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.”
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.”
Attribution: City Sales quarterly report.