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Martin Dunn assesses the apartment market

Apartment specialist Martin Dunn, owner of the City Sales agency in Auckland, made 5 key points in his market assessment the week before Christmas:

  • Lending restrictions cut investor activity by 35%
  • Apartment values on a $/m² basis rose by more than $1000/m² in the last 12 months
  • Average city centre rents were up more than $100 on a year ago
  • Despite the rent rises, capital gains continued to erode gross returns
  • Those capital gains, once a rarity in the city centre apartment market, might be sustainable long-term.

Mr Dunn said in his quarterly report: “New bank lending regulations, coupled with a turbo-charged new supply both in the city & city fringe, have left stamps on what has been a typically investor-led market since the late 1990s.

“City Sales figures show a slowing of investor activity, timed with the introduction of new lending criteria. The figures suggest an observation period, rather than a withdrawal of investors.”

As bank deposit rates headed lower, he expected investors to return to the market in search of 5% net returns plus capital gains.

For his assessments, Mr Dunn deducts $40/week for parking rentals (but $50/week after March 2015), and $40,000 for parking sales up to March ($50,000 after that). He counts freehold apartments with gst included, excludes leasehold, also excludes sales off the plans, and excludes balconies from $/m² calculations.

Mr Dunn said the rise of more than $1000/m² in apartment values in 12 months – now edging close to $8000/m² – had been predictable: “If you study Auckland residential as we do (that’s houses & apartments), it’s obvious that the $/m² rate will continue to climb to near new-build rates, then new builds will climb as land & building costs take their toll.”

He said the agency’s property management division had seen strong growth throughout the rental sector: “Rent achieved within the cbd is typically higher than in the wider city circle, but has not historically kept pace with average sale prices or $/m² figures. However rental figures show this may be changing, as City Sales reports a growth of more than $100/week on average in the last 12 months.”

City Sales property manager Shona Kydd put this down to a flow-on effect from the housing market and a continued shortage of accommodation around the region: “Rents are increasing due to high demand & short supply. In 2015, more people arrived in New Zealand on a student visa than a working visa, and these people tend look for city apartments.”

While rising prices had eroded gross returns, Mr Dunn said confidence was growing that capital gains, once a rarity in the cbd apartment market, might be sustainable long-term because, although hundreds of apartments are under construction in the cbd and more are planned, they still won’t meet demand: “We need an extra 400,000 dwellings built over the next 30 years [in the whole region]. We’re not even close to this target. It’s great to see cranes dotting the skyline and some fabulous-looking new-builds around the city, however we will continue to see a shortfall for some time.”

For serious investors, Mr Dunn said the most pertinent section of his report was about the price/m²: “New developments require a selling rate of around $10,000/m² to be considered viable. Within the secondary market we have seen this rate go from below $5000 to close to $8000 in less than 5 years. The trend continues month by month and has hit new records in recent times.

“City Sales reported earlier this year that we were surprised to see values holding consistently at over $6000/m². With values now pushing the $8000/m² mark, we are witnessing the secondary market nudging new-build values.”

g cs sales to investorsThat’s the last year, up to Christmas. Mr Dunn also took out his crystal ball for a few thoughts on how Auckland might change over the next decade:

Gazing into the future

“Apartment living isn’t only the start-up choice for first-homebuyers any longer, it’s the preferred choice for Aucklanders. The 30-year-old professional thinks of nothing more foreign than a home with a garden & lawns to look after, unless it’s right in the inner city. Mind you, these start at $4 million. Suburban homes now start at well over $1 million, even in Papakura & Massey.

“Rail is the preferred transport option for Aucklanders, and work is beginning on a line which snakes up the North Shore towards Long Bay.

“Suburban apartment complexes dot the city, and this has brought a dramatic culture change to strip shopping. Conventional retail is engulfed by international brands of shopping malls. Eating out is now the norm in the city.

“The city boasts nearly 100,000 apartments now, quite an increase from the 30-odd thousand 10 years ago [in 2015]. 250,000 residents now call the city home and this has resulted in some incredible bars & restaurants, not to mention world-leading infrastructure changes (people don’t drive in the cbd anymore). City living is very expensive. These residents are predominantly owner-occupiers, quite the opposite of the landscape 10 years ago.

“Families are now brought up in apartments. To live in an actual house is only for the mega rich now.

$10+ million house sales are now commonplace.”

Link: City Sales, December quarter apartments report

Attribution: City Sales quarterly report.

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CBRE sees trend towards owner-occupier – and larger – apartments

Auckland’s central city apartment market is reshaping, according to CBRE research.

“Historically,” says the research team in its Market flash paper out this week (though to put history in perspective, it’s a period of less than 20 years), “apartment buildings in Auckland’s cbd have been designed & sold for investment purposes. Over the course of 2015, CBRE has observed a growing pipeline of apartment projects within the cbd aimed at, and being taken up by, owner-occupiers. This has affected the pipeline by increasing the overall average internal size of apartments.

“Of the 23 projects in the current Auckland cbd apartment pipeline, 10 are primarily ‘investment’ apartment buildings, 10 are primarily ‘owner-occupier’ apartment buildings and 3 are classified as another use type, such as serviced apartments or student accommodation.”

The researchers said the average size of all investment apartments in the cbd pipeline was 54m² compared to the owner-occupier pipeline average of 73m². The average number of bedrooms investment apartments averaged 1.3 bedrooms, the owner-occupier apartments 1.6: “This data suggests that spaciousness, rather than additional bedrooms, is a key feature of the emerging central city owner-occupier market.”

The researchers said 1-2 investment apartment projects had been launched each quarter for 2 years, but 9 aimed at the owner-occupier market had been launched in the last 12 months.

The investment apartment projects had a total of 1455 units, the owner-occupier projects 1056 units. CBRE classified 685 as ‘other’, taking the total number in the pipeline to 3196 as at this month.

CBRE said the researchers classified the pipeline by building rather than individual apartment, depending on which market a project was aimed at or the takeup.

Attribution: Agency release.

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3000 new apartments planned for cbd, 6600 for region

Colliers International researchers said today 3000 apartments would be built in the Auckland cbd in the 4 years to the end of 2018, raising stock by 18%, from 17,395 to 20,472.

Research & consultancy national director Alan McMahon said 6601 new apartments would be built in the whole region, 44% in the cbd, 28% in each of the city fringe & suburbs. 1112 of them would be for student accommodation.

Mr McMahon said recent increases in sale prices had boosted supply allowing developments to become feasible at land values that equal or exceed values for alternative uses, such as offices.

“Ironically, the price of accelerated supply is increasing unaffordability,” he said.

“No price slowdown is expected in the short term. However, overall residential annual price escalation over the last 20 years in Auckland has been 7.4% on an annual compounding basis. This is much lower than the 11.2%/year over the last 5 years, calculated on the same annual compounding basis, and in the medium term markets usually revert to trend.”

The research indicates Auckland will have 31,654 apartments by the end of 2818, 66% (20,472) in the cbd, 19% (5969) on the city fringe, 15% (5105) in the suburbs.

The new developments will increase intensity from 459 buildings averaging 69 units. The extra 80 buildings will average 82 units/building.

Mr McMahon said the proportion of owner-occupiers would be much higher than in the 2003-06 construction boom, when most of the cbd product was aimed at investors, and prices would be higher than for terraces or large detached new houses.

Recent new stock has been priced at $10-13,000/m², compared to $5500-7000/m² for terraces & houses.

Attribution: Agency release.

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Bayleys research shows apartment sales & values up as income returns boosted

Published 15 June 2012

A review of the Auckland apartment sector by Bayleys Research shows the market strengthened significantly throughout 2011 and the momentum has been maintained through the opening quarter of 2012.

Bayleys Research manager Gerald Rundle said in his latest Market Beat paper the 340 transactions completed in the March quarter was the highest figure for that quarter since 2007.

In sharp contrast, the Real Estate Institute recorded only 44 sales in January 2011, just 2 above the lowest monthly figure on record since 2001, when the Auckland apartment market was still in its infancy.

In February 2011, the monthly total doubled to 87 and sales since then have exceeded 100/month, with the exception of November, when there were 95.

At the end of the survey period, the 143 sales recorded in March was the highest monthly total since August 2007. In the year to March 2012, 1340 transactions were completed, up 27% on the previous year and up 51% on the March 2010 year.

“While current sales activity remains below the levels regularly witnessed between 2003-07, it must be remembered that during the earlier period apartment construction was running at record levels and, as a result, high volumes of new stock were being brought to the market.

“The recent upturn in sales activity has stabilised prices in the sector following the sharp correction which followed the global financial crisis & New Zealand’s own recession. Median prices across the city had reached a peak of $299,000 in late 2008. However, 2 years later this figure had fallen to $180,000. The latest quarterly figure has seen the median price again pass $200,000, finishing the quarter at $205,000.”

Mr Rundle said much of the attraction of the apartment sector was its price structure, presenting an affordable opportunity to enter the property market either as an owner-occupier or an investor. For investors, he said recent upward pressure on rentals had resulted in high returns being generated.

54% of cbd apartment sales for the year were for less than $200,000 and 29% in a range of $200-350,000, contrasting sharply with inner-suburban house prices – the Mt Eden median in the March quarter was $759,000, Ponsonby $802,500, Parnell $960,000.

“Investors have been drawn to the market as a result of affordability & high returns. An analysis of auction sales over the last year has shown freehold apartments are returning 6% – 8.5% net of rates & opex. Investors are looking for higher returns from leasehold, where returns have regularly been in double digits.”

Want to comment? Go to the forum.

 

Attribution: Company release, story written by Bob Dey for the Bob Dey Property Report.

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JLL researchers say don’t lump whole apartment together as one bad unit

Published 13 November 2005


Auckland’s apartment market is likely to continue to perform well overall, despite recent comments to the contrary from market observers, says Edward Bell of Jones Lang LaSalle’s valuation department.



“Recent negative commentary surrounding the Auckland apartment market has focused on the performance of poor-quality one-bedroom & studio units, which tend to attract student occupiers. The problem is, there has been very little distinction to date between the performance of this stock and the balance of the market,” said Mr Bell, who has joined Jones Lang LaSalle to head the company’s new high-end residential valuation service.


“There are several sub-markets within the overall apartment sector. These include central city apartments, good-quality 2-bedroom apartments, character apartments, luxury waterfront apartments & fringe cbd apartments, among others. Many of these sub-markets are showing – and look likely to continue to show – strong performance.


“The future of residential property in Auckland City must include a strong apartment component, as this offers a comparatively affordable entry into desirable suburbs, although apartment prices are rising along with the rest of the market in such locations.


“Free-standing homes are becoming too expensive for many people, particularly first-home buyers. This follows the supply & demand-driven trend towards increasing land values, which are the largest component of a property’s cost. The less land your property occupies, the lower the price, which leads directly to an apartment choice.”


According to Jones Lang LaSalle’s research division, there has been a 70.5% increase in total sales of apartments & multi-unit dwellings in the Auckland region over the past 5 years. In the first half of 2005 there were 1110 apartment & multi-unit dwelling transactions. But Mr Bell said this didn’t adequately reflect the performance of stand-out markets such as Mt Eden, which has seen an 88% increase in the number of apartment sales and 61% average price increase over the past 5 years.


Jones Lang LaSalle research analyst Kimberley Paterson said: “Apartments have now overtaken stand-alone housing in terms of new dwelling consents issued across the Auckland region, especially within Auckland City. By 2021, we expect the Auckland metropolitan area to be housing 371,000 more people than it did in 2001. This will require an additional 47,100 households by 2021, with apartments likely to represent just over half of all those new dwellings, going by current statistics.”


The researchers  expect locations near the cbd will continue to be the most desirable, with buyers choosing to sacrifice on land and buy an apartment, instead of sacrificing location and moving to larger sections further from the city.


“Looking ahead, increasing transport costs, higher petrol prices & increased congestion are all likely to contribute to increased demand for centrally located apartments,” Ms Paterson said.


Mr Bell said Mt Eden provideda good snapshot of this market: “It is a well regarded residential location that incorporates both high-value residences & apartments. Here, when the average sale price for 2-bedroom homes is tracked against the average sale price for 2-bedroom apartments between 2001-05, there is a very close correlation, with a near-consistent 30% price differential between the markets, which should continue into the future.


“Within this wider trend, the success or failure of any individual apartment building will be purely the result of construction quality, the level of amenity both within the building and in the immediate area, and the overall liveability of the apartments.


“The value of poorer quality studio apartments is indeed likely to follow a downward movement because they fail to meet market demand in this regard. However, those apartments that perform better are set to follow the overall residential market over the medium to long term.”


If you want to comment on this story, write to the BD Central Discussion forum or send an email to [email protected].

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Multi-unit – there is a future

Published 23 October 2005


Seminars often present an array of views which aren’t easily joined together into a coherent article, so from 2 Property Council events in the past fortnight I’ve presented ideas & quotes which would be lost if I waited to complete more definitive articles.



This page is from 2 of the speakers at the Property Council’s annual multi-unit dinner on 12 October. The other is from the Property Council’s investment seminar on 20 October.


Many of the points made here cry out for additional information. You may want to use the Discussion forum to discuss aspects of the material below, or send me an email: [email protected].


Chris Aiken, chief executive of Kitchener Group Ltd:

Big Australian trusts will enter the apartment market
We think there’s demand for 1800 units/year
Immigration is down, but so is supply
Supply is about to fall off a cliff – 600 were lost in the last few weeks
Investors’ love affair with yields continues
The Australians love our low-cost apartments, so do the English & Americans.
There’s plenty of primary & secondary funding.

We thought the apartment size controls (introduced by Auckland City Council) were timely, but there are hundreds of units in the city which are problems, not thousands.


Mr Aiken highlighted the 7 Cs from the Urban Design Protocol – 7 essential design qualities that create quality urban design: Context, character, choice, connections, creativity, custodianship & collaboration. The Ministry for the Environment’s website says they’re a combination of design processes & outcomes which:

provide a checklist of qualities that contribute to quality urban design
are based on sound urban design principles recognised & demonstrated throughout the world
explain these qualities in simple language, providing a common basis for discussing urban issues & objectives
provide core concepts to use in urban design projects & policies, and
can be adapted for use in towns & cities throughout New Zealand.

We think there will be significantly more multi-unit development in the next 5 years. We see a dramatic reduction in supply of affordable units and you will see shortages drive up rents.


Good-quality existing apartments will increase in value.


The cbd will become unaffordable for lower-paid service workers.


We’re responsible for up to 10% of the middle market, and we wouldn’t have built any under the new rules.


The focus has shifted away from the investor to the owner-occupier, $750,000-plus.


Early-stage planning is critical. We now make our margin pretty much only when we buy land.


We’ve learned a lot about our craft by getting involved in the urban design process.


We need to build our balance sheet because this is a capital-intensive environment. Where it used to cost $60,000 to get through a resource consent, it costs 10 times that now.


Jonathan Woodhams, Blue Chip NZ Ltd general manager:


Underpinning the residential investment market, the country is moving away from state subsidies, and the growing affluence of societies wanting to look after themselves is a key driver for the industry.


We’re seeing growing professionalism in design, whether a project is viable. We will manage and participate in all aspects, before resource consent if we can. We’re now planners, we’re developers from the start, we’re responsible for seeing that the investment people make is well managed.


People are taking cuts at all stages. You will see commercial project managers turn into residential project managers, and funders come in demanding a lot more say in the industry.


This year we’re predicting we will sell 800 residential units, and probably 500 apartments will be in that mix.


The market is highly stratified, not well reported on. One thing the industry has cottoned on to is what tenants do want.


An extra half million people coming into Auckland aren’t going to be able to be housed in single-storey dwellings. There is a realisation that what people 2 generations ago didn’t consider accommodation (apartments) is going to be the means of keeping Auckland inside its boundaries.


About 2 thirds of Aucklanders will be renting in 25 years. If you are looking to rent your requirements will be different – we look for an entirely different property when we look for a tenant. For security, multi-unit development is very attractive.


How we meet that demand is a significant challenge to us – about making housing liveable, not necessarily affordable, and there will have to be a balance struck. You will see project managers checking for weathertightness guarantees, guarantees that last beyond settlement, and in 10 years there will be 2-3 managers (apart from Housing NZ) who will be responsible for 3-5000 units.


Yes, our love affair with yields will continue and apartments will form a significant part of residential accommodation.


We see retirees, farmers, people wanting to get ahead investing in the market. They’re not fly-by-nighters, they’re looking to create long-term investments. They are a growing, affluent investment group that will be looking for returns, and returns of 100% over 8 years. They’re looking for yield, and that’s based on having a property people want to rent.


In terms of growth, Auckland remains one of the largest centres in Australasia. There is still significant demand for new properties to be built.


There’s a question of what councils are going to allow to be rezoned, and how. The other key trend is urbanisation – the way Aucklanders live is going to be different.


Website: Ministry for the Environment, 7 Cs


 


If you want to comment on this story, write to the BD Central Discussion forum or send an email to [email protected].

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Oil prices may boost inner-city living again, Cairns Lockie suggests

Published: 26 August 2005


High oil prices may make inner-city apartments more popular, Cairns Lockie Ltd partners William Cairns & James Lockie suggest in their latest newsletter.



In a brief note entitled Will higher oil prices affect property? they suggest current higher oil prices may be permanent.


“It will be interesting to see if this will affect where people want to own property. Back in the 1970s, during the last oil crisis, the older inner-city suburbs such as Ponsonby in Auckland & Newtown in Wellington did become more popular.


“There is a current move towards inner-city apartment living – a higher oil price may give this an added stimulus. It is much easier & cheaper to live in the city, walk to work and enjoy the restaurants rather than paying an increasing price for petrol.”


As an innovative property lender, Cairns Lockie also says it may no longer need a formal registered valuer’s report before approving a loan because council valuations are being updated.


“In a number of circumstances we are happy to approve the purchase of a new property without the need for a formal registered valuer’s report. Later this year a number of council valuations are being updated. Most have not been done since 2002 and many properties have risen substantially since then. This will enable us to use more council valuations when we are being asked to refinance other lenders’ mortgages. This is good news for our borrowers as it will save both time & money.”


Website: Cairns Lockie


 


If you want to comment on this story, write to the BD Central Discussion forum or send an email to [email protected].

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Building company failures a worry for off-the-plans market

Development trend towards suburbs, says Toogood

The collapse of building companies has raised concern about the viability of developments, particularly in the apartment market. Bayleys apartment marketing specialist Phil Toogood told the Property Council’s market preview breakfast on 21 February it had to make it harder to sell off the plans, which had become customary for new projects.

“In Australia they have the backing and experience to build first and sell later. It is going to get very difficult if we don’t address those issues.”

Central Auckland ended 2000 with 6000 residential units, 6500 residents, 70% up on 1996. Mr Toogood said the focus of apartment development had moved to the suburbs, terraced housing was moving out to the second circle of suburbs, and the inner-city secondary market reflected quality of product.

“The owner-occupier market is maturing in the $400,000-plus range.”

Mr Toogood said in the early days “45-plus people bought for investment. Now it’s owner-occupiers.”

Future developments would be concentrated on arterial routes and be 4-5 storeys high, larger floor areas — and with play areas.

Other Property Council preview addresses: Retail: Eden Quarter
Commercial
Industrial

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