Given the current stage of the global financial crisis one question upper-most in some minds is where does one invest surplus funds.
In NZ we have traditionally been obsessed with residential property; an obsession successive governments have been at pains to end.
In this attitude, I’d like to propose that the Auckland apartment market may be an area currently being overlooked.
Traditional thinking and experience says that there was a boom in the Auckland apartment market in the late 1990’s and early 2000’s as the influx of foreign students, largely from Asia, created a huge demand. Apartments were knocked up very cheaply and developers offered eye watering returns to those brave enough to buy apartments off the plans, often with minimal deposits. Some apartments were little larger than the average kiwi living room.
At the same time a decline in central city retailing, caused by high lease payments and a move to suburban malls, saw people converting character commercial buildings to apartments.
With the development of the Auckland waterfront and upgrading of Queen St, kiwis also saw that Auckland apartment living held an appeal.
Owners were sitting on Cloud 9.
The GFC and the rapid drop in student visas rapidly changed this.
As developers went into liquidation, owners found that written, contracted, guaranteed rental returns were worthless.
Those unable to service the mortgage on their Auckland apartment found the market value had declined, in many cases, 50 or 60% from the price at which they purchased.
Many lost vast equity sums.
The current apartment Auckland landscape is vastly different from at the height. Developers have disappeared and there are no cranes on the CBD landscape.
So, has the apartment Auckland, ceased to be a prudent investment?
I suggest not.
The market has found the natural price level, the small, cheap apartments are now priced accordingly.
It is my view young kiwis find central city apartments Auckland living very appealing and so there is a “genuine” sustainable market for this type of real estate – providing people exercise the normal, prudent care. Price needs to be balanced against location, size, quality of construction, outlook, light and air etc.
Similarly, there is no shortage of buyers for quality, spacious, top end apartments as those with disposable income desire an Auckland base to go with a “lifestyle” home somewhere else.
So, to go back to my original question as to whether an apartment in Auckland is a prudent investment, I believe it is, with certain reservations.
Character conversions have traditionally been of higher value than “newer” construction. But, the Christchurch earthquakes are going to put pressure on any older buildings to be brought up to modern earthquake standards. This will be expensive and some buildings may need to be vacated during major construction periods. This needs to be factored into value.
For my money, I see well-constructed, well located newer buildings with apartments of reasonable size and with good light being the key pick over the next few years as there is a cessation of new construction.