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Targeting Yields The Top 20

Changing property investment landscape means the focus is switching from capital gains to yields, so Miriam Bell takes a look at New Zealand’s top 20 highest yielding suburbs.

By: Miriam Bell

1 August 2019

Yields. It’s not a concept that has been a hot topic in the investing space in recent years. Rather the focus has been on capital gains and reaping the rewards of the spectacular growth the market has seen. Yet, as any savvy investor knows, decent yields are critical.

But now it is time for yields to take their place in the sun. That’s because the property investment landscape has changed. Despite ongoing price growth in certain markets, most commentators believe the property cycle has peaked.

Add in a slew of recent policy changes which are set to increase costs for many property investors and it all makes the prospect of a high yielding, cash flow positive property very attractive.

It also means the time is right to conduct our regular investigation into where in New Zealand the yield hot spots are. To that end, CoreLogic has isolated the 20 suburbs nationwide that return the best yields, based on their median values and median rents, and we talk to local experts to find out more about many of them.

First up though, it is worth examining why yields are so important. Basically, it’s because the yield on a property determines cash flow and an investor’s ability to pay for the mortgage plus the rates, insurance and some maintenance. In turn, that determines the viability of an investment.

Legendary property investor Graeme Fowler says that if the yield is too low (6% or below) cash flow is often tight. “Many people who buy these low yielding properties either have to top their loans up with their own money each month or use interest-only loans, which means the loan itself is not getting paid down.”

He has always had a minimum of 8% gross yield on rental properties he has purchased and, up until the last three years, it has always been fairly easy to get. But that has changed.

“Although rents have risen significantly over the last few years as well, house prices have gone up exponentially more. So now to get an 8% yield in an area I would be happy buying in, it has become very difficult.”

Therein lies the rub. The rise in property prices means that yields have, largely, fallen nationwide. Our top 20 high yield suburb list shows it is still possible to find decent yielding properties to buy. But those properties tend to be in areas that are smaller and away from the main centres.

CoreLogic senior property economist Kelvin Davidson says some of the suburbs on the list are not the most salubrious, but have cheap property prices and rents. “With regional economies going pretty well, that affordability is a big drawcard for people who can work in the industries these areas have.
“Now rents have risen strongly in many of these markets, as have median values. And when rents and values are both rising strongly, it’s a sure-fire sign of strong property demand – ie: people wanting to live there.”

So where are these high yielding suburbs? While they are scattered around the country, from Kaikohe in the Far North to Invercargill in the deep south, there are notable clusters of suburbs in certain districts and it’s these that we are focusing on.

Weighty West Coast Deals

One of these districts is Grey District which is home to three of the top 20 highest yielding suburbs. They are Runanga – which is sitting in the number one spot on the list with a very robust 11.1% gross yield; Cobden with a 9.9% gross yield and Blaketown with an 8.7% gross yield.

While Cobden and Blaketown are both suburbs of Greymouth, Runanga is a small town about eight kilometres out of Greymouth. Greg Daly Real Estate’s Deedee Daly says they are some of the least expensive suburbs in the district: Runanga’s median value is $128,750, Cobden’s is $144,750 and Blaketown’s is $163,450.

“The West Coast’s cheaper house prices mean it has become more attractive to first home buyers and investors and there’s lots of people buying,” she says. “As a result, we’ve seen a property shortage hit over the last six months. Now rental demand is high, rents are going up and that equates to good yields.”

Runanga, Cobden and Blaketown tend to attract tenants in the lower socioeconomic bracket, Daley adds. But they have all seen rent rises lately and that contributes to their attractive yields.

Mining and forestry are the dominant industries in the area. But the eco-tourism industry is growing and new developments – like the Taramakau Bridge, the Grey Base Hospital and the New Zealand Institute for Minerals to Materials Research – are all set to be solid economic drivers and to attract more people to the area.

Mike McMillan has an investment property in Blaketown and another in Cobden. He says the market is seeing better sales, less stock available and values gaining traction – all of which could hurt yields a little going forward.

“In the meantime, to get the better yields, a property must be the right purchase. A number of lower value houses get good yields but have suffered neglect over the years. They tend to require some cash spent. That ranges from maintenance, like painting and a bit of rot, up to kitchens, bathrooms, roofs, and piles which are the pricier items.”

South Taranaki Hot Spots

The biggest cluster of highest yielding suburbs can be found in South Taranaki. Patea commands a gross yield of 9.7%; Normanby has an 8.1% gross yield; Manaia turns in a 7.8% gross yield; and Waverley has a 7.6% gross return.

Patea, Manaia and Waverley are regional country towns which are close to the coast. Normanby is further inland and just five kilometres away from South Taranaki’s largest town, Hawera. While they are all small communities they benefit from the district’s strong dairying and agricultural service industry.

Fonterrra has factories in Whareroa, Eltham and Kapuni, Silver Fern Farms has a plant in Hawera, and Yarrows Bakery and Ballance Agri-Nutrients both have factories in Manaia. They are all big employers and provide a solid pool of tenants.

First National Mills & Gibbon Hawera director Shawn Gibbon says that’s why there is a strong rental market and always has been. “Over half of all properties are rented, or not lived in by the owners. So that means the rents are good.”

Property prices in the district remain eminently affordable: median values in our four suburbs range from $134,150 in Patea up to $206,550 in Normanby.

However, prices have gone up 20% over the last 18 months and there’s no sign of a slowdown, Gibbon says. “And rental values are going up at the same type of speed. The new rules for landlords are impacting on rents.”
“The rental market is tight. But it has been forever. It hasn’t changed much in the years I’ve been here. There’s always been high yields. It’s all based on the lower prices and strong rents, but the outlook for the rental market remains positive.”

Ruapehu's Holiday Attractions

Another district with a notable cluster of high yield suburbs is Ruapehu District. Three of its suburbs feature in our top 20. They are Raetihi with an 8.5% gross yield;

Manunui, which has an 8.1% gross yield; and Taumarunui with a 7.6% gross yield.

Raetihi is located just 11 kilometres away from the winter hotspot of Ohakune and is also close to Tongariro National Park. Bayleys Whanganui & Ruapehu’s Wayne Frewen says Raetihi is benefitting from its proximity to the currently hot Ohakune market as people look for more affordable holiday properties to buy.

It means that while Raetihi’s median value remains under $150,000, it has inched up to $146,000 in recent months. “This is having a big impact on the rental market here too. Former rental properties are being taken off the market. And so now there is a big rental property shortage here.”

Investors looking to purchase a longterm rental would do well, Frewen says. “It’s possible to purchase a property for well under $200,000 and then rent it out, right away, for rent of $250 up to $350 a week. That equates to a pretty good yield.”

Raetihi’s tenant pool is strong – thanks to the Winstone Pulpmill which is a big employer in the area and the huge numbers of people who come to work on the mountains each year, he adds.

“The ski season may be just four months but it’s possible to rent by the room for about $200 a room a week, which works out nicely. Additionally, there’s lots of development in the non-ski field tourism space with new gondolas and mountain bike trails being built to attract people all year round. These are expected to be big tourism drivers and will also attract workers. The outlook is good.”

In contrast, Manunui and Taumarunui are further away from the ski fields and are small forestry and farming oriented towns. These days Taumarunui is also working to develop its adventure and eco-tourism industry.

Increased investment into the area, along with the tail end of the property boom, mean that both median values and rents in Manunui and Taumarunui have gone up. This has impacted on their yields: they have gone down slightly from the same time last year.

Treasures In The South

Invercargill is well known for having solid yields on offer so it’s no surprise that two of its suburbs have made our top 20. Those suburbs are Appleby which turns a 9.1% gross yield and Clifton with an 8.3% gross yield.

Price growth has been strong in Invercargill over the last 18 months and median values in both Appleby and Clifton have gone up, to $177,950 and $193,650 respectively.

But Invercargill’s rental market is very tight as there is a widespread shortage of rental property, veteran Invercargill investor Angela Strang says. “Neither Appleby or Clifton is the most desirable of suburbs. But people have to go somewhere. So their rents have lifted and that means yields have too and that’s appealing.”

Both suburbs do have other attractions. Clifton is near Tiwai Point aluminium smelter as well as Bluff and its fisheries, so it’s a drawcard for tenants who work at those facilities.

Appleby is close to Invercargill’s CBD, which is about to see some major retail development, and the Southern Institute of Technology (SIT). That makes the suburb attractive to students, young professionals and, going forward, retail employees.

Strang says both suburbs should benefit from investment in the area and they will see more growth in values and rents, as will the city generally. She says she recently bought a property across the road from Appleby which she’s particularly happy with.

“It cost $235,000 with no deposit; I’m spending $20,000 max on the renovation. The total rental will be $730 per week because it is a rent-byroom property for students. So there’s 16% gross return, 13% after tax. That’s what these suburbs have to offer.”

Weighing Up Risks

In the search for high yields, it’s important to acknowledge that there are risks. Many higher yielding suburbs are in small towns or rural areas which have lower house prices. Such areas often don’t have a diverse economy with multiple employment drivers.

Fowler says when a smaller town is reliant on a few big businesses and one moves out of town, or closes altogether, this can affect the number of people who want to stay living there. “In turn, this impacts on the availability of tenants wanting to rent a property from you.”
But it does depend on an individual’s risk profile, he adds. “I have investor friends that buy in areas that I wouldn’t buy in, as the yield is even more important to them, and they will accept the extra risk and management of these types of properties.”
There can indeed be risks with investing heavily in high yielding areas, property commentator Ashley Church agrees. “If an area is depressed economically and deteriorates further that can be a problem.”
However, the fact that some regional markets are seeing both capital gains and good rental returns makes them an interesting investment proposition, particularly if an investor is approaching retirement. “That’s because they will provide positive geared, cash flow properties right away. For a retiree, that’s income and it could be a smart move.”
Church does sound a note of caution though. “It is critical for investors to think about an area carefully before investing. An investor should visit the area to check it out, get a feel for the place, talk to people and really do comprehensive due diligence on it.”

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