This year's annual round-up of the top 50 yielding suburbs analyses 481 locations around New Zealand and exposes some interesting new trends. But you’ll notice a few changes in this year’s data - we’ve added more depth in order to help understand the highest yielding areas, with numbers of bedrooms now included and a distinction between whether the dwelling is an apartment, unit or house. These new distinctions expose some compelling trends around high-yielding apartments and undervalued provincial spots.

Investors after cashflow will always use yield as a marker for whether an investment is viable – this equation doesn’t rely on future or past trends, but focuses solely on whether the deal is good today. Rent and capital value increases – or decreases – over the past 12 months may influence the viability of an area, yet, as our local experts reveal, they aren’t necessarily a prediction of future trends: a suburb that has had massive capital gains may continue at the same trajectory, or it may stall.

Gross yield is therefore a more useful way of analysing which locations are best to invest in. However, for those chasing the holy grail – highest capital gains combined with highest yields, we have ranked the top ten locations with highest capital gains of our top 50 highest yielding suburbs on p25 - but read the commentary on these places, before you rush out and buy! Lower-value areas sometimes pose a higher risk and there can be hidden costs in any purchase.

Cashflow In The Windy City

Lambton, Wellington one-bedroom apartments make a surprise debut in the number one spot this year with 9.7% gross yield. And although dwelling type wasn’t included in last year’s data, (so direct comparisons aren’t viable), it is interesting to note central Wellington onebedroom apartments appear three times in the top eight and two-bedroom apartments bring this to five appearances in the top 23.

But are there higher costs associated with apartment living? Corelogic senior research analyst Nick Goodall says it’s important to consider the costs of owning an apartment. Such costs as body corporate fees can reduce yield. But Shane Thurston, of Lambton Property Management, says body corporate costs are probably comparable to maintenance and insurance costs on a stand-alone dwelling of the same nature, as long as leaky or older stock are avoided. “If you are buying newer stuff that’s up to code, you’re not getting all the unexpected parts that are leaking, or [need] earthquake strengthening.”

He says Wellington apartments are an even more affordable choice now that “Body Corporate fees are coming back a bit, because insurance costs are coming down.”

Most of [Wellington central apartment] tenants are professionals and are very reliable. They want easy access to work and easy access to going out - Shane Thurston

Thurston says central Wellington apartments are popular among the high number of Wellingtonians working in the CBD, particularly with the many government employees. “Most of these tenants are professionals and are very reliable. They want easy access to work and easy access to going out.”

Thurston says one-bedroom apartments are a popular lifestyle choice now, as he finds single apartment dwellers, who in the past made use of a second room for a PC set-up, now prefer only a single room because of the proliferation of portable devices.

Of the top-ranking Wellington suburbs with one-bedroom apartments, Lambton comes out on top with highest growth, with 4.6% growth in AVM over the last 12 months, compared with Wadestown/Thorndon’s 1.4% and Te Aro’s 3.3%. Although its median price sits lower than the others at just $193,800, it’s median rent is equal to Te Aro ($360) and higher than Wadestown/ Thorndon ($310). Two bedroom apartments in Lambton had reasonable capital growth in the last year (5.7%), and with a median value of $356,350 and median rent of $480, they are also a solid investment with a gross yield of 7%.

Considering Wellington apartments rank 341st - at the highest - on our list (Lambton twobedrooms), and at the lowest 433rd (Roseneath two-bedrooms) in growth in AVM over the last 12 months, are they a good bet if you aren’t just looking for cashflow? Thurston thinks so, and expects there will be growth across the board in Wellington in 2016 – so look for changes in this line-up next year.

Central Auckland In Top 50

The unlikely suburbs of Auckland Central East and Central West made it into the top 50. Both groups consist of one-bedroom apartments and have median rents of $375 and $370 respectively, and median values of $304,900 and $306,650. Correspondingly, their yields sit at a modest 6.4% in Central East and 6.3% in Central West, but those who bought in these areas a year ago, will be enjoying the whopping 29.9% growth in AVM over the last 12 months in Central West and 21.2% increase in Central East.

Ray White City Apartments agent Michelle Yurak says values continued to increase in the central city apartment market at the beginning of 2016, as it played catch-up on value gains seen by other suburbs – where value rises now appear to have peaked. Auckland Central saw the greatest percentage rise, with values up 3%, Yurak says.

“People looked [at apartments] to find a more affordable entry into the market after being priced out of the stand-alone home market.”

She says new high-end apartment developments are popular with baby boomers down-sizing for retirement and there are very few issues with tenants in the Central Auckland area.

“Studio, one-bedroom and two-bedrooms are the best for yields - vacancy rates are very low at the moment,” Yurak says.

To The Regions

As regional growth took hold over the past few months, (following the trend of high capital gains in Auckland over the past year), we expected some of the regional areas to fall from their perch as high-yielding hot spots in last year’s survey and for more remote, provincial areas to shine as the highest yielding hot spots this year. Gore, Invercargill and Rotorua median yields dropped since our last year’s survey (although results aren’t directly comparable due to new data groupings) and Napier was absent from the top 50 (Napier, Maraenui, which had a gross rental yield of 10.6%, appeared at fourth last year).

Goodall says some provincial spots had been previously undervalued and recent growth in these areas is an inevitable catching up to pre- GFC levels. “Some of these smaller areas lost a lot of their value in the GFC,” he says. This may explain why yields in these areas aren’t as hot as they were last year.

High Risk Vs Affordability

In the Far North, Kaikohe three-bedroom houses came in at second place this year with a median gross yield of 9.5%. But last year Kaikohe was much farther down the list with only 7.8% gross yield.

Kaikohe is a service town to the rural population in the mid-north. It’s smack bang in the middle of the two coasts and has gone through an economic downturn in recent years. It’s a low socio-economic area with a high rate of unemployment and high percentage of social welfare beneficiaries.

Mid North Real Estate rental property manager Sandra Robinson, who has worked in property management in Kaikohe for the past 21 years, says “Recently we’ve had a rental shortage due to the same as everyone else across the nation – the buoyant sales market reducing the supply.” Median rent has increased 13.6% in the last five years, while median value has only in the last year caught up to and surpassed the losses in value created by the GFC. Median value sits at $136,300 for a three-bedroom house.

Robinson says yields are high here because of the low house prices and supply shortage and represent good value for investors, compared with nearby wealthier coastal towns, such as Kerikeri, where a typical three-bedroom house will cost around three times the price of one in Kaikohe.

“It’s always been a very strong rental area because not a lot of people can afford to buy their own home here. Because it’s not the flashest or the most popular place you can live, prices are very reasonable for the rents that you can get.”

But while prices are affordable and yields are high, there are much higher risks for landlords in Kaikohe, Robinson says. “The biggest risk would be people struggle to pay the rent,” she says. “If your expectations are critically high you are not going to handle a market like this quite so well.” Her recommendation for those looking to purchase? “It’s knowing how to manage the different types of people. Maintenance costs can be higher because there are bigger families. We sometimes have over-crowding problems because people are struggling and they’ll move in extra people to help pay the rent and of course that creates high wear and tear on the house.

“There isn’t a lot of spare money, if any. So if there is anything extra they have to pay for – say if they break a window- or a bigger disaster, they are in big trouble. It’s being sympathetic to that – I think one of the most important things is not to have too high expectations of people.

People looked [at aparments] to find a more affordable entry point into the market after being priced out of the stand-alone home market. - Michelle Yurak

“I wouldn’t ever buy a rental property here and think you won’t have one disastrous tenant, because you will. But it’s about managing the situation quickly and getting on top of it.”

The high level of demand in the area means it’s a very positive area for investors and Robinson expects capital gains to continue their trickle north this year, before tailing off.

Gisborne Undervalued

Along with Kawerau, Gisborne was the only other location to make a reappearance in our top dozen this year, at sixth (two-bedroom houses) and 11th (three-bedroom houses), with yields of 7.8% and 7.3% respectively. The two-bedroom median house price has had little change in AVM over the past year, at 2.2%, while three-bedroom houses have had even less at 1.9%. Their rents have risen though, which perhaps accounts for the continuing strong yields – twobedroom dwellings have increased rents 6.1% and three bedrooms increased 3.6% in the past year.

“Some of these smaller areas lost a lot of their value in the GFC,” Goodall says. “A lot of the value was stripped out of these smaller areas, greater than some of the main areas. And the recovery back to that peak is still not there.”

Bronwyn Kay Agency principal Bronwyn Kay says in Gisborne values are returning to previous peaks. “I’ve felt that we’ve pretty much returned to those values at the start of this year.”

Kay says recent hype in the property market has resulted in population growth and sales growth in Gisborne from both investors and people retiring there. She says there were approximately 71 sales in February this year, compared to 23 in February last year.

She says investors should be looking for a dwelling that will attract a good tenant.

“You are better to invest in a home of good calibre,” she says. “There are nice homes for around $165,000 in pretty reasonable areas.

The Holy Grail

Kawerau and South Waikato come in at third and fourth place this year with 9.1% and 8.7% gross rental yields, respectively. What’s more, the pair also place 5th and 9th (of our top 50 yielding locations) as having high increased values in the past year, with Kawerau’s median value increasing 16.5%, and South Waikato increasing 10.8%.

Kawerau, which began as a mill town for the Tasman Pulp and Paper Mill, still provides a lot of employment. Currently there is a fiveyear contract for exploration into mining for gold in the area, which will create big opportunities for the town, should this activity develop further. Whakatane First National principal Debra Gibbons says “We are struggling to get [rental] properties,” she says. “There is also a real shortage [of listings] at the moment - there is huge demand.”

Gibbons says the demand is coming partly from Auckland investors and partly from local owner-occupiers who are trading up, having benefited from their properties’ recent growth in equity, and there are those who are taking advantage of the low interest rates.

The town currently has a high rate of social welfare beneficiaries and unemployment, and a median property value of $174,900. But Gibbons says there isn’t always a higher level of maintenance for properties in lower value areas, as long as property buyers are aware of the state of the property when they buy it. “In the past year we’ve had a very good run with the calibre of tenants we’ve had,” she says.

Gibbons doesn’t expect further growth in Kawerau. She says sellers’ expectations are becoming too high. “It will return to a buyer’s market.”

In South Waikato, Ray White real estate agent Michelle Lamberton says Tokoroa is seeing a lot more buyers coming from out of town, as well as locals trading up, effectively pushing up capital values.

She says an 80,000 rental property in the town will typically have higher maintenance costs.

“Properties above $120,000 are in slightly better areas, as opposed to that property with 9% return,” she says. “With the higher yielding property there are more risks involved – is the purchaser prepared to take that risk?”

But she says lower risk properties in Tokoroa are street-specific and not suburb-specific.

The Sweet Spot?

While both Kawerau and South Waikato three-bedroom dwellings have the perfect combination of high yields and high capitals gains – in monetary terms, are they really the sweet spots on the map? If you consider the median house price in Kawerau is $114,250, and made an increase of 16.5% in the past year, you made a capital gain of $18,851.25. In South Waikato with a median price of $130,850 and a 10.8% value increase, you made $14,131.80.

However, if you had chosen to invest in a Dunedin Glenleith/ Roslyn/Belleknowles three-bedroom house a year ago, for example, with a current median value of $301,500, you would have made $28,039.50 in capital growth, due to a median value change of 9.3%. So, if you sold at the end of the last 12 months, your Dunedin property with a modest yield of 6.0% may not have paid the bills throughout the year, but a positively geared property in Kawerau or South Waikato would still have left you with less cash in your pocket and less opportunity to leverage for another property purchase.