If you're looking at this type of property, make sure you're not in danger of being dazzled by plush accessories and opulent furniture packages.
The rising demand for high-end apartments reflects the changing nature of the market, says Aaron Tunstall.
IF YOU’D TOLD ME 10 YEARS AGO that an Auckland development project would have a starting price of $1 million for a one-bedroom apartment, I’d have thought you were pulling my leg. But this is how far the market has come: ‘The International’ is a conversion of the old Fonterra office into 88 luxury apartments and the penthouse apartment has been presold for a record $15.3 million.
You may well think this has no relevance for investors, but one of the beautiful things about investing in property is that there’s something for everyone. I recently spoke to a client who was about to spend $1.3 million on a large three-bedroom apartment in the CBD. At around 115m2, it’s larger than many family homes, and much more luxurious than most. It will rent for around $1,200 a week; a high rent but a lowish yield for an apartment, before the body corporate fees, which will be somewhere in the vicinity of $4,500 annually.
Should he buy it? Well, that’s not up to me.
My client knows what he’s doing: he wants a low- maintenance investment that will maintain its value long-term and attract a high-quality tenant. Certainly if you had purchased a luxury three- bedroom apartment in London 10 years ago you’d be feeling pretty happy about now. Arguably you’d be even more ecstatic if you’d purchased two mid-priced apartments, but it depends how you want to weigh your portfolio.
A 40m2 apartment in Volt, for instance, will take us about one week to rent out; there’s no doubt it’s more difficult to find a tenant for a $1,200 a week apartment. We do have some of these properties on our books and it can take a month or even a little longer to find the right tenant. But that tenant is much less likely to cause problems with arrears or damage than your typical entry-level tenant, and often stays for a longer duration. Expensive buildings are dominated by owner-occupiers, who tend to ensure the building is maintained at peak condition, which also helps protect your investment.
However, I certainly wouldn’t recommend you put all your eggs into one luxury basket. This is a cash flow negative investment that will require you to have a portfolio that can support it or (preferably and) a strong income from other sources. If you’re looking at this type of property, make sure you’re not in danger of being dazzled by plush accessories and opulent furniture packages. Sometimes we see apartments that sell for more than their fundamentals really justify, because a savvy vendor has staged the property so effectively and spent enough on the kitchen and bathroom that it looks like something from a Hollywood movie about wealthy entrepreneurs. Look past the dressing and make sure you’re concentrating on the location, the rentability and other vital factors.
I was recently asked about converted buildings: are they better or worse than purpose-built developments? The pros and cons mean they really balance out – conversions usually have more character, interesting provenance and a sense of story behind them that buyers and tenants love. They must be up to modern building codes so there’s no risk of them being constructed in a way that’s inferior to a new building. But there are definite challenges to converting an existing building into apartments because there are always compromises – to make the numbers work developers are sometimes compelled to create oddly-shaped apartments or communal spaces that don’t function as they could. Having done the numbers on these in the past, it’s no cheaper to convert an old building, so you’re mainly weighing up whether you’d prefer interesting history or modern design.
The final point to make about a luxury apartment is that these can be a fantastic future retirement purchase. Many people buy a property to live in when they retire and rent it out in the meantime. If you can picture yourself living in a beautiful inner-city apartment, sitting on your balcony looking out across the harbour, buying now rather than later could be a superb strategy. As always, talk to a financial advisor about your situation before you invest in any property.