The 3 categories of apartments and the rise of luxury apartments

Do you know the three categories of apartments?

An apartment in Remeura sold for over $8 million. But then again this is not your typical apartment, it has a floor area of 356 square metres.

Earlier in the year another apartment on the 29th floor of the Sentinel building in Takapuna sold for about $7 million. The apartment had a floor area of almost 700 square metres. This includes over 200 square metres of deck on the roof. Wow! This apartment’s deck is bigger than most people’s homes.

The Sentinel

The last time on record someone spent over $7 million on an apartment was in 2014. This time the apartment was a luxury penthouse in Metropolis. The floor area? Almost 930 square metres.

The metropolis

But the record to date has to be the penthouse on the International Residences (which is Fonterra’s  former offices on Princes Street). The developers sold it for $15 million to successful businessman Chris Liddell.

There is a big difference in prices between luxury apartments (with over 300 square metres of floor) compared to the typical apartments which have only up to 60 square metres of floor area. Take an ordinary  2 bedroom apartment in Nelson Street (328/72 Nelson Street). It sold for $418,000. Even a new 2 bedroom apartment in Freemans Bay (G6/5 Howe Street) with 72 square metres of floor area only sold for $620,000 in April 2016.

So why do luxury apartments fetch such a high price? For one, luxury apartments have the best views. Secondly, luxury apartments are very, very spacious. None of this shoe box apartments. Thirdly, they are very high quality (no leaky issues) buildings. But most importantly, there is a lack of supply of these luxury penthouses. It’s all a matter of demand and supply.

The 3 categories of apartments

To be honest, apartments are like cars: there are second hand cars, new cars, and then there are the classic cars.

Auckland has an abundance of old apartments, built at least 10 -15 years ago. Old apartments are like second hand Toyota, Hondas, etc. Many of these apartments are small (between 30 and 50 m2). Some are leaky. For whatever reason, people have a perception that apartments in this category (old, outdated, small apartments) are for student and budget accommodation. For this reason, apartments in this category fetch the low prices. To add insult to injury, it is difficult to get funding for apartments less than 40 m2.

Then there are a fair amount of new apartments (built in the last few years or currently in the construction stage). These apartments tend to be bigger and more spacious (with floor area of 50m2 to 85 m2). The prices for new apartments are quite good, starting from $700,000 and ranging upwards to a $1,000,000 because the apartments are new and and good quality. Apartments in this category currently fetch a premium price compared to older, smaller apartments.

But as apartments age (say over 10 or 20 year period), the maintenance gets more expensive (lifts break down and need to be replaced).  Body corporate levies rise to cover the increased maintenance. Over time, these apartments will become less fashionable and move into the “old apartments” category. Just like you pay $80,000 for a new BMW. But after 5 years you wouldn’t pay the same $80,000 for that car. Unless there is a huge shortage of CBD apartment accommodation, the price is likely to be less than what you originally paid for the apartment.

When somebody else builds another new apartment block, older apartments cannot compare in quality. This is why brand new apartments almost always command a premium over similar sized older apartments.

And then the luxury apartments (usually penthouses) are a class of their own. These are like classic cars. While there are few buyers, there are even fewer luxury apartments available. This can be evidenced by the high prices ($5 million and upwards) which buyers are paying for the luxury apartments.

Lakeview Apartments developer understands this very well. The luxury apartments in Takapuna have elevated view of Lake Pupuke, Hauraki Gulf, Takapuna and Auckland City. Three bedroom Penthouses starting at 134m² + balconies are expected to start from $2,995,000.

So next time you consider buying an apartment, consider the long term value of your investment. If it’s a luxury apartment, it will most likely keep its value. As for old and new apartments, it all depends on your timing of the property cycle. If you bought it at the trough, then there is a good margin of safety. If you bought your apartment at full price at the peak, there is just a chance that you will be disappointed at the price you get when you sell it. Yes, even if you buy a property to live in, it is an investment.

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