It’s been more than a year since the country’s borders closed and overseas students swarmed back to their own countries in the wake of Covid-19. And the effect on Auckland’s CBD apartment market has been swift and dramatic.

Almost overnight the hallmarks of a sector falling into a crevasse were evident – a glut of empty apartments, rents falling by up to half and sale prices tumbling.

From stock of about 40,000 CBD apartments, 1,274 lay empty within one week. Many had been abandoned, without notice, by overseas students and foreign working visa holders fleeing home.

“It was a huge shock to the market,” says Scott Dunn, City Sales broker and marketing manager.

The flow on from the substantial number of empty apartments was that rents tumbled. Investors had no option but to drop their rents to attract new tenants. Many new tenants were able to secure an apartment for $100-$150 a week less than the going rent before Covid-19 lockdowns hit.

Even more important than the rent drops were the number of vacancies, says Dunn.

“If the rent dropped for an apartment next to a sitting tenant, that tenant would then move into the cheaper apartment.”

Dunn says it took months to get apartments rented and during this time many investors were stressed and stretched to the limit with mortgages, body corporate fees and rates still to pay. “They had to lower their expectations.”

CBD Back In Business

It is only now that the CBD apartment market is getting back on its feet to near normal (vacancy rates of 10%) and rents are slowly starting to rise again.

Local university students, renters who choose to work and live in the city and people migrating from the regions have filled the gap left by international students and foreign worker visa holders. “There is not the demand there was 18 months ago, but in the first half of next year, average rents of $500 for a onebedroom apartment and $650 for a twobedroom should return,” says Dunn.

Auckland’s CBD apartment market was once nearly the total preserve of investors, who made up 80-90% of the sector. This has dropped back to 60- 70%. They mainly own the CBD’s smaller apartments – the lower the floor area the higher the return.

Anything under 50m2 excludes owner-occupiers because banks won’t lend on them and if buyers can get a loan they often need a 50% deposit. “It is also better to buy two or three studios rather than a two or three-bedroom apartment, as a studio can be sold easily if an owner hits financial strife,” says Dunn.

The pandemic woes didn’t just include rent drops, says Dunn. When some stretched investors came to sell they hit a major issue. “For example, if they had a freehold studio apartment and accepted rent of $200 a week just to get a tenant, whereas pre-Covid it would rent for $400, and then expected to sell for pre-pandemic prices, buyers were nowhere to be seen. It was difficult for investors to accept the return from a tenant paying $200 a week rent was only 1.5% and buyers won’t pay that for an apartment when they are used to a 4-6% return.”

Investor sales stock became difficult to move and prices went down.

“It hasn’t been pretty,” says Dunn.

largest volume of new CBD apartment sales occurred in 2016 and slowed down in late 2017 to 2019 when the Government’s KiwiBuild mission was in full swing. It changed the focus from the CBD and city fringe higherpriced apartments to more affordable residences in the suburbs, where investors on average have just a 30% foothold, compared to owner-occupiers at 70%.

Suburban Options

There has been a shift in investor interest to apartments outside the city centre, says Peter Evans, Colliers International residential projects director.

Auckland Council’s Unitary Plan, which allows higher densities, height and scale in good areas close to cafes, bars, retail and transport, has been a boon for suburban apartment developments. Investors who get a foothold in these developments can have a completed new apartment leased within two weeks at a rent that will often cover mortgage payments, says Evans.

Developers have turned to the suburbs because of build costs and the ability to build larger apartments. Building a CBD high rise costs about $5,500 per m2 (which doesn’t include land, professional and other fees) compared to a suburban apartment project, without basement car parking, at about $3,500 per m2.

New CBD apartments sell on average for about $16,000 per m2 whereas a suburban apartment will sell for about $9,000 per m2.

“It’s a significant difference on a rate per m2, making suburban apartments far more attractive to owner-occupiers,” says Evans.

Prices for a freehold CBD studio range from $350,000-$420,000, a one-bedroom with car park $550,000- $650,000 and a two-bedroom with car park $750,000-$900,000 but varies from building to building, says Dunn.

In the suburbs where affordable apartments are selling well, they range from $450,000-$700,000 for studios to a one bedroom. Evans says $750,000 for a two-bedroom apartment is also considered affordable. “They are easy for investors to rent.”

Two-Beds Popular

Most popular for CBD investors are 60m2 two-bedroom apartments with a car park in a freehold building up to about $700,000-$750,000. Dunn says investors kick out of buying at about 3% rental return.

Both Dunn and Evans say despite the pandemic hitting CBD apartments hard, they remain good investments because of cash flow and until recently the good capital gain.

“Rental returns of 5-6% for apartments are by far the better option than houses at 1-2%. However, houses are better than apartments in terms of capital gains.”

Williams Corporation, the seventh biggest New Zealand building company, sells its new apartment/townhouse projects in a 50/50 split to investors and owner-occupiers in Auckland, Wellington and Christchurch. Last financial year the company built 550 homes and this year will deliver 800.

Investors mainly buy two-bedroom townhouses in a lesser location for a better yield.

“The better the location the lower the yield,” says Matthew Horncastle, Williams Corporation director.

“Investors are either buying for yield and capital growth – or often there will be a family reason –such as a son/daughter at university or flatting, a member of the family they want to help.”

Since May last year sales for Williams Corporation have far exceeded expectations. The development/building company has no stock left and demand is still high, particularly for properties in the $600,000-$700,000 range in Auckland and Wellington. However, it has 68 construction projects on its books to be completed.

It usually takes only a day for the company to sell a typical development of 15 townhouses off the plan and occasionally an investor will buy an entire complex.

A capital gain between the time investors sign up for a home and when it is completed is normal. For example, a three-bedroom townhouse put on the market six months ago would have been priced at $650,000 and by the time it is finished it will be valued at $800,000.

Cost Inflation

Horncastle says the biggest risk for developers and builders is cost inflation.

“New Zealand is caught by materials monopolies, shipping hold-ups, a global building boom and a weak local supply chain. In the past year the cost of building a home has gone up $60,000. I have never seen costs rise that fast in my 15-year career.”

He says every developer/builder/ tradie is trying to increase apartment/ housing supply but many issues from zoning; build, land and services costs; a lack of tradies; and a range of other issues means the supply is what the supply is.

“These issues also make it extremely difficult to build affordable apartments.”

Investors are expected to switch to buying new builds, particularly apartments, when the Government scraps mortgage interest tax deductibility, as they will be exempt but the final detail won’t be known until September. Reintroduced loan to value ratios, meaning 40% deposits, will also not apply.

Whether this will dampen investors’ enthusiasm for existing property is yet to be seen, especially as there have been many attempts to “fix the market” in the past, says Dunn.

“New rules initially create panic. When the foreign buyer ban was introduced, the lights went out for a couple of weeks and then people realised there were local buyers.”

Apartments are increasing in popularity across the country. Building consents for apartments, townhouses and flats are increasing and now account for about a third of all new consents issued.

Apartments In The Pipeline

In the past year Auckland has had 65 apartment projects of 10 units or more under construction. Some of the bigger projects include the 19-level, 121 apartment CAB development in Auckland Council’s old administration building; the 178-metre-high Pacifica with 627 apartments; 250 units in a four-stage development at Alexandra Park; 210 apartments in Ockham’s Manaaki development across four blocks in Onehunga; 138 units at Parkside Residences in Mt Wellington.

In Wellington developments includeIn Wellington developments include Willis Bond’s 123-unit Victoria Lane apartments in Cuba Mall; Wellington Company’s Aroha, an office building to apartments conversion; Sunset West, a 28-apartment complex and oTTo, a complex of 80 modular units.

Tauranga has 200 new apartments either completed, under construction or being planned to revitalise the CBD, and Downtown Tauranga says that number needs to increase 10-fold if the city is to prosper.

In Christchurch 90 units at Brougham Street, Sydenham; 68 units at Latimer Square in the CBD; and 43 units at Riccarton Road are among the bigger consented developments.