Your Cash Options
NZ Property Investors’ annual survey of landlord activity reveals an optimistic outlook for 2016. The stratospheric rise in Auckland property prices in 2015 created options for those prepared to use equity in order to re-invest. Yet difficulty securing investment properties in an over-priced market is keeping investor behaviour relatively conservative - despite historically low interest rates. Joanna Jefferies consults with the experts on investor activity and finds out where you are putting your money.
1 March 2016
It is no surprise the B=bigges issue property investors face in 2016 is property unaffordability – high property prices have resulted in a lack of viable investment properties on the market. Astronomical residential property value increases seen in Auckland in 2015, and ongoing high net migration, means pressure on Auckland housing supply is likely to persist this year.
But although NZ Property Investor’s Investor Survey 2016 respondents say high house prices are the number one issue this year, surprisingly 54.63% of investors surveyed are planning on buying an investment property within the year and 42.02% purchased a property in the past year. This suggests investors, while concerned with prices, still have a high level of optimism.
Outside The Box
Fuzo general manager Troy Patchett confirms great deals are still out there - even in the SuperCity - for investors willing to think outside the box. He says his clients are buying average properties in Auckland with the potential to be developed, either by adding a granny flat or minor dwelling or by subdividing.
“People are having to create the deal themselves as opposed to buying it packaged up,” he says.
Of the investors surveyed, 74% own less than seven properties and of those 52.75% own between one and three. Patchett says it is these novice and new investors who are struggling to grow their portfolio in a time of elevated house prices. He says those who have a borrowing capacity of between $400,000-450,000 may feel they have limited ability to purchase in Auckland, but a shift in peoples’ expectations is all that is needed.
“We see novice investors that might only have one or two properties that have given it a go and are getting to their third property and the bank has turned the taps off. It’s an education process. We are asking them what sort of properties have you been buying and are they the right sort of properties? Nine times out of ten we find they are not.”
Barfoot & Thompson director Kiri Barfoot agrees investors wanting to buy more property in Auckland need to downsize their expectations, “or they might need to go further out – west or south Auckland.”
Some of the pressure on Auckland’s housing supply has been soaked up in the regions, with median house prices in areas outside Auckland having taken a sharp turn upwards, further exacerbating landlords’ difficulties in securing investment properties where the numbers stack up. Nearly 60% of survey respondents expect house prices to increase further over the next year, while a third believe they will stay the same - suggesting optimism for those already in the market. The area where the opposite is true is in Christchurch where survey respondents raised concerns that prices may fall.
Some of those investors who have benefited from capital gains made in the SuperCity have taken the opportunity to use equity to buy positively geared or higher yielding properties in other regions or sectors. Patchett says there has been a shift in investors’ mind-sets. “There are definitely people that might not have considered apartments a couple of year ago, who are now considering them, people that might not have considered buying outside of Auckland are now going outside of Auckland.” Mike Pero Mortgages CEO Mark Collins is seeing the same trend, “We are seeing investors based in Auckland looking further afield to invest and capitalise on the cheaper housing stock outside of Auckland.”
But do the figures support this? The survey shows the percentage of investors who have property in Auckland sits at 46.6%, with 15.81% owned in Canterbury, followed by 14.29% in the Waikato and 12.29% in Wellington. Considering Wellington’s considerable population advantage over Waikato, it is interesting that it lags slightly behind in investment property numbers. This could be put down to the large number of Auckland buyers active in the Waikato region late last year, following the changes to loan-tovalue ratio (LVR) requirements for Auckland investors from November 1.
The latest Corelogic data shows since the LVR changes came into effect, Aucklanders account for 15% of sales in the Waikato compared with only 5% in Wellington.
Corelogic senior research analyst Nick Goodall says while investors are looking outside of Auckland for better yields and capital gain, they still want property that is close by to them.
“The majority of investors are more likely to stay closer to home. But they need to get outside of Auckland to avoid the 30% deposit.”
In other investment areas there has been a slight lift in investor interest. The number of investors considering apartments is at 22.5% (up 1.2% on last year) and commercial properties have increased interest too at 31.8% (up 1.8% on last year).
A Conservative Approach
In last year’s survey, investors indicated they were keen to reduce debt levels and this year’s results show they have achieved this. Those in the debt level range of 81% and above have shrunk from last year’s 14.6% to 9.24% this year. Over the past year 38.45% of investors took advantage of the low interest rates to pay down debt, suggesting a strong level of conservatism, despite the optimism prevalent in the market. Investors are taking a moderate approach to their loans also, with the majority (39.2%) of those favouring fixed-rate loans, locking in for two years.
Notably, the typical investor worry of interest rate hikes was a less prevalent issue in this year’s survey. Nevertheless, it is still understandably an issue, as the market is at or near the bottom of the interest rate cycle and there is only one way to go after that. Up.
However Reserve Bank announcements released during the survey period should allay many investors' fears about increases in the cost of their debt. Inflation remains stubbornly low at a time when the Reserve Bank would like to see it higher and around ‘normal levels’.
ASB chief economist Nick Tuffley says the Reserve Bank “seems a little too relaxed about the risks of inflation remaining subdued.” It, like Westpac, is forecasting the Official Cash Rate will be cut twice more before the economy reaches the bottom of the cycle. That should give investors some comfort.
ANZ chief economist Cameron Bagrie agrees, “I still think we are in an era where interest rates are going to remain low for an incredibly long time.” However, he cautions that each investor needs to be comfortable with his/her own appetite for risk.
Collins says he is seeing investors acting conservatively in terms of interest rates, despite the buoyant market. “We are seeing investors hunkering down and taking advantage of cheap rates and fixing for longer periods than we have seen before.”
Collins says the LVRs imposed on Auckland investors late last year, with banks requiring a 30% deposit means second tier lenders are becoming a popular way to finance investment properties. “We are seeing an uplift in volumes as we find we can help Kiwis invest further due to our approach which is based on individual circumstances and not just ‘in the box thinking’. They are looking for solutions and support in growing their portfolio, and we find in many cases we can help them do just that.” Collins sees investors taking advantage of low interest rates, with many more locking in for medium to long-term fixed rates, rather than short-term or floating.
Considering the potential cash-flow benefits of renovating or adding additional dwellings, it is surprising only 28.8% of respondents say their strategy is to renovate and add value, then hold. This strategy, whilst involved, creates an opportunity for better yield in over-priced areas.
But investors aren’t typically buying for yield. Many of the investors (68.8%) site capital gains as a driving factor, with one investor pointing out: “Yields, whilst important, are less important than growth. Growth in rents turns yields positive fast enough.” But another investor counteracts this point with: “Auckland rents are hitting a ceiling where tenants’ incomes restrict the ability to pay more.”
But compared with last year’s figures, there is a lower expectation on yields (6.33% expect to get yields of 10-14%, compared with 7.84% last year). A number of survey respondents put forward investing outside Auckland as an alternative for improving yield.
Surprisingly, the next two major drivers when considering an investment are fairly equally weighted, yet perhaps opposite in their risk profile – immediate cash flow (33.82%); and low maintenance and quality of tenant (34.79%).
One of the biggest issues landlords face is attracting and securing good quality tenants and many investors feel the laws and regulations being placed on landlords are becoming too onerous.
"There are too many laws favouring tenants," one investor says. "Yes, tenants need security and good rental properties but it needs to work both ways. Landlords have little protection."
Nearly half of all investors have been involved with the tenancy tribunal and while there is a consensus that at the advice stage, the tribunal is helpful and effective, a surprising number of landlords say tenancy tribunal decisions are weighted unfairly in favour of the tenant. The expression that the tenancy tribunal “has no teeth” was used multiple times in reference to a failure to receive any monies awarded to landlords in a tribunal decision.
A whopping 64.99% of landlords believe rents will increase this year, and these increases will go a long way to lifting yields in some areas. Patchett says rents should be evaluated by landlords every six months, whether that results in an increase or decrease. He says all indicators suggest rents will increase this year.
“When you go to talk to a tenant about a rental increase, the tenant already knows that they might be paying cheaper than the market rent. You don’t get a lot of hesitation from tenants because they know what the market rent is.”
Tenants’ living conditions will also improve mid-year, when insulation and smoke alarms become compulsory in rentals on July 1. But cleverly, investors are ahead of the game on this account. Of the respondents, 74.4% have already installed alarms in all their properties and 50.89% of investors’ rentals are already insulated. A further 30.99% have insulation in some of their dwellings.