The dark side of the city's burgeoning apartment business

Falling rents and bad property managers threaten to bring down the grubby end of Auckland's apartment market, creating Hong Kong-style slums.

While there is no evidence of a market-wide apartment crash - overall demand for apartments remains strong - the seedier of the city's 11,000 apartments are suffering what property watchers call a "market correction".

Most affected are low-quality one-bedroom apartments, let to students, where rents have fallen by as much as $40 a week, unnerving owners and frightening off prospective buyers.

These apartments were bought in some cases by heavily leveraged buyers for as little as $1000 down on the promise of guaranteed rental income for two years. With rental guarantees expiring and a fall in the number of immigrants and foreign students, who traditionally underpin the apartment rental market, sale prices for smaller, less-desirable units have fallen.

Mayor Dick Hubbard, who last year threatened to rid the city of "ghetto-type" apartments, said the council would insist that developers took account of aesthetics when planning their projects. He said he would also seek to amend the district plan to stop developers building ever-smaller apartments.

"We just cannot have uncontrolled development of the wrong type in the central business district of Auckland."

Asked if he thought the city would end up with Hong Kong-style slums, he said: "There is a real risk. It is not now but what these apartments are like in 15 and 30 years." He said the council had a duty to create the "right urban environment".

Despite these public concerns about the quality and viability of apartment development, real estate agents say there are no signs of an apartment market crash. "Some people, particularly the media, have been talking about a crash for 11 years," Barfoot & Thompson's Auckland city manager, Graham Smith, said. "The rental levels are very high compared with what you would pay in the suburbs. There have been some people burnt by guaranteed rentals running out but owners generally do better [renting] in the open market."

Mr Smith said Auckland was actually running out of apartments because of a sharp rise in building costs in the past 18 months. He conceded that some unattractive apartment blocks had been built but purchase costs and rents reflected this. Yields were still good and much higher than for comparable properties in Sydney and Melbourne. He said the apartment market was holding its own.

Research into the apartment market suggests a sharp divergence between apartments bought by owner-occupiers and those bought by investors to rent out.

Quality apartments in the Viaduct Basin on the edge of Auckland's central business district carry $1 million-$3 million price tags and there seems to be no shortage of prospective buyers, even though sales are sometimes slow.

"If you tried to buy an apartment in St Heliers [in Auckland's eastern suburbs] you would be hard-pressed to find one," retired builder Geoff Simpson said.

For vendors of medium-to-low-priced apartments, the message is different. Estate agents are urging them to be "flexible" with their prices or expect a long wait before their apartments are sold. Where the price is right and buildings are well-managed and maintained, the sales are going through.

Professor Bob Hargreaves, director of the Massey University real estate analysis unit, said there was a sharp difference between the owner-occupier and investment markets. His research shows that the median apartment gross yield nationwide for the June 2004 quarter was 7.2 per cent - higher than for flats and houses. But capital gain was significantly less.

In October 2004 the average one-bedroom Auckland city apartment rented for $290 compared with $330 15 months earlier. There were smaller drops in rental income over the same period for larger apartments. Overall, though, median rents across the city dropped only slightly between October 2003 and October 2004, suggesting tenant demand is still strong, if not for all classes of apartments.

Mr Smith said lower rents at the bottom of the apartment market would not attract poor renters from the suburbs as city rents were still much higher than elsewhere. But Mayor Hubbard said poor-quality apartments generally attracted poorer tenants.

Colliers International's Auckland-based director of project marketing, Philip Toogood, who has tracked the Auckland apartment market since in started in 1993, denied there was a crisis in the city market. He said some of the smaller developments were more profitable than the bigger ones, though he conceded the lower end of the market had become "softer".

"The biggest issue you have got are buildings that are badly managed. What we would recommend to anybody buying an apartment is that they do what they do for any real estate."

Housing New Zealand Corporation warned in December 2003 of a "correction" in the national private rental market but did not say when. "Declining rental yields increase the likelihood of a correction at some stage," the corporation said. "This is most likely to occur through a stabilisation of house prices and a gradual decline in real house prices."

No significant stabilisation in Auckland house prices has occurred since then, though galloping year-by-year capital gains have slowed slightly. This is despite warnings from the Government and the Reserve Bank that Kiwis are top-heavy in property.

- Herald on Sunday