Balancing risk against strong rental income

Although residential rents are highest in Auckland, the city is also the riskiest place for rental property, data shows.

Massey University's real estate analysis unit's quarterly survey, which also rated Wellington alongside Auckland in the rental stakes, this week showed the Hutt Valley as one of the safest places to own a rental property.

Professor Bob Hargreaves, of the finance, banking and property department, produced figures to illustrate the point, which also highlighted a drop in inner-city Auckland apartment rentals, reported in the Herald yesterday.

"Average annual pre-tax return for Auckland was 14.31 per cent, with a standard deviation of 9.01 per cent," he wrote. The higher the standard deviation, the higher the level of risk.

"For Lower Hutt, the average rate of return was 13.18 per cent with a standard deviation of 4.38 per cent. Thus the Auckland-only investor would more than halve risks by diversifying to Lower Hutt with only a slight trade-off in total returns."

But he acknowledged many investors would not want such a geographic spread to their portfolios.

"Although locational diversification may not be an attractive option for the smaller investors who prefer to self-manage their rental properties, it is a viable alternative for larger investors and those prepared to employ property managers."

The Government's housing strategy released in May pointed to the explosion of the private rental sector which grew 35 per cent between 1991 and 2001, resulting in 100,000 more rented households. About a quarter of all households rent, compared with more than 40 per cent in Australia.

But the strategy also noted a drop in home ownership levels and how house prices had outstripped rent.

"The decline in owner-occupation has been accompanied by increased investment in rental property. This investment may not continue, however, if house prices cause rental yields to fall too far behind house prices. In some regions, rental housing returns are below the cost of capital and investors may be relying on capital gains and tax advantages to make a return on investments. This may not be a sustainable basis for ongoing investment that delivers a stable rental market," the strategy said.

The national median rent was $250 a week in the last financial quarter, up only 4 per cent on the same time last year. Social service experts thought the drop in rents would have little long-term effect.

Housing Lobby spokeswoman Sue Henry said incomes had also dropped and any rental fall was insignificant. Rezoning large areas of Auckland and the entry of many new landlords to the sector had driven many tenants to become transient.

"Renters are being shunted around. I know people earning $60,000 a year for whom home ownership will never be an option."

Campbell Roberts, the Salvation Army's social policy national director, said the drop in rents was only making a marginal difference for families in crisis. "There is a softening of rents but it isn't going to be the answer for a lot of the families we're dealing with."

* A survey of rental housing will be released by Building Research and the Centre for Housing Research next Wednesday.