Is this the start of the apartment boom?

“By 2017 over 50% of new homes built in Auckland will be attached.” RCG 2016

“Auckland apartment builds to outstrip houses by 2017” NZ Herald, 2016

Property developers have recently shown a renewed interest in developing apartments.  I’m sure you have heard of Park Residences, Victoria Residences, and Sugar Tree apartments just to name a few. There’s talk of a block of apartments going up in Avondale as well.

Buyers are keen too. And what’s amazing is a lot of these residential projects are largely pre-sold. This means you are buying off the floor plans before the apartment blocks are built. Buyers put down a deposit and place a high level of confidence on the developer to start and complete the project on time. That’s all good as long as the developer doesn’t go bust.

Assuming all goes according to plan, apartment owners take ownership and possession of the apartment on time. But what if a few years down the track you find your apartment has a leaky building issue? Experts call it a “weathertightness” issue. Or what if the body corporate levies go skyrocketing up and you find out that the body corporate secretary hasn’t kept expenses under control? (If you are wondering what Body Corporate Levies are, read this post. And it’s true that body corporate fees for CBD apartments can cost at least a few thousand dollars per year.) And suppose you wanted to use a different internet provider. No problem right? Well, if the internet supplier needs access to the common infrastructure (eg Risers or Comms room), you have to get permission from the Body Corporate. And it’s not that easy. Unless of course you have a majority vote in the body corporate.

You see New Zealanders haven’t always had a good experience with owning apartments. And it’s not so much we don’t like living in the CBD (which tends to have the highest concentration of apartments). Everyone likes the social life that the CBD provides: close proximity to cafes and bars and entertainment. And if you work in the CBD, it’s convenient too. You save money by spending less on petrol and save time you’re stuck in traffic. True. There are clear advantages to living in the city but it’s just we hear about bad experiences about body corporates and leaky buildings and don’t want to experience them.  The best remedy here is to educate would-be buyers about the fundamental aspects of apartment ownership and how it is different to owning a house.

Nonetheless, there has a surge in demand for apartments recently. So who are buying these apartments? Apartments are popular with investors both local and overseas. University Students and young working couples are the likely tenants. In fact, some property managers in Auckland CBD specialise in managing apartments as student accommodation.

So will the apartment boom continue and how long will it last? As long as there is money to be made, it will last as long as there is demand for these apartments and developers can get financing. You see developers are clever these days. Until the apartment project is 80% or in some case over 90% pre-sold (and buyers pay the deposit), property developers won’t start building the apartment. This condition satisfies the bank loan requirements and allows the property developer to borrow enough money to complete the project.

When everyone is making money (banks, property developer, valuers, investors and agents), everyone is happy. What people tend to forget is the cyclical nature of the property market. I have seen some developers sell a 2-bedroom apartment for over $600,000. But remember, it’s not usually until a few years later, do we hear about unpleasant experiences with body corporate managers, and rising body corporate levies. Not to mention a nasty experience with pests. It’s unfortunate that pests like bed bugs and insects tend to spread rather quickly in this type of accommodation. Unhappy owners will cut their losses and sell their apartment. If interest rates continue to rise, struggling investors will sell their apartment. If this happens in waves, supply in the apartment market goes up and guess what? Prices start to fall. It’s usually around this time, seasoned apartment investors (who look for high yields) will enter the market and pick up deals at rock bottom prices. It was less than 10 years ago (in September, 2007) when I saw an article by Anne Gibson in the NZ Herald titled “Auckland apartment prices plunge”. The article clearly reminds us the cyclical nature of the property market:

“One owner at the City Sales auction lost $90,000 on a Hobson St unit in the student-oriented Stanford. Another lost $79,000 on a unit across town at The Cube on the eastern fringes of the CBD in Beach Rd.”

I like it how the writer Anne Gibson sums up “The glass is either half-full or half-empty, depending on your outlook”.

So what’s new? Nothing really. It’s just the typical property cycle (and it depends on your outlook J). More apartments will spring up in the near future. In later years, we will continue to hear stories of owners having a bad experience with apartments. So too, will we hear of shrewd investors picking up a bargain when prices start to fall. Whether or not you decide to go for a ride in this sector of the property market, is your choice. But the most important thing is you enter the apartment market as an informed market participant. People may even tell you this time it’s different.

In the same NZ Herald article by Anne Gibson, she quotes Ian Mitchell as saying “the [apartment] sector last boomed in the mid-1990s, then prices dropped by around a third in the next five years.”

Sure. Apartment prices might not drop that dramatically this time round. After all, as Mark Twain supposedly said “History doesn’t repeat itself, but it does rhyme”.

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