TelferYoung Limited
Apartment Market - Auckland
8 December 2007
There are currently around 15,000 apartment units in central Auckland with a further 1,500 to be built over the next 2-3 years. Of these 15,000, approximately 2,000 were built last year and only 150 are planned for the forthcoming year.
The apartment stock ranges from basic studios that are targeted at the student market through to superior quality developments around Auckland Viaduct Harbour allocated on leasehold plans. They range in size from around 20m2 to in excess of 200m2.
Building of apartments within Auckland gathered momentum through the 1990s easing off towards the end of that decade although increasing significantly in the period through to end of 2003/early 2004. Original developments were centred on conversion of office buildings struggling to find tenants in the wake of the share market collapse in 1987. The quality of the original conversions varied significantly.
Construction of specifically designed apartments commenced in the mid 1990s in response to demand for inner city living and Council initiatives. Again there has been a significant range in quality of design over this period although much was targeted at owner occupiers in 2+ bedroom developments with 1 to 2 secure carparks.
In the early 2000s extensive development was undertaken of compact one and two bedroom units targeting the investment market combined with the overseas student rental market which was running at a high level in response to a weak $NZ. This in turn led to the formation of a large number of English language schools. Development during this period shows a proliferation of small, “shoebox” apartments particularly along the Hobson Street ridge, reaching a peak in 2003/4.
The change of Council in 2004 resulted in the imposition of more stringent controls on apartment development which combined with the strengthening of the $NZ and decline of the English language market has seen development of the small apartments decline significantly through to the present. Having said this however there has been some better quality large scale developments completed recently which were obviously planned several years ago. Other developments have been “shelved”.
At present the market is considered to be in a state of flux, with the appreciation of the $NZ likely to limit sales potential to overseas purchasers (particularly in Asia), the increase in interest rates which could make investment returns on apartments even less attractive and increases in construction (and consent) costs deterring developers.
Apartment Stock Levels
We have recently considered data provided by Statistics New Zealand which indicates the number of consents issued for apartments with the Auckland CBD over the past decade. While a number of these have not proceeded they provide an interesting reflection of demand for such development as translated by developers.
The data indicates the number of proposed developments has declined markedly following extensive activity in 2002 through to the end of 2004. In 2004 19 consents were granted for around 3100 units while in 2005, eight consents were granted for 616 units.
At present we understand that there are some 2000 consented apartments which are either underway, due to begin or not proceeding. Some developers have voiced their concerns over increased compliance costs and have virtually withdrawn from the market while others are looking at changing their plans to encompass more retail or office accommodation. The recent granting of consent by Auckland City for a large scale development in Elliot Street will increase these numbers although there are a number of appeals against that consent, while the viability of the proposed scale and market for these apartments could be questioned.
Median Sale Price
We have analysed two sets of sales data to extract the median sale price; one as provided by Headway systems’ Valpak sales and the other from the REINZ monthly sales statistics. The median price is reasonably consistent from both data sets and shows some variation over time. The Headway system has enabled us to extract leasehold sales from around both the Viaduct Basin and the former Railway grounds. These leasehold sales, interestingly enough, show only a nominal discount on analysed rates per square, a factor which could be explained by purchasers not fully understanding the potential impact of ground rent reviews when purchasing such property. The data indicates a general decline in the median sales price. This is considered to reflect both the current easing in values generally and the progressive decrease in the size of freehold apartments.
In using the sales we have endeavoured to remove records which have not been “at arms length” or have been at a discounted level for multiple purchases. The monthly data can be skewed by off-the-plan sales being recorded only when a development is completed and titles issued, with these sales all being recorded as at the same date. The sales indicate an increase in the median sale price throughout the 2000s and it currently lies at around $280,000. As noted above, however, we consider this has been influenced by a number of high sales in the Viaduct Basin of superior quality apartments.
When the higher priced leasehold sales are removed from the analysis, the data actually indicates a decline in the median sale price. This can be a factor of supply levels, although we consider it is equally reflective of the reducing floor area of apartment throughout this decade.
Commentary
It is apparent that the Auckland apartment market is entering a period of consolidation in response to changing levels of demand. A number of developers of what can be regarded as cheaper products have left the market in response to higher compliance costs, higher construction costs and a more cautious investor market. There are still some of the smaller units coming on to the market, however these tend to be of a better standard than the earlier “shoebox” type apartments. The continued strength of the $NZ is likely to have an ongoing impact upon the overseas student population and, as a consequence, the rental market for the smaller apartments.
There continues to be a sound demand for quality and character apartments however, with some of the superior quality apartments around the Viaduct Basin showing good capital growth upon resale. The overall potential impact of future ground rent increases in these areas however, have the potential to impact upon their saleability into the future – a fact evident in suburban areas where leasehold properties are meeting strong market resistance in response to large increases in ground rent.
A recent study by Massey University on the apartment market makes the following pertinent conclusion:
“The results indicated that the capital appreciation for the Auckland and Wellington apartment markets over the period 1997 to 2005 was lower than for the same period for single family housing market with more volatile price changes….Overall the apartment values in the two cities tended to lag single-family housing prices in a strong market and further depreciated in a weak market. When the market was stable, the apartment values were more correlated with the single-family housing prices.” (Emphasis added).
With general recognition that the residential market is easing in activity and potentially entering a “weak phase” the risk of declining values for apartments is, in our opinion, very likely. This could be exacerbated by declining rents in cheaper apartments which could well lead to an increase in forced sales over the next few years. Caution should be exercised in entering this sector of the market.
Dave Regal
This monthly paper reflects the views of the writer and may not represent the views of all TelferYoung staff.