Brian Gaynor: Auckland lacking apartments

Apartments represented only 8 per cent of total New Zealand residential building permits for the September 2015 year compared with 48 per cent in Australia.

One of the main differences between Auckland and the three major East Coast Australian cities - Sydney, Melbourne and Brisbane - is the huge number of apartments on the other side of the Tasman.

More and more Australians live in high rise apartments while we have largely maintained the characteristics outlined in Austin Mitchell's 1972 best seller "The Half-Gallon Quarter-Acre Pavlova Paradise".

Mitchell wrote "the home is the focus of the nation's life. A New Zealand house begins life as a 1,000-square foot wood or brick box". It then becomes "a decoration, then an extension and enlargement, then an extension and enlargement to the extension and enlargement".

Changes are occurring but houses are still far more popular than apartments in New Zealand. The relatively low number of new apartments is one of the main contributors to soaring Auckland house prices.

The accompanying table shows apartments as a percentage of total dwelling consents and approvals in New Zealand and Australia.

Apartments represented only 8 per cent of total New Zealand residential building permits for the September 2015 year compared with 48 per cent in Australia. The New Zealand figures exclude apartments built in retirement villages.

Apartments represented 20 per cent of all Auckland residential building permits but are still well below the 57 per cent figure for apartments in New South Wales (NSW), 50 per cent in Victoria and 51 per cent in Queensland. The Australian figures mainly comprise Sydney, Melbourne and Brisbane.

Chart: Apartments as a percentage of total residential building approvals

Apartment consents represented only 3 per cent of total NZ consents - excluding Auckland - for the September 2015 year.

The low level of apartment construction is due to the high cost of regulation and resource consent, as well as our strong bias towards houses. These costs were analysed in a recently released research paper by Arthur Grimes and Ian Mitchell "Impact of Planning Rules, Regulations, Uncertainty and Delay on Residential Property Development".

The detailed study, which has a strong Auckland focus, looked at the regulations and resource consent costs associated with the subdivision of land and the construction of stand-alone dwellings and apartments.

The report concludes that regulation and resource consent adds between $105,000 and $180,000 to the cost of an apartment unit, including the required deck, while they add between $32,500 and $60,000 to the cost of a house.

Additional costs of between $105,000 and $180,000 are a huge disincentive as far as the profitable development of affordable apartments is concerned.

Grimes and Mitchell compiled the following cost estimates:

• Building height limits add an additional $18,000 to $32,000 to the development costs of an apartment unit.

• The requirement to have a balcony costs an extra $40,000 to $70,000.

• The floor to ceiling height requirements are an additional $21,000 to $36,000.

• It costs an extra $6,000 to $15,000 per unit to conform to Auckland Council's desired mix of apartments.

The paper is critical of Auckland's apartment requirements and resource consent process. It states that the increase in the floor to ceiling height requirements from 2.4 metres to 2.55 metres or 2.7 "makes it difficult to develop affordable apartments" although it does not impact on mid to upper end priced developments.

It reveals that Auckland CBD development sites have increased from $5,000 to $6,000 per square metre in 2012 to $10,000 to $12,000 per square metre in 2013 and $18,000 per square metre on Elliot Street earlier this year.

The combination of soaring land costs and costly regulation is a major deterrent to the development of affordable apartments in Auckland.

Meanwhile apartment construction activity is soaring across the Tasman, particularly in Brisbane. There are a huge number of apartment blocks under construction in the Queensland state capital, including the 90 story Skytower which will have 1,100 apartments.

The following figures show that Auckland's apartment construction activity is static while apartment activity has soared in the three East Coast Australian cities over the past decade:

• Apartment building consents have increased from 1,708 units to 1,759 units in Auckland since 2005.

• Queensland apartment approvals have risen from 16,396 to 26,860 units over the same period. This is 15 times Auckland's total even though Queensland's population is only 3.2 times higher than Auckland.

• Annual apartment approvals have soared from 10,170 to 39,674 units in Victoria and from 21,470 to 40,159 units in NSW over the same ten year period.

The situation is deteriorating in Auckland as only one new residential building consent was issued for every additional 5.24 Auckland residents in the June 2015 year compared with one residential consent for every 2.49 additional inhabitants in the rest of the country.

In other words net migration into Auckland is growing far more rapidly than residential dwelling construction as the region's inhabitants/dwelling ratio was 2.84 people at the 2013 census compared with the latest new inhabitants/new dwelling ratio of 5.24 individuals.

This column is not advocating the removal of apartment regulations and resource consent requirements but the Auckland Council needs to strike the right balance between regulation and the encouragement of apartment construction. Its regulations were far too lenient in the past and encouraged the building of a large number of tiny one bedroom apartments. However, the current regulatory regime and land costs do not encourage a significant upturn in Auckland residential dwelling construction, particularly apartments.

Meanwhile, the Reserve Bank has identified the Auckland housing market as the main risk to the New Zealand economy in its latest Financial Stability Report released this week.

The Reserve Bank wrote:

House price inflation has strengthened considerably since the last Report, particularly in Auckland. Auckland prices increased at an annual rate of 26.6 per cent in the year to September, driving the nationwide rate to 17.5 per cent. In contrast, average prices increased at a lower rate of 7.2 per cent in the rest of New Zealand. The increasingly stretched Auckland market is at risk of a damaging correction, especially if economic conditions deteriorate. House prices now exceed nine times gross income in Auckland, placing it among the most expensive cities in the world.

The central bank has introduced a number of measures to dampen the Auckland housing market but it noted that "increased housing supply remains an essential factor in reducing the imbalances in the Auckland housing market, and more rapid progress in building new housing in the region is required".

In other words Auckland needs more houses and apartment units but we are still building almost the same number of apartments as we were a decade ago even though the region's population has increased by 222,000, or 16 per cent.

Kathmandu

There should be fireworks at at the Kathmandu annual meeting in Christchurch next Friday, mainly because of the proposal to issue A$546,000 worth of performance rights to new Chief Executive Xavier Simonet.

The concern is that Simonet's performance target is a 15 per cent compound average annual growth in the company's earnings per share over the next three years with a base net profit after tax of NZ$20.4 million.

The problem with the 15 per cent per annum target is that Kathmandu achieved earnings of $44.2 million two years ago, $42.2 million in 2013/14 and the company forecast net earnings of $31.1 million for the 2015/16 year a few months ago.

It is totally inappropriate for a board of directors to set a net profit or earnings per share performance target of only 15 per cent per annum after a substantial decline in earnings. It would be a huge surprise if Rod Duke, who owns 19.9 per cent of Kathmandu, voted in favour of Simonet's performance rights proposal.

Disclosure of interests; Brian Gaynor is an executive director of Milford Asset Management which holds shares in Kathmandu on behalf of clients.