD investments himself and he cites one as an example. “It is a three bedroom house in Shortland St, so right in the heart of the city. I bought it recently for $730,000 and I get $1,655 per week in rent. So it cost less than the average Auckland house and it is earning much better returns.”

CAUTIONARY ADVICE 

However, investors need to be aware of some issues with CBD apartments

One is the difference between a leasehold apartment and a freehold apartment. With a leasehold apartment, the owner doesn’t own the land the apartment is on – they just own the apartment itself. As such, they pay ground rent for the use of the land.

Dunn says quite a lot of leasehold apartments are in this market and, further, with five different types of leasehold tenures. “It is a complicated area so, if someone is considering buying one, they need to talk to an expert in the area to help them understand all the issues before purchase,”

He doesn’t object to leasehold apartments, but Bruce is not a fan. The reason people buy them is because they tend to be in prime locations, like around the waterfront, he says. For example, the Wynyard Quarter apartments will be leasehold apartments.

“They tend to be cheaper than similar freehold apartments, which some people like – especially if they want to get into those prime locations,” Bruce says. “But, in the end, you do want to get some capital growth, and land is what pushes it. So, for that purpose, a leasehold apartment is not the way to go.”

Another issue which investors need to know about is whether an apartment is a leaky building. According to some estimates, up to 40% of buildings in the CBD need remedial work because of weather-tight issues – although that figure covers all buildings, not just residential.

Thanks to the amended Unit Titles Act, the possibility of buying a leaky home without being informed of it has been ruled out to the extent possible. With no surprises, buying into a leaky building is one of the ways that an investor can get a good deal – if they know what to do, Samuel says.

“They have lower prices so the returns are good. It is necessary to factor in the known outlay for repairs and costs. But you won’t need to do the repairs; the body corp does. And the costs are coming down.”

Bruce, who owns a leaky apartment, believes they offer potential opportunities, depending on the investors’ skill set and risk tolerance. “Newbie investors probably shouldn’t have a go, but they can be worthwhile for more seasoned investors,” Bruce says. “Anybody thinking of it should get expert advice before going down that route.”

FUTURE DYNAMICS

The ongoing investment in, and development of, the central city means the future is bright for the rapidly evolving area. Changing attitudes towards apartment living will, however, have the most significant impact on the CBD market.

Samuel says many New Zealanders remain scared living in the CBD, but that is changing. That it is still possible for someone to get into the market for under $250,000 has a lot to do with that.

“Yet, in discussions about suburbs with median prices under $500,000, the CBD is not usually included. People don’t think of it as a suburb. And it is probably the last place in Auckland where professional people can live in a reasonably upmarket suburb – and where landlords can get a return.”

As people realise the benefits that can come with apartment living, the move of owner-occupiers into the CBD is expected to increase dramatically. This will be given further momentum by the SuperCity’s supply and affordability issues.

The council is focusing on intensification as one of its solutions to these problems. Already higher end apartment developments aimed at owner-occupiers are springing up in, and around the fringes of, the CBD. The roll call includes Sugar Tree Apartments, Union Green, Wyndham Quarter, the Hereford Residences and Ockham Residential’s Hypatia.

While these developments will have an impact on the market, it is set to be a positive one. Not only will these types of apartments drive further development of the area, but they will drive value growth. The work and lifestyle attractions of the CBD’s rental market mean it is expected to remain extremely strong.

As Dunn says, big changes are afoot and the times are exciting – good news for investors.

If you are looking to invest in the Auckland CBD get in touch with Quinovic

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