With the “property shortage” in Auckland there has been a spike in apartment development and selling off plan. New Zealanders are typically averse to buying off plan so Apartments are often marketed to investors offshore. A lot of early sales will go into places like Singapore pushing New Zealand’s tax status, recent capital growth, and the hyped property shortage. A focus on investment means that we end up with lots of small “shoebox” apartments. From a planning perspective this is disappointing. From an investor perspective you need to be careful. Firstly banks have much stricter policy on non-standard apartments. For the majority of banks, a non-standard apartment is anything less than 50sqm for a 1 bedroom and 55sqm for a 2 bedroom.
Pre-approvals only last 6 months. Between buying and completion, bank policy and credit rules can change and catch out unwary buyers. Harder still to predict is that banks will limit the amount they lend in total on an apartment building. You may get declined by a lender simply because they have too many mortgages in the building already. For non-standard apartments, banks typically only lend 50% of the lower of the purchase price or a registered valuation. Foreign investors need to be doubly careful.
Tight lending criteria makes non-standard apartments less popular. As a result the value of existing apartments is lower than new apartments selling off plan.
New apartments are being marketed at over $9,000 per sqm. For a 40 sqm 2 bedroom apartment that is around $360,000. Apartments in similar existing apartment blocks (less than 10 years old) are selling for around $5,600 per sqm (30%-40% less.) For those who bought non-standard apartments off plan back in the mid 2000’s for around $300,000-$350,000 they have suffered large capital losses when selling. When it comes to yield (and rent appraisals) it is important to think through the perceived property shortage in Auckland. Students, young new immigrants getting started, typically rent small apartments. Is this where our property shortage is? There are currently 1,050 apartments listed on Trade Me for rent in Auckland and over 900 for sale of which many will be vacant. We have over 2,000 small apartments getting build or currently being sold off plan in Auckland and that’s increasing. What will happen to rents in this part of the market? Investment apartments will be sold based on yield. It is critical to view this on a net basis after adjusting for rates and body corporate costs. Also factor in higher vacancy and turnover given the transient nature of small apartments. Like swimming in rivers, it pays to look before you jump.