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End of a Golden Age?

Posted by Aaron Tunstall on 31, May 2017

Aaron Tunstall - General Manager

Buying for yield, rather than capital gain, is your winning strategy for long-term apartment investment, says Aaron Tunstall.

I love our can-do Kiwi attitude, but when it comes to your investment strategy, it pays to get a professional opinion.

Gains on Auckland apartments have been nothing short of spectacular this decade. In mid-2010 the average asking price on an Auckland apartment was $316,000 on Trade Me – it’s now $578,900, a whopping 83% increase. Investors who purchased between 2010 and 2013 have seen incredible equity growth, but it’s important to remember that the majority of investors were still sitting on their hands during this period. 

The investors who did buy were looking at yield, not capital gains; we’ve been spoilt with the rising values and you certainly wouldn’t want to bank on this continuing.

Apartments have traditionally been a higher yielding, rather than a high capital gain, investment. This decade has seen the apartment market come off a very low undervalued post-GFC base point and bound to new highs – both in price and public opinion. But I do think this golden age of apartment capital gain is behind us. Apartments are no longer undervalued, lenders have made them a little easier to borrow on, and they’ve been endorsed by no less than the Prime Minister as a great way to get into the property market. All good news, but apartments are back to their original position as a yield investment, not a growth one. 

Buying apartments for yield instead of capital gains is essential, in my opinion. It’s all about cashflow, which is the lifeblood of the savvy property investor. Too much negative cashflow makes it much harder to sustain and maintain your properties, as well as making lenders nervous and hampering your ability to expand your portfolio. Good yields shore up your total portfolio and allow you to support the odd negative cashflow growth orientated residential property. 

A good return on your investment is a rare and precious commodity in such a low interest rate environment. Putting your money in the bank doesn’t pay much, and suburban Auckland rental properties are returning almost comically low yields, often under 2%. Apartments have always been the superior yield option; we’re seeing gross yields of 7% to 7.5% looking very achievable at the moment. We recently sold a two-bedroom apartment in the CBD for $350,000 that rents for $480 a week at the moment with an increase to $520 likely in the hot February rental season.

Small packages - The best yielding apartments tend to be the smallest apartments, with one or two bedrooms. On the plus side, these are relatively affordable – you can still pick up a freehold apartment in the Auckland CBD for less than $300,000. The downside is that small apartments are more difficult to borrow against, but this means when you put down a full 50% of the value of an apartment, the loan is smaller – say $150,000 – and the rent rapidly rises to cover not only the mortgage payments, but also the body corporate levies and maintenance costs. We find the smallest apartments on our books are incredibly easy to rent with vacancy levels extremely low at this end of the market. For the best yields, you’ll usually want to stick with existing apartment stock, though canny buyers may be able to pick up a good deal by buying off the plans. 

I believe we’ll see more suburban apartment buildings springing up near transport links and these will be hugely popular with tenants. Auckland’s population is predicted to increase by another million people by 2040. That may seem a long way away, but in the property cycle 24 years comes around quickly. If an investor was able to buy four or five apartments over the next 10 years, rent increases mean capital gains will be a fantastic bonus rather than a necessity. With a bit of luck, that investor could have enough positive cashflow to fund a more-than-comfortable retirement or invest as he or she chooses.

Aaron Tunstall is the general manager of award-winning Impression Real Estate, which specialises in property management and sales and manages over 1,750 Auckland apartments.

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