Property Report: Moving on up - The rise and rise of Auckland's apartment market

High-rise buildings and apartments in Auckland's Queen St. Photo / Chris Gorman

Why Auckland could soon be a city of vertical villages as more Kiwis embrace high-rise living.

The Auckland apartment market is looking up. More than 150 apartments are now sold every month in central Auckland, with the post GFC slump in the market fast receding. And the sector is finally shaking free of the shackles that had caused potential buyers to hesitate. Issues surrounding poor management of apartment buildings, leaky building worries, the cost of earthquake strengthening and post-earthquake insurance hikes have largely been addressed.

Tighter body corporate legislation giving owners more transparency about the way their apartment blocks are managed is helping to underpin greater confidence. The heated residential property market has boosted fortunes too, with the price of a stand-alone home in a desirable inner-city suburb now way beyond many buyers, making apartments a more attractive, or necessary, alternative.

Infographic: Click here to view latest property data from CoreLogic.

Also driving growth is the fact that Auckland is the favoured destination of immigrants to New Zealand, many of whom are used to living in tower blocks overseas and prefer the vibrancy of more crowded inner-city living rather than stand-alone suburban life. Returning expatriates, too, are happy to buy an apartment, having experienced the
benefits when living overseas.

As Auckland's population increases so the range of apartments spreads, and already there are large apartment projects in suburban areas such as Manukau, Ellerslie, New Lynn, Mt Wellington and parts of the North Shore.

Higher density living is provided for in the Auckland Council's Unitary Plan, which provides for zones where terraced housing and apartments can be built. Controversial though these planning changes have been, it is difficult to escape the need for Auckland to start moving skywards instead of continuing to sprawl. Some of this future development has already taken place around railway and bus transport hubs. Once the apartments sprout up, along with them come retail and food outlets and amenities, creating new communities.

"Predictions a year ago that demand for central city apartments was increasing to the point where developers would have confidence to start building new projects, have proven correct, and several major new complexes are under construction."

Property experts warn against making sweeping judgements about what, in fact, are a series of complex markets, each with their own dynamic. They are encouraged by the developments providing more up-market apartments in the city and its fringes. There could be as many as 3000 new apartments available on the market during the next 18 months, bringing the total number of apartments in the city and inner suburbs to more than 20,000. Of course the price of the new apartments will be much higher, with apartments in the new developments starting around $450,000.

Real estate agents say there has been a steady increase in the numbers of owner-occupiers buying apartments in the last two years, and many new developments are aimed at this market rather than at property investors buying to rent their properties.

Building consent figures suggest Aucklanders should get used to seeing more apartments coming onto the market - and not just in the central city. Auckland City planners say the city has to adjust to more intensive living if it is to cope with projected population increases.

Property valuers say the apartment market appears more volatile than it really is, because of the high number of apartments being bought and sold. They also note that, in some parts of the apartment market, values started increasing earlier than the residential housing market.

But figures suggest apartment values in suburbs such as Grey Lynn, Parnell and Remuera have not increased as fast as stand-alone houses in those suburbs during the last two years. For example, apartment values in Grey Lynn increased by 17 per cent between January 2012 and January this year. This compares with a 32 per cent increase in residential house prices during the same period. In Remuera, house prices increased by 21 per cent during the same two years, compared with a 4 per cent increase in apartment prices. The difference in Parnell was less stark, with house prices increasing by 12 per cent and apartments 9 per cent.

The lack of residential homes in the central city makes a comparison difficult, although there was a 20 per cent increase in the value of central city apartments during the same two years. Bayleys Real Estate Central Auckland Apartment Manager, Hayden Butler, says the apartment market has significantly recovered, especially in the freehold sub 50sq m market, where there had been a 30 per cent to 40 per cent drop in pre global financial crisis prices. Now many apartments are selling for $5000 per sq m plus compared with less than $4000 per sq m between 2008 and 2010.

Predictions a year ago that demand for central city apartments was increasing to the point where developers would have confidence to start building new projects, have proven correct, and several major new complexes are under construction. Local authorities gave consent for just over 2000 dwellings to be built across the country in December, 473 of which were apartments. Of these, 397 were in Auckland.

While monthly apartment consent figures are volatile, there has been a strong and consistent upswing in consents issued since October, the vast majority in Auckland. Quotable Value valuers say it is pleasing to see some top quality apartments being built, in contrast to some lowquality builds in the past. They expect these well-designed complexes with communal facilities will be attractive to both owner occupier and investment markets.

Leaky buildings continue to be a problem, however the market has matured somewhat and there are purchasers who are prepared to buy in an apartment complex that has an identified issue.

Hayden Butler, Bayleys Real Estate central Auckland apartment manager

Buyers are wary of over-paying for new apartments, and the valuers say buyers are still in the main shying away from leasehold apartments. Recent sales of apartments in central Auckland also indicate a firming apartment market. For example, an 86sq m apartment in the Pullman residences in Princes St, sold in January for $485,000. The one-bedroom apartment with a large deck and view of the harbour, had a 2011 capital value of $415,000. But, as a reminder of earlier values, the same apartment sold for $490,000 in January 2010. A two-bedroom, 37sq m apartment on the 11th-floor of the Zest apartment complex in Nelson St, sold last month for $205,000. It had sold in September 2005 for $172,500.

Inner-city apartments have not always been a happy hunting ground for investors. Many bought their properties off the plans, and had to watch the value of their investment tumble.

Auckland apartment sales numbers continued to fall until they reached a cyclical low in 2008, when only 864 apartments were sold. Apartment sales began picking up in 2009 but, while sale numbers increased during the next two years, it was not until 2012 that most apartment values started to improve.

During the last two years there has been a sustained increase in the number of apartments being sold, and real estate agents report a significant change in the profile of purchasers in that period. Between 2007 and 2012 the apartment market was dominated by investors attracted by high yields. With prices falling, investors regularly achieved returns of up to 9 per cent.

Bayleys Real Estate says apartment investors generally achieved the higher returns from smaller apartments, around 45sq m, at prices of up to $200,000. The company says between 2008 and 2011, sales in this sector of the market accounted for more than half of apartment sales.

Apartments in the higher price ranges are favoured by owner-occupiers rather than investors, and it is this market segment that most new projects are catering for. Two years ago there were an estimated 70 per cent of apartments in central Auckland owned by investors. Agents say this has fallen now with an influx of owner-occupiers, although investors still dominate the small apartment market.

Owner-occupiers have been attracted to the city by waterfront improvements such as those at Wynyard Quarter where there are open spaces, good pedestrian areas, frequent entertainment and events. Among the more than 20,000 apartments in the city and inner suburbs are many shoe boxes, from 15sq m to 30sq m, still selling for around $200,000. At the other end of the apartment spectrum are large penthouse apartments selling for as much as $6 million.

Many apartments are in buildings that are modern and well-constructed, and are run by efficient and professional body corporate managers. Others are not, and in some cases building administrators have come under pressure from cash-strapped owners to defer maintenance.

An overhaul of body corporate legislation means potential buyers can demand greater transparency about the size of building maintenance funds, maintenance programmes, and the number of tenants versus owner-occupiers in each building. Changes to the Unit Titles Act mean it is no longer possible to run an apartment complex on a really lean body corporate maintenance levy. Valuers say many leak building issues have been identified and fixed, but not all.

Hayden Butler says yields have softened slightly as prices have recovered at a greater pace than rental returns. "There are still good 7 per cent yields, however these are typically in smaller size apartments below 40sq m," he says.

While earthquake strengthening issues had an impact on the market, councils were allowing time to rectify any problems, which enabled purchasers to factor in these costs when buying. "Leaky buildings continue to be a problem, however the market has matured somewhat and there are purchasers who are prepared to buy in an apartment complex that has an identified issue," says Butler. "They will typically take into account a worse-case scenario and price in the cost of rectifying these issues."

Strong immigration numbers have helped underpin the rental and investment markets, and it is now more difficult for developers to build more shoe box apartments, so increased demand and limited supply will have an effect on prices.

QV valuers say there is more interest in owner-occupier apartments from young professional couples looking to buy a home, but who do not want to live in the outer suburbs. Apartments offer them an affordable inner-city living with a low-maintenance property that suits their busy and social lifestyles. There is also another market of those in the 50 to 70 age bracket who want to downsize and be near amenities and hospitals should they have any health problems.

It is clear there will be more apartments on Auckland's skyline, and not only in the central business district. Approval last month of a controversial high-rise in Milford is evidence of the new wave of apartment construction.

While banks still insist on higher deposits for apartments than houses, in some cases 33 per cent and higher, Aucklanders continue to embrace apartment living. Apartments will play a significant role in meeting the Government's ambitious target of building 39,000 new dwellings in Auckland over the next three years.