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Revisiting Apartments

Kiwis are traditionally resistant when it comes to buying and living in apartments but the time is right for investors to take a fresh look at them as an investment option, reports Miriam Bell.

By: Miriam Bell

1 March 2019

Imagine a low-maintenance property that has a price significantly below the oft-quoted median for its desirable location and that still attracts a high rent. It sounds like a pretty attractive investment option – and it’s not a pie in the sky proposition. Such properties do exist in the shape of apartments.

Yet New Zealand investors are often resistant to investing in apartments. In this year’s Squirrel Property Investors’ Survey nearly two thirds (63.48%) of respondents answered “no, not interested in apartments” to a question on investing in apartments.

This seems surprisingly high and begs the question of why investors continue to be so apartment averse, particularly in the current market. But there are reasons for the resistance.

One reason is that in the 1990s so many cheap apartments were built in central Auckland that there was an oversupply and few of them saw any capital gain. On top of that, many of those apartments then developed remedial problems. This combination of factors left many people believing that apartments are not worth investing in.

Another reason is that apartments were long seen as not being a New Zealand way of living. Instead the New Zealand dream was always a standalone house on a quarter acre block in the suburbs. Owning apartments, which are usually of a smaller floor size and governed by a body corporate, has just not been part of the Kiwi psyche.

Now though, times have changed: The population is growing fast, there’s a widespread shortage of housing and increased intensification is on the agenda for New Zealand cities going forward. Additionally, demographic changes mean that apartment living is growing in popularity.

All of these factors mean that it is time for investors to take a fresh look at apartments. In this article, we make the case for why they are a viable investment option and examine what investors need to know before they break with tradition and take the plunge.

Positive Equations

There are some fundamental reasons why apartments add up as an investment, particularly in Auckland. These include more affordable prices, better cash flow and yields, tight supply and growing demand.

‘There is a perfect storm at work: prices have gone down a bit, interest rates are low and rents are going up, plus supply is getting tighter’ GRANT HOEY

The “apartment master”, Grant Hoey, has been investing in property for over 25 years and apartments have long been his specialty. In his view, one of the biggest attractions is the cheaper entry point they offer as compared to standalone houses.

In Auckland, for example, Colliers’ latest apartment market report has the median sale price for an apartment at $558,000 in the second half of 2018. That is as compared to the median house price of $910,000 over the same period. It’s a big difference.

Hoey says at those prices younger people should be buying them up as they are a great way to get onto the property ladder. “Right now is a particularly good time as there is a perfect storm at work: prices have gone down a bit, interest rates are low and rents are going up, plus supply is getting tighter. This all creates an attractive situation for investors.”

The dip in apartment prices is wellrecorded. Auckland apartment agency, City Sales’, latest data has their average sales price at the $350,000 mark at the end of 2018. It’s down from around $440,000 at the end of 2017. The data also has the average price per metre at about $8,000 at the end of 2018, down from around $9,400 at the end of 2017.

What it means, alongside more affordable prices, is that apartments are becoming cash flow positive in a big way again. And that’s because while there’s lots of talk of new apartment developments, in reality, the apartment supply pipeline is drying up.

Hoey says many owner-occupiers have bought, which has reduced rental stock, while developers are not building to a great degree, so not much new stock is coming online. “It all equals very limited supply and we are seeing multiple applications for not much rental stock. The end result of that is higher rents, which equals better cash flow.”

As the market has changed and capital gain has dropped off, the focus for many investors has turned to yields and cash flow. For this reason, it’s hard to look past the fact that apartments cost less than houses yet the rents per week are not much lower.

Trade Me Property’s latest rent data has the national median weekly rent for apartments at $480 and $495 in Auckland. At the same time, the national median weekly rent across all property is $495 and $555 in Auckland.

Apartment Specialists director Andrew Murray says investors need to buy for cash flow now and they can double their rent returns with wellbought apartments. “You are still looking at returns of around 6% in Auckland which is pretty good. But investors should think about what the tighter supply situation means going forward. It means higher rents, better net returns and, ultimately, capital gains.”

Generational Drivers

There is another major factor having an impact on the apartment market. And that’s change. Not only are our cities changing – expanding and intensifying, but so too are the population demographics shaping them.

Globally, populations are becoming more urban and moving to cities. This is also true of New Zealand. Auckland, Wellington, Christchurch, Hamilton and Tauranga are all seeing strong population growth and the resulting intensification of their cityscapes. But the trend is best exemplified in Auckland.

Murray says the Auckland CBD has been transformed and has become a destination. “It’s not like it used to be. It’s now somewhere you can live, work and play. You don’t need to leave. And it’s going to keep changing.”

There is estimated to be 30,000 more jobs coming with the development of the City Rail Link, and then there’s the development of places like Commercial Bay, he says. “Plus the America’s Cup is coming and the SkyCity convention centre is nearing completion. All of this is going to attract more people to live in the CBD. That puts more pressure on supply and it’s good for rents.”

‘High-density apartments are a more effective way of housing a growing population. It is a whole change of thinking. It might be challenging for many but it is necessary’ MATTHEW HORNCASTLE

For veteran apartment agent Martin Dunn, who is the managing director of City Sales, there’s no doubt that apartment living is set to become the new norm – thanks to Unitary Plan related intensification, the now buzzing CBD and culture change. \

The switch to apartments will be driven by younger people, who are sick of spectacularly high house prices and traffic congestion, he says. “Apartments are great for the younger generation. They are less expensive than renting a unit in Avondale and they are right in the middle of the buzzing CBD.”

It’s not just the cost and convenience equation driving younger people to apartments. There seems to be a broader generational change in mindset going on.

That’s according to a young Christchurch apartment developer, Matthew Horncastle. His company, the Williams Corporation, is in the midst of six apartment developments, three in Christchurch and three in Auckland. He says that millennials are poised to become the most important part of the buying population and so investors need to think about who are going to be their tenants.

“Among millennials, there is huge demand for high-density living – they don’t want to live in standalone houses. There are many reasons for that: the lifestyle, the lock up and leave aspect (for travel), quality of living, standard of housing, and easier maintenance. Also, a big flash house is simply not an asset that signifies success for my generation.”

Environmental considerations come into play too, Horncastle adds. “Urban sprawl with all those big subdivisions are not good. Ethically, we need to be savvier as a society. We need to cut down our footprint and build smarter, more ecofriendly properties.

“High-density apartments are a more effective way of housing a growing population. It is a whole change of thinking. It might be challenging for many but it is necessary.”

Where To Buy

So if apartments are the future what do investors need to know, or watch out for, when thinking about purchasing one?

When it came to picking apartment markets to buy into, the first choice for most of our interviewees was Auckland, particularly the CBD. That’s largely because of the ongoing development and intensification of the CBD and hubs around the city, along with economic growth projections for the city going forward. And while prices are flat at the moment, they are expected to pick up again over the next few years.

But apartment markets outside of Auckland elicited mixed responses. Wellington’s geographic constraints, along with its resurgent public sector base and tight rental market, make apartments in the city centre an attractive option.

Christchurch was seen as less of a sure bet – except by Horncastle who believes there is a bright future for the city’s apartment sector, especially once the CBD rebuild is complete. It is, after all, the biggest city in the South Island, he points out.

But Hoey says that if you get the fundamentals on an apartment right and the numbers add up, they are a solid investment be they in the Auckland CBD or suburbs, or the centre of another city like Wellington or Hamilton. “If you buy well, they are solid. It’s just the ingoing and outgoings might be a bit different depending on where you are.”

Need To Know Information

On the financial side of the ledger, there’s a few critical things investors need to know. First up, banks tend to be warier about apartment lending. Buying a large freehold apartment might be possible with a 20% deposit, but it’s a different story if the apartment is considered “non-standard”.

Mortgage Supply Company director David Windler says rule one for the banks is that size matters. “They will assess the square metre of the apartment (excluding the balcony and car park) and decide if it is a standard or non-standard sized apartment. Over 50m2 and you’re safe with most banks. But under that is not usually considered secure by most banks and you will need a 50% deposit.”

Banks also look at whether it is a freehold apartment, he says. “They are uncomfortable about leasehold apartments and usually treat them as non-standard. The same usually goes for serviced apartments. So, again, you’d be looking at a 50% deposit.”

While it would be unusual for a bank to not lend on an apartment at all, Windler says it’s worth noting that non-banks tend to look at apartment purchases on a more case-by-case basis.

Additionally, not all apartments or apartment blocks are created equal, so investors need to do thorough due diligence on the building before going to the banks, let alone buying. That means finding out all about the building’s body corporate including obtaining the last three to four years’ worth of minutes; getting relevant documentation including a pre-contract disclosure statement (PCD); and identifying what the building’s earthquake rating (IEP) is.

Windler says banks tend to keep pretty accurate records of what buildings have had problems with body corps and remedial issues. “That’s why they will want to see a PCD – to see what is going on in the body corps with fees, long term maintenance funds, and the like. And, with the IEP, they won’t lend on anything of 65% or below.”

While body corporate levies and rules are an unfamiliar area for many investors, so too are some of the other classifications that come up in the apartment sector.

One is the leasehold vs freehold distinction. Leasehold apartments are often in very desirable areas and provide a comparatively cheaper entry price point. But that’s because it is a lease on the property that is being purchased rather than the property itself.

Hoey says that capital investment in a leasehold apartment will be lower, but the outgoings are more expensive and can increase considerably.

“You can get premium sites on the waterfront for leaseholds, but 99% of the time you can’t make the numbers work on a leasehold in your interest. That’s why I don’t own any.”

Another such classification is serviced apartments, which are touted as providing tenant security and stable returns. The truth is more complex though and none of our interviewees were fans of serviced apartments. They say they offer less control and flexibility, particularly in terms of rents, as owners are locked into the terms of their contract.

All our interviewees recommend that investors thinking of entering the apartment sector should seek out some professional advice, as well as a good mortgage adviser, to navigate the complexities of the market.


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