TelferYoung (Auckland) Limited

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Auckland Newsletter - October 2004

1 October 2004

Introducing... Glenn Dyer joined TelferYoung in May and is currently working with Evan Gamby.

Glenn who is a Graduate from Massey University with BBS (Real Estate), grew up in Albany on the North Shore and for the past two years has been working for L.J.Hooker, Whangaparaoa as a Real Estate Salesperson. He is super keen on fishing and diving.

Regan Johns a keen Marist rugby player joined TelferYoung in February replacing Peter Galliven who returned to Massey University. A proud southerner Regan made the shift from Invercargill to Auckland after completing the B.COM (VPM) course at Lincoln University. He is adapting to the Auckland lifestyle with the guidance of Lewis Esplin who has introduced him to expresso coffee and Auckland traffic etiquette.

Retirement Villages - An Australia Study

Peter Young has recently completed a short but intensive visit to Melbourne and Geelong in order to examine the most recent trends in the development of retirements villages. In essence these villages construct residential units and community centres for the elderly people within their communities, selling a license or "lease" to occupants with a provision that the property be sold back to the retirement village owner when licensees choose to move out or are forced to move out.

Most retirement villages require that the minimum age for licensed purchasers is 55 years and in most cases the average age is somewhat higher, the general impression being that it is probably in the early to mid 70's.

The following are the most significant features if lessons are to be learned from this visit:

  • One bedroom units are extremely difficult to "sell" under a licence or lease basis. The easiest units to sell are those incorporating three bedrooms and two garages.
  • Building costs in Australia are generally lower than in New Zealand so that in many villages quality units can be purchased in the $300,000 to $400,000 price range. The most luxurious units command prices of up to $700,000, these units incorporating three bedrooms and double garages.
  • "Serviced Retirement Apartments" are now difficult to sell and most Australian developers are certainly avoiding this end of the market. The reason given is that elderly people who require in-house nursing and other services can obtain these services in their own home and do not therefore need to move into a retirement village.
  • Almost all retirement villages emphasise that they are for "independent living". Most do not provide any form of rest home, geriatric hospital or "confused" elderly service. When a resident becomes physically frail or confused they are required to move out of the retirement village and seek more intensive care.
  • All rest homes have a community centre. Some of these are very expensive and elaborate incorporating swimming pools, gymnasia, libraries, billiard rooms, commercial kitchens and dining rooms etc, etc, etc. In fact, even in the larger retirement villages these facilities appear to be under-utilised. For example, "On a visit to nine retirement villages we did not encounter one person in a swimming pool and on only one occasion did we see one person in a gymnasium". In one large retirement village a full expensive commercial kitchen and dining room was installed but it is used only once a fortnight. These communal features appear to be constructed more to attract purchasers into the retirement village rather than stand on their own feet from an economic point of view.
  • When leases or licenses terminate the units must be sold back to the retirement village owner. In most cases, the terms of the "buy back" involve the fixing of a market price at which the unit is sold. The outgoing licensee receives this price generally less a discount of between 34% and 36%. In addition, the cost of refurbishing or redecorating the unit are deducted from the outgoing licensees entitlement and this entitlement is paid only when the unit is re-licensed. These terms are rather more severe than those which apply to retirement villages in New Zealand.
  • There are a large number of retirement villages in and around Melbourne and Geelong. They all appear to be very successful with the exception of those with a large number of serviced apartments which are not selling.

Building Act 2004

The Building Act assented to by the Governor General on 24 April 2004 is now available and can be checked on the internet or from Bennetts Bookshop. This new legislation will come into force on 30 November 2004 when the power and function of the BIA will be transferred to the Department of Building and Housing. The legislation first arose because of the weathertightness issue but the changes are now much broader.

The first of the changes will come into effect on 31 March 2005 and include:

  • Changes to the Code Compliance Certificate requirements.
  • The definition of "change of use".
  • A new Certificate of Acceptance.

Other changes will be:

  • A review of the Building Code.
  • "Licensed Builder" for "Restricted Work".
  • Building Consent Authority Accreditation.
  • Building Product Certification.

Note: The BIA has published some useful guidance documents on:

  • Durability
  • Weathertightness
  • Monolithic cladding
  • External moisture

Commercial Property - The future?

Commercial property is continuing to sell at very low yield rates, there are numerous examples in the market place. We note the following three examples for your consideration.

A suburban leasehold property occupied by a Supermarket sold in October 2004 for 7.28% at auction with a sale value of $6,135,000. The land being 3884m2 is subject to a 21 year perpetual lease to the local Council. The ground rent reviews are 7-yearly with the next review due on 1 January 2007. The building was constructed in the 1970's but recently substantially refurbished and comprises a total area of 2917 m2. The lessee is responsible for the ground rental payments and the annual rental payable for the premises is considered to be excessive due to the impact of the ground rent. There is a base rent plus percentage of turnover payable. The lease for the premises expires on 31 March 2006. We accept that there was competition amongst the Supermarket operators to secure the property. However the lease was about to expire and the ground rent was to be reviewed. An extremely low yield rate for a leasehold property.

A modern fringe city warehouse/office building occupied by an international tenant sold in May 2004 for 6.06% yield with a sale value of $3,800,000. The land is 2874m2 with the property being in an area experiencing high demand for apartment development. However, the building was constructed in 1985 and is of good quality. The warehouse was 842m2 with 304m2 of offices. The lease expires in 2005 with the last rent review in 2003. The building has not reached the end of its economic life nor does the sale value equate to land value. Another extremely low yield.

A small retail premises was purchased by an existing tenant in October 2004 for 5.15% yield with an effective "private treaty" sale value of $750,000. The sale value was fully contested as there were two other interested parties bidding for the property. The building is a 100 year old two storey brick shop with living accommodation above. The existing rentals are considered to be below market however the yield rate on estimated market rents is still only 5.7%. How low can yield rates go?

The above sales indicate that investment property is still keenly sought after. Although it is difficult to see why investment money should continue to find its way into property at these levels, for those who are not so highly indebted there is still some sound reasoning. The recent rise in interest rates and maintenance costs must impact on the return an investor can obtain on his funds. We accept that some investors take a very long term view for property, but the economics of borrowing to purchase at current interest rate levels and the prices being paid must indicate that purchasers expect to obtain further financial gains in the short term, beyond those at the date of purchase. Most commercial /industrial land values have increased significantly and further increases in the short term would appear unlikely. This increased land cost and current building cost inflation is now being reflected in rental increases for most commercial / industrial properties. This rental growth is perhaps the area where buyers are looking for added value to their property purchase and are prepared to accept an initial low yield in the hope of better returns. There are many other factors, which affect the demand for property. Some of these include a shortage of land, vacancy levels for properties and the level of business confidence. Unlike the price cycles for residential property the commercial/industrial sector is more complicated. We recommend a valuation be obtained on any commercial / industrial property prior to purchase.

 

Back issues of the newsletter can be obtained from TelferYoung (Auckland) Ltd
Phone: 379 8956
Fax: 309 5443
PO Box 5533
Auckland
www.telferyoung.com
email: auckland@telferyoung.com

+ Evan Gamby + Lewis Esplin + Trevor Walker + Ian Delbridge + Dave Regal + Phil White + Bruce Somerville + Bob Hawke + Weston Kerr + Arthur Appleton + Sonia Dryden + Yoon Jin Cha + Matthew Straka + Mark Maginness + Aimee Martin

Opinions expressed in this newsletter are of a general nature and should be used as a guide only. TelferYoung should be consulted before acting on this information.