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The Finance Hurdle

Posted by Aaron Tunstall on 13, Jun 2017

Apartments make great investments, but don’t expect the banks to share my enthusiasm, Aaron Tunstall writes.

Aaron Tunstall is the general manager of award-winning Impression Real Estate, which specialises in property management and sales and manages over 1,500 Auckland apartments.

NEWBIE PROPERTY INVESTORS tend to talk a lot about finding the right property, often just to let you know what a cracking deal they got. Fair enough – those first few properties are always the most exciting. But veteran investors prefer to talk about finance. Which banks are lending and what are they lending on? How does each lender do its sums? People who are seriously involved in property investment know that the big question is not what you can buy, but what you can borrow. Finance has always been the stumbling block for those hoping to generate a serious portfolio, with many small-scale investors stuck at two, three or four properties. And the financing hurdle has recently got a bit higher for all investors, but particularly apartment investors.


Banks have always preferred houses; if they’re going to lend on an apartment, they’d prefer it to be larger than 40m²; for some, it needs to be 50m² or more to be a ‘standard’ apartment. Anything smaller, and you’ll usually only be able to borrow 50% of the value. Recently we’ve seen banks declining to lend even a dollar on studios or one bedroom apartments at 30m² or below. This creates a few issues – a two-tier market, for starters, where prices leap up when you hit the lending size threshold. It’s also an issue for first home buyers, especially single individuals, who might like to get into the CBD’s most affordable properties but can’t get the banks on board. With plenty of talk last year about how first home buyers should choose affordable apartments, the finance hurdle was rarely mentioned. The result is that small apartments are almost exclusively purchased by investors, who love the excellent returns. Recently I ran some numbers on a 40m² two-bedroom apartment and found that at the current market price, current market rent, even with 100% finance the property was cashflow positive by $20 a week. Not too bad. The key here is it needs to really be purchased by someone who has cash or equity in their home. Not much help to first home buyers, unless banks decide to make exceptions, which I know they sometimes do.

Auckland Council thinks its going to help the continuing housing shortage in Auckland by reducing the minimum apartment size. This would helpfully create more high-yielding properties for investors, but I doubt that’s what the Council has in mind. When the banks don’t come to the party, prices stay suppressed. Add more small apartments and the prices will be even flatter, helping yields stay buoyant. A great equation for the apartment investor, but again, without finance the first home buyers won’t be spending their money at this end of the market.

The finance hurdle for apartment buyers is the small-scale version of what developers are facing when it comes to apartment buildings. I can understand a cautious approach to lending tens of millions to a developer, but what’s so risky about a 35m² freehold apartment in the Auckland CBD? There’s always going to be a demand for that type of housing, whether for sale or rent, and provided the building doesn’t leak it doesn’t seem any riskier to me than a house. Is lender caution partly a hangover from decades past? There also seems to be a trans-Tasman nerviness caused by the parent banks’ markets, which just don’t operate the same way that ours do. Should a jittery Sydney market make lenders nervous about Auckland? I really don’t know the answers, but if the Council wants this city to embrace apartments it can’t change the hearts of the buyers without influencing the heads of the banks.


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