TelferYoung Limited
Is The Residential Investor Growing Up?
15 September 2006
Over the last five years a large number of New Zealanders have invested in residential property.
They range from those that have bought one or two homes, to those that have purchased ten and more. In the main they have been lucky, seeing good capital gains associated with the ever rising real estate market. Times change, and so does the property market, so where to now for the residential investor?
It has been 'trendy' for some years to invest in residential property. The smaller or new investor feels quite comfortable putting their money into an asset type that they know well, is quite liquid, and has relatively low risk. A perceived lack of performance of other investments such as bank term deposits and the share market contributed to the move towards property.
The residential boom of 2002 to end 2005 (in some market sectors still continuing) has been driven by a wide range of factors, one of these the extra demand created by residential investors. In the low to middle value ranges these investors competed with the owner/occupier type purchaser, helping to push up property values. Initially weekly rentals also increased but rental growth slowed and over time returns available have declined. In many parts of the country gross returns were in the 7% to 8% range, but these have reduced to 3% to 4%. Many investors accepted these lower returns as long as value growth continued to increase their equity, but as value growth has now slowed the more established investors are reviewing their portfolios.
Poorer performing properties are being sold and the equity reinvested in other areas, or investors are selling out of the house market and moving into rental flats and the commercial property market. In these markets a higher amount of equity is normally needed, which the mature investor now has.
Activity in the residential rental flat market has increased markedly in the last 18 months. Sale prices have risen strongly and demand for good examples is strong. The traditional residential house investor is attracted by higher returns and perceived capital growth. However investors often do not consider some disadvantages of this property type. Management requirements are greater, tenants of flats are often more transient than those of homes, and there is a greater chance of bad debts. In a time of market slowdown, traditionally vacancy rates increase more than for residential homes.
Increased wealth also enables the investor to buy into the low to middle sectors of the commercial market, where different market forces and value drivers are at work. Normally commercial properties are less liquid and have higher equity requirements, but lower week to week management requirements and tenants usually pay the property outgoings. Recent sales show the former residential investor may pay more than a long term commercial investor, most likely due to their experiences of low residential returns. This can result in property prices rising for this type of investment.
Feedback indicates that the former residential investor tends to overlook the risks of maintaining income levels commercially. In the residential scene if a tenant leaves you get a new one - a simple process and a short time frame. Commercially the process is often more difficult and takes much longer. Can the investor afford to 'prop up' his or her property for an indefinite period from their own week to week cashflow? Often the situation is no, and lenders are cautious about this, while investors need to weigh up the amount of risk they are prepared to accept.
The residential investor is growing up, in many cases moving out of home and into different markets. Those that remain in the house market will achieve lower returns than in previous years, but may have lower risk than those that move into commercial property. As individual property markets differ in their drivers new investors need to be cautious and should always obtain professional advice before committing to purchase. At TelferYoung a wide range of advice and background information is available to assist investment direction and decision making. The best way of making money from your property investment is to make the right decision and be informed before you buy.
This monthly paper reflects the views of the writer and may not represent the views of all TelferYoung staff.