Apartment views

Using apartments for short-term rentals or for foreign students has been a popular option for investors but, in the wake of Covid-19, what will happen to apartment markets around New Zealand? Miriam Bell investigates.

Monday, June 29th 2020, 8:00AM

Apartments have long been a key component of the great modern cities of the world, yet New Zealanders were slow to warm to them. But, in recent years, they have grown in popularity. While they have been increasingly embraced by owner-occupiers, it was investors who led the charge, motivated by the more affordable prices and healthier yields on offer.

As a result, investors are major players in the apartment market and, particularly in Auckland, that means many apartments have been turned into short-term rentals or targeted at international students. But, given two of the industries hardest hit by the Covid-19 crisis are tourism and international education, what does that mean for New Zealand’s main apartment markets going forward?

We decided it was important to find out. So, we talk to apartment experts from the Auckland, Wellington and Christchurch markets to establish what lies ahead for these urban markets.

Shock to heart of the city

It’s New Zealand’s most well-established and diverse apartment market, but the Auckland CBD market is also the one with the highest reliance on both tourists and foreign students.

That said, it’s also a market that features distinct sub-sectors: there’s luxury high-end offerings for owner-occupiers; there’s classic investor stock; and there’s also the city fringe suburb offerings, which are pitched at a range of buyer groups. This makes for greater complexity when assessing the outlook for Auckland’s apartment market.

Andrew Murray is the director of Apartment Specialists and an apartment investor. He says the Covid-19 prompted downturn will be felt in the CBD market, particularly as it has more jobs per capita than any other area and lots of jobs will be lost.

“That will have an effect on the apartment market, because why rent a place in the city if you are not working nearby? Likewise, the loss of international students has had, and will continue to have, an impact: those smaller, investor-type of apartments that cater to them are not being rented as much.”

Demand has decreased and that points to what will be the biggest problem for this market – rental income. The problem will be heightened by an influx of short-term rental properties, as well as the serviced apartments leased by hotels, on to the traditional rental market, Murray says.

He doesn’t think that all existing short-term rentals will be put on the market: he picks that about 40% will remain on the short-term market or for private use. But the increase will be enough to impact on rents.

“Investors who were getting about $500 a week, might see their rents dropping back to about $450 a week over the next six to 12 months. That’s a drop of about 10%.”

Prices for investor stock are also likely to decline a bit, Murray says. “I think we’ll see prices go from about $400,000 to about $340,000 over the next 12 months. But yields will remain decent, around six per cent. And rents will head up again over the next few years.”

For investors who are in a healthy position, there will be some good deals in the apartment space, he adds. “But getting finance for apartment buying will be harder, so if an investor is in a position to put in an unconditional offer they stand to do well.”

It’s worth noting that Murray doesn’t see the owner-occupier segment of Auckland’s market being hit that much. One reason for this is that first home buyers are still out there and a softer market with lower prices could work well for them.

“Also, the group that will see this through is the baby boomer buyers. Because they will keep doing what they want to do: if they want to downsize to an apartment in their area they will. So the high-end, city fringe apartments aimed at owner-occupiers should sail through this.”

Impression Real Estate’s Aaron Tunstall is more positive about the outlook for the market, although he acknowledges the dark clouds on the horizon. His company specialises in inner city Auckland properties and, since moving to level two, they’ve had a rush of enquiries.

He thinks this is driven by low interest rates, the removal of the loan-to-value ratios (LVRs) and the view that properties are less likely to be overpriced. “We are seeing a gap between vendors’ and buyers’ expectations. It will be interesting to see what happens in a few months’ time. But there’s likely to be deals out there for investors.”

From a rental point of view though, the Auckland CBD market has been affected. In March there was about a four per cent vacancy rate and that went up to 6-7% going into lockdown, largely due to a lack of international students.

In a similar vein, on Trade Me there’s usually about 750 CBD rentals, he says. “That doubled to about 1,400 right after lockdown and that was probably due to the short-term rental type properties coming on to the market. The vacancy rate is now about 10%.”

However, Tunstall thinks the influx of short-term rentals on the market has happened and they are now in a position to work through that backlog of supply. “When the borders are opened up that will change things. International students have underwritten the market for many years, so here’s hoping we can get them back again as soon as possible.”

Capital outlook

In contrast, Wellington’s apartment market seems to be heading into far calmer waters. The Capital’s market is smaller and more centralised and has a higher proportion of owner-occupiers in it. Also, much like the broader Wellington market, it has long had a shortage of rental properties.

These features stand it in good stead for the coming months. John Kettle, from Tommys Real Estate, says the market has swung back into action again post lockdown.

“To date, there are no signs of a fall-off. We’re getting lots of enquiries and interest. I think the market is still robust: apartments are in strong demand. I don’t think that’s going to change. It’s significant that we went into the lockdown with very low supply.

“It means if properties do start to get sold off, the market is not going to get flooded. Prior to the lockdown, demand far exceeded supply. More listings can only improve the situation for buyers as they have more choice.”

Wellington’s apartment market has a strong base because it’s the seat of the Government and the public sector is the city’s major employer, he says. “Part of the attraction is that the apartments are right in the city where many people work. With that urban lifestyle at hand, there’s all you need right there.”

It’s attractive not just for owner-occupiers, but for tenants too, and that means there are lots of good opportunities for investors in the market. Additionally, Kettle believes Wellington’s market will be sheltered from the downturn.

“Employment is not likely to get as smashed as it will in other places. It is protected because it is a government town, which is good in the employment stakes, and there’s lots of people coming back from overseas. Many of them are used to living in apartments and want to continue doing so. I can’t see the demand falling off.”

Kettle is not alone in his optimism about the outlook for the Capital’s apartment market. Veteran apartment developer and investor Chris Parkin agrees.

There are several reasons for that. One is that he too doesn’t think Wellington’s workforce will see high unemployment because of the predominance of public sector and professional service industry jobs.

Another is that the demand for affordable, inner-city living in Wellington is still there.

But if people are waiting for significant price reductions, he doesn’t see where they will come from. That’s because there is no construction overhang and not enough under construction to suggest there will be a flood of apartments come on to the market.

“The only area for downward pressure could be from forced sales. But the banks have committed to taking a soft approach and trying to get people through this. Interest rates are at record lows, so the ability to service a mortgage is heightened. I don’t see prices lowering, although I see less interest in the high end of the market.”

On the rental side of the equation, Parkin doesn’t see short-term rentals coming on to the traditional market as a problem. “Wellington’s tourism market is not an internationally driven one. It is more locally based. The short-term rentals get most of their business from Kiwis. So I think that part of the market will sit tight and then pick up again.”

The dearth of international students has had a bigger impact on the rental market, although students don’t tend to go for the apartment types on offer, he says. “I understand Universities are working with the Government to get a quarantine process in place to attract international students back. In another six months’ time, I would be surprised if that market hasn’t picked up again.”

In his view, investors should consider the Wellington apartment market as offering good investment opportunities. “There hasn’t been a fundamental change in the long-term outlook since before Covid-19.

That’s why while there might be bargains in the short-term, they should be snapped up because they won’t last for long. The market will just keep growing.”

Garden City opportunity

The earthquakes that devastated Christchurch back in 2011 changed the city forever. They also led to the creation of a new, high quality apartment sector as part of the city’s rebuild. Now, nearly 10 years on, that post-earthquake recovery has left the apartment market in Christchurch in a strong position in the wake of Covid-19.

Harcourts Redwood’s Mark O’Loughlin says their apartment stock is the highest quality of stock of any city in the world. That’s because they are built to the most current building code and high spec engineering requirements and are centrally located in a super-modern, liveable city.

Many of the apartments built post-earthquake have gone to owner-occupiers and they don’t have enough properties built for the investor market to service the demand, he says. But the investor stock they have sits in the $400,000 to $600,000 range which is comparatively affordable – and it’s been attracting attention from out-of-town investors.

When it comes to the rental market, O’Loughlin says that, pre-Covid-19, it was looking healthy but it has shifted slightly now. “About 30% of apartments were being used for short-term rentals. Of them, about 70% were used for domestic travel and business visitors rather than overseas tourists.

“But Christchurch is not overly dependent on tourism. Tourism is important, but our economy is underpinned by other industries, like education and rural support markets, so our rental market is not as exposed to it in the way other places are.”

He is positive about the future. “Christchurch itself is well-placed. The convention centre is built and pre-booked, there’s about $8 billion in government expenditure on the cards, we have a strong port, there’s the farming industry. The city is expanding and it bodes well.

“As to the market, it has been flat here, with limited capital gain, for some years. But now things are starting to pick up again. People have invested here because of the future of Christchurch. But it also has key points for investors. It ticks all the boxes and it’s a great place to buy into.”

Christchurch’s apartment market may not be poised to see the dramatic growth other markets have seen in recent years, but it has much to offer investors. Investor and developer Matthew Horncastle says it is fundamentally strong and steady.

He doesn’t think the Covid-19 crisis will impact on that. “There will be a reduction in sales, but there’s not much around in terms of supply. I think about five apartment developments are planned. But around 50% of those planned new ones won’t go ahead so the market will be undersupplied - yet there is definitely demand there.”

Further, Christchurch’s properties are under-valued so there’s still scope for growth in apartments, Horncastle says. “That means there are some great deals for investors in the offing. Especially because the locations are fantastic, the quality is great, the price point is affordable, and the returns are good. What’s not attractive about all that?”

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