TelferYoung Limited

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Napier Apartment Market

15 August 2006

Napier, along with other cities enjoying premium waterfront localities, has seen significant apartment development, over the last five years.

Apartment market development in Napier commenced with the QuaySide development in the mid 1990's. This was followed by a small number of apartments in Waghorne Street, Ahuriri plus a limited number of apartments in the inner city area.

However within the last two to three years, there has been significant growth in the number of apartments being built. These include Northridge on Napier Hill, West Quay, the Quadrant and the Number 5 Wool Store in Ahuriri, and the T & G Building and McLean Towers in the city.

TelferYoung research (Figure 1) indicates that almost 280 apartments have become available or are currently planned. Of this 172 are either built or under construction with completion due this year. The significance of this number is seen when compared against new building housing consents for Napier which we calculate to have averaged approximately 165 for the last four years.

Figure 1

Napier Apartment Market

Of the 280 units, 40 units in the McLean Tower Complex are mainly selling in the $175,000 to $320,000 price bracket. The remaining units have sold or have asking prices typically from $285,000 up to $900,000, with a few in excess of this.

Apartment presales have been strong, and we understand that of the 104 units in Globe Holdings West Quay development, 80% have sold. For the Quadrant Development, where construction is well under way, current presales are at approximately 60% of the 89 available. We anticipate some of the West Quay units will become available for sale as resales once construction is completed or near completion, and titles issued. We understand there is a resale some 17% above the original purchase price, which is similar to the general property increase in Napier over the same period.

Feedback from the apartment sector agents is that steady interest continues with sales proceeding at a more modest rate than was previously the case.

It will be interesting to follow the apartment market, both its own value levels and the impact on other residential properties in the Napier market. TelferYoung believe there may be an impact in the wider residential market in the $400,000 to $800,000 price bracket. This market may be affected by those selling in this price bracket to complete their apartment purchase and by the apartments attracting buyers that otherwise would have bought houses in that price bracket. Any impact is likely to be moderate, dependent on how the general market holds up.

The availability of new apartments is approximately one year worth of new residential housing, and though the markets are different, there will undoubtedly be some cross effect. At this stage we believe that effect may be as much in the existing housing market as the apartment market.

The redevelopment of the Napier Hospital Hill site may result in further apartments becoming available with retro-fitting of existing buildings possibly adding some 80 apartments to the market.

The apartment market appears to have operated slightly removed from the general property market, driven by those seeking a low maintenance and easy care lifestyle option in preferred and favoured waterfront localities. Although the apartment market has shown significant growth along with the general property market price increases since 2003, it will be of interest to observe the expected consolidation period as resales occur. The question is, will there be sufficient demand from affluent 'baby boomers' to maintain demand in these preferred locations or will demand and prices wane.

We believe the construction quality of the buildings will have a significant long term impact on apartment values. Those that are not constructed to the highest standards will undoubtedly show wear and tear and purchasers are likely to become more discerning. Sound proofing between units is a major consideration with the best apartments having double dividing walls. TelferYoung expect there will be a period of consolidation over the upcoming 12 months as developments are completed. However the cliche of 'location, location, location' will undoubtedly have a major influence on the future value of apartments, together with the build quality.

There is certainly a trend with busy working people choosing a 'lifestyle' where the apartment provides an easy care low maintenance weekly living environment. In many cases, these buyers supplement their lifestyle with a bach which provides a 'weekend escape'.

As the apartment market further develops, Ahuriri in particular is likely to see the emergence of convenience stores, more especially catering for the apartment dweller with a range of easy care meal options, further simplifying the 'lifestyle'.

The alternative to owner/occupier is the rental market. Napier is becoming increasingly popular as a holiday/weekend destination. Research (Figure 2) done by Napier based Economic Solutions Ltd indicates that total visitor numbers to Napier will continue to grow for the next 4 years. The projected domestic visitor annual average growth rate is 5% and international growth rate is 10%. We understand there are moves to establish a business especially for the rental of apartments on behalf of owners. Whilst returns may be modest, longer term capital gains will be sought.

Figure 2

TelferYoung believe the apartment market will have an impact on the entire market by taking away potential buyers from other sectors of the market. The apartment market itself is well supplied and developers will need to balance demand and supply to prevent price adjustments. We believe prices are likely to consolidate in line with the general market but better quality well located units are more likely to be best placed to ride out any market uncertainty. Investment for short term capital gain is risky and we will watch this market with interest over the medium term.

This monthly paper reflects the views of the writer and may not represent the views of all TelferYoung staff.