Do Apartments Stack Up?
Despite tough times, many Kiwis still have money to invest in property. Could an apartment be a cheap way to get started? Amy Hamilton Chadwick checks out the risks and rewards.
11 October 2021
Rental properties have long been a favourite investment for New Zealanders – there’s the chance to add value, to be in control of your own investment, to use the bank’s money to get ahead, and to choose your own strategy.
If you’re looking for an investment providing a higher return than the bank offers, an apartment could work, but be ready to spend some time looking into the paperwork.
Leverage, plus returns
The two big advantages of apartment investing are compelling.
- First, apartments have a lower entry point when it comes to price.
- Second, your apartment can earn more money than it costs you to own it.
“Apartments have been pretty stable in terms of yields,” says Bindi Norwell, chief executive of the Real Estate Institute of New Zealand.
Yield is worked out by describing a year’s rental income as a percentage of how much the property cost. It’s different from a return.
“For Auckland apartments, the average yield was 3.8 per cent in June 2020, not much different from last year when they were 4 per cent.
“In Wellington, they’ve gone from 5.3 per cent to 4.6 per cent.”
Pick the best returns
Those yields include the full spectrum of apartments, so by cherry-picking the best properties, you can find a much higher return.
“We can get a 6 per cent [net] return for any investor who wants one, absolutely,” says Aaron Tunstall, general manager of Impression Real Estate, which sells and manages apartments in Auckland.
“You can beat the bank if you get something that gives you a decent return.”
You can achieve a similar return in Wellington, according to apartment specialist sales agent John Kettle of Tommys.
“If you’re looking for 6 per cent, we can find something and make it work. I listed one [in July] with a 6 per cent net return and we had huge interest from investors.”
Demand in Wellington
If you want a bargain in a post-lockdown price slump, the news from Wellington will be disappointing.
Kettle says interest is strong for both new builds and existing stock.
“Wellington has the advantage of being sheltered from the worst of the downturn because of government employment. Plus, we have a lot of people coming back to New Zealand from parts of the world where apartment living is the norm, so I think the market is benefiting from that.
“I’m really busy – lots of listings and turning them over reasonably quickly. The high-end stuff is moving really well.”
The Auckland market has been less buoyant, mainly due to the downturn in international students, who rent many of the smaller CBD apartments investors like to buy.
Tunstall says the vacancy rate shot up, although it’s had a slight recovery, and rents are flat or slightly declining.
“It’s been a buyer’s market for a few years now,” he says.
“But lack of listings is one of the big problems. It’s a bit difficult to convince owners to sell – what are they going to do with their money?
“They can’t put it in the bank, so they might as well keep the apartment.”
So far in 2020, apartments have continued to fare well in terms of sale price to capital value (CV) ratio – and relative to houses, says Kelvin Davidson, senior property analyst for CoreLogic.
“Unfortunately, though, apartments do tend to suffer more than houses in downturns.
“So, even though they’re performed okay lately, history would suggest that they’ll underperform the wider market in the coming months – especially given the absence of international visitors (for Airbnb), and foreign students.”
Costs and risks
If you’re considering dipping your toe into the water with an investment apartment, it pays to understand how the market works.
Apartment buildings operate under the Unit Titles Act. They’re run by a body corporate committee that sets rules, collects fees, and looks after maintenance for the complex.
When you buy an apartment, there are special disclosures the vendor must tell you. This means there’s more due diligence needed when you buy an apartment. Due diligence is looking over important financial records before you buy.
You’ll also need to factor in body corporate fees.
“You’re forward paying for someone to do all that maintenance and putting money aside for future maintenance as well,” says Tunstall.
“People sometimes say, ‘I don’t want to pay body corporate fees.’ I say, ‘I don’t know the last time you painted a house, but how expensive is that?’”
There are also two particularly high-risk categories of apartment: those in leaky buildings and those on leasehold titles.
Leaky buildings: When it comes to weathertightness, the costs for repair can be massive, so buyers have been steering clear. In late July, a 31-square-metre apartment in Auckland’s CBD with ‘remediation issues’ was passed in at auction despite a declared reserve of just one dollar.
But newer apartments tend to be well-constructed and designed with quality of life in mind – they can be a great way to get started in the property market.
Leasehold: Leasehold apartments are an ongoing dilemma. The returns can be outstanding, but you have to pay ground rent every year. The spectre of shocking ground rent rises makes these an investment best left to the brave and well-informed.
What to look for
Make sure you’re buying an apartment that will be attractive to tenants, says Norwell –pools, gyms and rooftop gardens are all strong selling points.
She recommends finding one that’s handy to public transport links.
“Think ahead: if there are some infrastructure projects in place, you could probably benefit in terms of price growth.”
It’s often said that apartments don’t go up in value as quickly as houses, but Norwell says it’s a misconception. The whole market tends to move together, including apartments.
The national median price for apartments rose from $580,000 in the second quarter of 2019 to $650,000 for the same period this year – up a hefty 12.1 per cent.
The median for standalone homes went from $595,000 to $645,000 – an 8.4 per cent increase.
To get a quality apartment that’s also an excellent investment, the most important factor is doing your homework.
Check your contracts, factor in your likely costs of ownership (both time and money) and read a few months of body corporate meeting minutes to spot past or future issues.
Apartments have been increasing in popularity, Norwell says.
“It’s possible that Covid may make people think more about whether their ideal home is an apartment or a house; it depends very much on your tenant market.
“Some of the newer apartments are really beautiful and very popular – and apartments can really help you save money and get a foot on the ladder.”
Borrowing to buy
Banks like to lend on quality apartments, but they’re more cautious on small apartments of less than 45 square metres (excluding the balcony), student accommodation, or dual-key apartments.
A dual-key apartment is two separate apartment units on one title, making a stand-alone apartment and an adjoining one or two-bedroom apartment with separate entries and facilities.
“Banks generally won’t lend more than 50 per cent on any of those – they don’t turn over very well and the values are more volatile,” explains Joel Oliver, managing director of SuperCity Mortgages.
“Banks will usually lend investors up to 80 per cent on the higher-quality apartments, but it can come down to the specific building – they keep lists of buildings with information about each one.”
When you approach a bank for apartment lending, Oliver recommends having all your body corporate minutes, weathertightness reports and fees information with you, because the lender will want to look at them.
“Always refer to the bank before you go to auction or put in an offer – there are lots of trips and traps.”
Illustration: Point & Miller apartments, Point Chevalier, Auckland
JUNO’s content comes from sources that JUNO magazine considers accurate, but we do not guarantee its accuracy. Charts in JUNO are visually indicative, not exact. The content of JUNO is intended as general information only, and you use it at your own risk.
Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.