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Waterfront Master

Investing in ‘problem’ apartment buildings and leasehold apartments has allowed Hamish Duke – aka Mr Viaduct - to build up a sizeable, high-returning portfolio in the Auckland CBD, writes Miriam Bell.

By: Miriam Bell

31 January 2020

It’s a well-worn route for property investors – buy a regional property at a low cost with a good yield, then sit back and wait on the capital gains...

In popular opinion, it’s a straight-forward road to property success. Except when it doesn’t work out. And then the goldmine becomes a liability.

That situation is one Auckland investor Hamish Duke is all too familiar with. He went down that path with his first foray into investment in Southland.

It didn’t go well for him, almost derailing his investment journey. But it was not the end of his story.

Fast forward eight years and the 39-year-old is a successful investor with a 26-property portfolio. There’s no regional properties in there though. Rather, that portfolio is comprised of apartments, all situated in the Auckland CBD. And he built it up by utilising a couple of strategies often perceived of as risky.

A real estate agent by trade, these days his business also revolves around the Auckland CBD, with a particular focus on the Viaduct. Duke has long sold in the area through his company, Viaduct City Apartments, but he also owns four property management-related companies, all of which focus on the same area. This means that he’s now often described as “Mr Viaduct”.

Lessons From Early Stumbles

Property has long been in his blood, however. His aunt was a real estate agent and, after spending his early 20s working in the hospitality industry, he switched to real estate too. Duke started off at City Sales, under the tuition of legendary apartment agent Martin Dunn.

After six years he moved to Bayleys where he spent another six years. During this time he worked around the Auckland CBD and, eventually, started to focus on the Viaduct area. Two years ago, he left Bayleys to establish his own real estate agency which specialises in the Auckland CBD waterfront and leasehold properties.

Yet, despite his career-long focus on Auckland apartments, when he decided to start investing in property himself he opted to follow a “traditional” investing path and look for yields in regional New Zealand.

“It was 2008 and the apartment market was slumping at the time,” Duke says. “So I purchased two three-bedroom houses on full sections in Southland, based on photos on TradeMe. One was in Invercargill and cost $110,000 and the other was in Mataura and cost $85,000.

“They were both rented for $185 per week and the yields were around 8% net. It seemed a good deal with low prices and decent returns. And there was talk the coal industry was about to take off which would boost the area and house price growth.”

Unfortunately, things didn’t go according to plan. The coal mining industry didn’t take off and the meat works in Mataura closed down. There weren’t enough tenants to fill the available rentals and that meant huge vacancies.

When the properties were tenanted, he had serious problems with tenants. Duke held the properties for four years. But the returns didn’t cover costs, which included a lot of upkeep, so he had to keep topping them up. As a result, he couldn’t buy any other properties to build a portfolio. His regional building blocks were draining his funds, rather than boosting them.

“Getting rid of the them was the best thing to do. I had to spend about $20,000 on renovations before I could sell them because they were in terrible condition. Then I sold the Invercargill property for $105,000 and the Mataura property for $74,000. So they lost me money.”

Looking back, it was a terrible decision to buy there, he says. But he learnt lots from the experience. “Cheaper doesn’t mean better and you shouldn’t buy a property unseen. Go and check it out, and comprehensively research the area and its industries. And find a good property manager as they are worth their weight in gold.”

The whole Southland misadventure was also what got Duke’s investment journey started. “Yes, it didn’t work out but it got me into investing. I never thought about investing as a quick money-making venture, I saw it more as a retirement fund for later on in life.”

Wealth Building Via Remedials

To that end, he decided the best approach was to take the knowledge he’d built up in his career as an agent – and act on it in his own investing. First up, he started looking closer to home, in his own market of the Auckland CBD where he could see incredible potential.

In 2011, he bought his first Auckland CBD investment property. It was the penthouse on the top of the Whitcoulls building on Queen Street. He bought it for $380,000 and the rent was $600 per week, so it was a good deal.

“A year later I sold it for $405,000 to my tenant. They loved it and approached me to buy it. But it would be worth around $800,000 now. It was another lesson learnt: never sell if you don’t need to, always hold.”

Shortly after that first investment, he bought several stock standard two-bedroom apartments for around $350,000 each. The returns on them were decent, but Duke wanted to find a way to make more money. So he started buying apartments in buildings with remedial issues.

Many owners just want to get rid of them, which means you can buy them at a cheap price - yet the rents are the same, he says.

“You do need to factor in the remedial costs and you want about one third of the intrinsic value. But the tenants stay in them so you can often get 15% net return till the work is done. It often takes quite a while for the work to be done.

“So you can grow your income in that way. Then once the remedial work is done, there’s a new code of compliance certificate (CCC) and the value of the building goes up.”

He has now owned 20 such apartments. Two which stand out for him, are in The Nautilus Apartment complex on Hobson Street. The building has a chequered history and had no CCC due to issues such as having the wrong cladding.

The freehold apartments, which he bought in 2015, were both 75m2 with two bedrooms and views over the Viaduct. One cost $450,000 and rented for $700 per week, while the other was $370,000 and rented for $650 per week. Both had 6% net returns.

At purchase, the previous owner had paid for the remedial works which were half done. Duke was told he’d need to pay $20,000 in the final remedial washup and that the balance of the work would take 16 months. As it turned out, the work wasn’t completed till 2019 – two years longer than expected – and he had to pay $50,000 per unit.

“It was frustrating but, thanks to experience, I knew the final cost and build times were going to exceed the original predictions,” he says. “I had factored this into my purchase price and was still getting rent over the remedial period. With the new CCC the apartments are worth about $700,000 to 750,000 each and I can now get them revalued accordingly.”

Investing in “problem” buildings can have challenges, such as harder-to-access finance and spiralling costs, but Duke is a firm believer in the strategy, especially as there are so many apartments around that still need to be remediated.

“There’s a few I haven’t made money off, but most have worked out. Factor the potential costs into your master plan when buying and you can get over the humps. Problem apartments have been good for me because they have got my equity up and allowed me to buy other properties."

Thinking Outside The Box

Along with his investments in remedial properties, over the last year he has been pursuing a strategy of investing in leasehold apartments. This is a strategy many investors would shy away from as leasehold properties tend to be considered risky.

Duke says there’s a stigma around leaseholds because people are concerned about the ground rates and, potentially, the uncertainty of the associated costs. Also, people think leaseholds don’t generate capital gains and that they are difficult to resell.

“But capital gains are there: leasehold values do follow the freehold market, just not as fast or as much. If you’ve got the price right you can resell. And in terms of leasehold rates in the CBD, the situation is different to that in Cornwall Park. It’s capped on what the land value is at the time and reviewed every seven years.”

The big attraction of leaseholds is that they generate significantly higher returns, particularly if being used for short-term rental accommodation. That’s because with a good quality leasehold, it’s price would essentially be double if it was freehold, but they can rent for the same.

As an example, he points to a leasehold he owns in the Viaduct. He bought the 30sqm studio apartment early in 2019 for $210,000. It is rented on a short-term basis and has seen 90% occupancy at an average of $225 a night.

After all the costs are taken into account, it has a 18% net return. “Where could you get that sort of return on a freehold?” he asks. “And Shell build in a week it’s only going to get better with the America’s Cup coming up. There’s going to be high demand for properties in the area but there’s a big shortage of hotel accommodation.”

‘It’s only going to get better with the America’s Cup coming up. There’s going to be high demand for properties in the area but there’s a big shortage of hotel accommodation’

Sailing Into The Future

While a different way of thinking is required when it comes to leaseholds as investments, Duke believes there are great investment opportunities in the Viaduct leasehold market that many people don’t know about or understand.

“It is expected that around 250 properties will be needed to house all the America’s Cup teams, members and families alone. We are starting to sign up a lot of the teams that are here from September next year up to the Cup date.

They are paying 50% to 100% higher rents than normal rates.” On top of that there will be an increase in visitors to the area, so demand for rentals – particularly ones for short-term accommodation – in Auckland’s Viaduct area will be huge going forward.

For Duke, this means his current focus is on building his business, rather than his own property portfolio. He is particularly focused on growing his property management companies, Viaduct Harbour Rentals (long-term rentals) and Viaduct Harbour Resort (short-term rentals) and providing great service to his clients.

“But I feel excited about the investment potential in this market. Because the leasehold prices are so good. You can’t build an apartment for the price you can buy them for today. We are buying for half the cost and, for investors who buy right, that means good value and high returns.”


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