Apartments perform well for investors as rental returns squeezed
Dwindling yields are prompting more Auckland property investors to consider buying apartments – but it comes with a warning that they need to understand what they are buying.
Although house price growth in Auckland has been strong, at 42.9 per cent over the past five years, rents have only lifted 20 per cent in the city over that same period, according to Trade Me data.
That has meant low rental returns for investors. While capital gains have been strong they are not guaranteed so most long-term investors look for ongoing rental return to back up their investments.
Barfoot & Thompson data shows that investors are making a gross yield of just 3.05 per cent on the Auckland properties on its books – that is before any expenses such as rates, insurance and maintenance are deducted.
But things are better for those who buy apartments. Barfoot & Thompson statistics reveal that in Auckland's city centre, the gross yield is 4.23 per cent, on average.
That is because apartments often command rent that is not much less than to standalone houses but are much cheaper.
Trade Me data shows that apartments in Auckland rent for an average $490 a week, up 2.1 per cent year-on-year, compared to $530 a week across all properties.
But the average asking price was $639,450, compared to more than $900,000 for houses.
Martin Dunn, of apartment specialist real estate firm City Sales, also runs a service helping people invest in residential suburban property.
But he said it had become noticeable that it was increasingly difficult to commute across the city, and to buy a "decent" property, buyers had to pay $800,000 or $900,000.
"There's now a feeling that my market, the apartment market, is the most legitimate residential investment market in Auckland."
City Sales' average sale price is now $400,000 but Dunn said there was also significant interest in $1 million apartments from Baby Boomers.
The average gross return from investors who were buying through City Sales was less than 6 per cent.
Auckland Property Investors Association president Andrew Bruce said the biggest difference for investors buying an apartment rather than a standalone house was the body corporate component.
A body corporate takes levies from all unit owners to manage things such as the maintenance of common areas, and insurance for hte building.
"People fixate on it and think body corporates are so expensive," Bruce said. "But the body corporate takes care of the insurance, power to common areas, maintenance and quite often the maintenance by a body corporate is at a higher level than you or I might keep our homes."
He said he expected to see strong demand for apartments in future. "More often than not they are around targeted areas of develpment."
Realestate.co.nz reported that year-on-year the number of one-bedroom apartments for sale in Auckland had risen 52.8 per cent and 45.5 per cent for two-bedroom units.
Real estate group CBRE data showed that, for the first time since 2013, there are more owner-occupier than investment-grade apartments in the construction pipeline in Auckland.