'Hybrid' hotel unit prices plunge

Prices on some Auckland hotel/apartment units have dropped suddenly as rental guarantees expire.

Damian Piggin, of Ray White Apartments, said the price fall applied particularly to inner-city apartments leased to hotels.

Many of the units had been sold at high prices initially because they came with rental guarantees. However, these were now expiring, hence the drop.

A lower-level Sebel Suites Hotel studio which sold for $195,000 when the Viaduct Harbour block was finished about five years ago had been auctioned for $146,000. That unit had dropped 25 per cent at a time when national property prices have been rising, often by 20 per cent annually.

A level 17 unit in the Ascott Metropolis, which originally sold for $300,000, was now likely to fetch $230,000.

Piggin said investors should consider buying now.

"Hotels are the best investment property in Auckland city and they'll never get cheaper than this," he said. Although replacement costs were rising, returns on many of the units were dropping, forcing down sale prices.

Returns for Hyatt Residences' investors have diminished drastically. Piggin cited one level-five unit where an investor previously receiving $3000 a month rental had got just $180.89 for April's rent after deductions.

Units in the Hyatt Residences were sold with rental guarantees, but those expired in February, resulting in the sudden drop.

The unit is managed by Regency Operations and linked to the Hyatt Hotel's business.

The room generated $2735 income during April but $1192 was deducted as house profit. Insurance and building service fees sliced further into the return. When rates, body corporate fees and other costs were deducted, the investor got the small payment.

"There will be some screaming going on," Piggin said. "This is going to happen right throughout the building. Anyone on a fixed rent will be suffering the same sort of fate."

Piggin said investors unhappy with their new returns had to give Regency three months' notice to extract their units from the leasing deal.

Earlier this year, Piggin sold a Metropolis carpark for a record $78,000 but hopes to beat that soon with $80,000 for another park in the same building.

Martin Dunn, head of apartment specialist City Sales, said properties within hotels often suffered on re-sale.

"In our experience, guaranteed returns are always contrived and built into the price. We haven't sold off-the-plan units with guaranteed returns because of this. On resale, the price always drops significantly," he said.

"The double hit, however, is the GST. Usually the developer doesn't pay GST on the sales where he offers a lease with guaranteed return as his take is that the sale is a going concern.

"However, as soon as the guarantee period expires, the income drops massively and investors look to us for an alternative rental income. This involves terminating the lease and triggers a catastrophic GST bill for the owner who is already looking at a significant drop in value as well as rental."