Stately southern star

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Dunedin is a market of two distinct parts but its affordable prices and healthy returns make it attractive for investors, discovers Miriam Bell.

Tuesday, October 30th 2018, 8:32AM 1 Comment

It’s the “Edinburgh of the South”, known for its proud heritage, nineteenth century architecture and old world cultural ties. Some of New Zealand’s best known companies, including Fletcher Construction and Hallensteins were established in Dunedin and the city is also home to the country’s oldest university and newspaper.

But Dunedin is also “scarfie” city, famed as a student centre and for the lifestyle that accompanies it. With over 21,000 people enrolled at the University of Otago – and many more at the Otago Polytechnic and the teacher’s training college – students and academia play a major role in the city.

This means that Dunedin’s property market is effectively in two distinct parts. There’s the more traditional family-oriented residential market in the suburbs and then there’s the busy, inner city student market. For investors, it’s critical to understand that.

But it’s equally important to know that Dunedin’s market has been the star performer amongst the main centres of late. While price growth in other centres has slowed or flat-lined, Dunedin continues to see double digit growth and high demand coupled with a shortage of supply.

Market buzz

Traditionally, Dunedin’s market has been a steady bet for investors. It has been characterised by affordable property prices and high yields, particularly in the student market. But more recently that has changed.

According to the latest QV data, the city’s values remain on a solid upward trend having increased 10.7% in the year to August and 1.7% over the past three months. This has left Dunedin’s average property value at $415,888, as compared to $375,814 at the same time last year.

Dunedin investor Simon Niblock, who has several rental properties, says that over the last year, things have been moving on the capital growth front. “It’s always a solid market but it seems buzzy at the moment and there is a good feel going forward. That’s great for values and yet, for investors, it’s still a comparatively affordable market.”

Otago Property Investors’ Association president Cliff Seque agrees. He says it is still possible to buy a three-bedroom house for $350,000 and then rent it out for about $400 to $500 a week.

“That means the returns are good. There are some places which yield around 6-7%. Compare that to 3% in Auckland. Unlike many other markets, you can get cash flow positive properties here. So, for an investor wanting a cash flow stream it’s great. And it’s a very stable rental market. There are no big ups and downs like there are in Queenstown.”

This makes Dunedin a very attractive market for investors. In turn, it means the city is currently seeing a lot of out-of-town buyers and local demand is high too, particularly from first home buyers. Local agents say there is a widespread shortage of stock and new listings have been down over winter.

Edinburgh Realty property consultant Lane Sievwright says the winter season’s sales turnover has been lower than in previous years. “But the shortage of stock has helped to increase prices. There is also a shortage of rental properties so rents are going up. That supply and demand equation will always increase capital gains.”

Market insiders are anticipating an increase in listings as the market heads into spring. But they are also reporting that landlords are starting to sell their former student rentals to first home buyers. That’s due to the changes to housing and tenancy policy and the fact that first home buyers pay more. This too is impacting on the workings of Dunedin’s market.

Developing times

While the property market might be going through changes, solid economic drivers remain in place.

The centrality of academia to Dunedin’s economy is a huge factor in this. Not only do the rolls of the various tertiary institutions continue to increase, but there’s a lot of construction work taking place around campus – in the form of new facilities and residences.

The government has also recently given the go-ahead for the redevelopment of Dunedin Hospital. The new hospital will be one of the city’s major construction projects over the next 10 years. On top of this, the Dunedin City Council has allocated $868 million for capital projects, including extensive infrastructure upgrades and an upgrade of the central city area.

Another significant development project on the horizon is the development of the Dunedin waterfront and port area. The government is funding a feasibility study into the project which would include hotel and residential accommodation.

All of this development means Dunedin is set for an influx of workers. Property Scouts Dunedin operations manager Darlene Johnson says lots of short and long term contractors will be arriving in the city. “That will boost rental demand even further. It will be a strain on the rental market. It’s good for Dunedin but we need more houses!”

According to Westpac’s latest regional round-up, economic activity levels in Otago generally are higher than in the same period last year and significantly better than the five year average. It records growth in tourism, improved conditions in the agricultural sector and increased activity in the manufacturing and services sectors.

Although Dunedin itself has this year seen the closure of one of its flagship manufacturers, the Cadbury chocolate factory, the city is home to some flourishing niche industries including engineering, software engineering, bio-technology and fashion. These industries are nicely complimented by a vibrant arts and music scene.

Johnson says the city’s affordability, as well as the research hub that is the University, are helping Dunedin become a destination for new, start-up companies. “Again, that means new people are moving to the area and needing houses. So there is ongoing demand for accommodation.”

Rental considerations

Traditionally, it has always been demand for rental accommodation that has been Dunedin’s lure for investors. With the booming student rolls and the anticipated arrival of new workers that demand is not likely to let up. Add in the supply shortage at play and the future of the city’s rental market looks rosy.

The latest Trade Me Property rental price data shows the median rent in Dunedin was up by nearly 10% on last July to a record $400 per week. It has the median rent in July for a large (five or more bedroom) house at $708 per week and $415 per week for a medium (three to four bedroom) house.

While the city has two distinct rental markets - it is the student market that the city is known for. Sievwright estimates there is generally a 6-7% yield possible on student rental properties, although it does depend on the age and type of property and the location.

He says that demand for student rentals is high and not going anywhere. But investors thinking about that market need to be aware that it works on 12-month tenancies and that those tenancies are advertised, and let, in June-July.

“Those properties are let with fixed rent prices for the coming year. So the tenancies don’t start till the January after they are let. That means landlords need to be aware of this and be careful to get it right when setting their rents.”

There are a number of things that landlords interested in the student market need to know. Seque, who owns around 80 Dunedin properties, says firstly, location is key with students preferring central areas that are handy to campus.

“Second, the rooms must be equal. People don’t want to get the small room or the dark room out in a flat – people want decent-sized, light rooms. Also, if you are looking at big six, seven, eight-bed flats then the property management is more intensive and the turnover of tenants and tenancies is greater.”

He says it pays for out-of-town investors to have a property manager on the ground, especially as tenants have higher expectations of properties these days. “In the student market, regular inspections are also necessary.”

Within this market, there is a sub-market for studios which are semi self-contained, furnished units with shared kitchen and sometimes bathroom spaces. In a studio rental, the landlord pays for utilities like power and internet. This means they can be rented for a higher price but the costs of providing them are higher.

Johnson says studios work best in central areas. “They are very popular with senior and international students who still want a communal feel but are over flatting. We’ve noticed they seem to be more popular this year. But anyone looking to convert a building into studios – or invest in a studio building should know tenants prefer studios with en suites.”

Quite a few older, inner city buildings are being converted into apartments and studios, which helps supply. In contrast, the pool of standard family houses for rent is strapped and the supply is getting tighter. That’s due to landlords getting out of the game and selling their rentals to first home buyers.

There has been a change in the rental market over the last 18 months, Johnson adds. “Not only has supply tightened up, but the higher sales prices mean that returns have gone down a bit. Yields were about 7-8%, but now they are around 6%.”

Picking places

When it comes to selecting where to buy, it’s no surprise that those interested in the student market are advised to buy in suburbs close to the University.

Sievwright says the campus area is in North Dunedin. “So that’s where most students want to live and that’s where investors should look to buy. But suburbs closer to the city are also good for visiting academics, young professionals and for people working on development projects.”

For investors interested in the family rental market, he recommends areas with good school zones from primary up. “Think Roslyn, Balaclava, Maryhill. Some of the outer suburbs are getting more popular with older people moving out to them to rebuild.”

Johnson also picks Maryhill along with Mornington, the older seaside suburbs of St.Kilda and St.Clair, and Andersons Bay as good suburbs to buy in.

They are all popular for families but the key for investors is to buy where there is sun, she says. “Access can be ridiculous in Dunedin so investors should go for properties on even ground with easy access. Also, it gets cold so you want well-insulated properties that are straight forward to heat.”

For Niblock, it’s all about potential and affordability. He picks North East Valley as the place to buy for those reasons. “There is lots of older stock with potential for value-adding renovation. But you need to be careful, do your homework and make sure properties are compliant and consented.”

St.Kilda is another area which is attractive to tenants but has cheaper stock, he says. “But rising sea levels could be an issue, so drainage and flooding are things you need to think about.”

Going forward, the experts all emphasise that times are changing in Dunedin. Along with the greater compliance obligations for landlords, tenants are more educated about rental requirements these days. That means owning and managing rental properties makes for more work now.

Johnson adds that while the market has been a star of late, it is cyclical and the market is starting to settle. “I don’t see prices dropping, but there will be more properties available. And it will take some time for the market to start rocketing again. But Dunedin is a good steady market with scope for good performance– if you buy well.”

Tags: housing market property investment

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