There was spirited bidding on all of the apartments up for sale at this week's Ray White City Apartments auction, with four out of five selling under the hammer.
The most competitive bidding was on a 2 bedroom student apartment in the Columbia building on Whitaker Place, which had a $1 reserve, which was also the opening bid. After very keen bidding from several potential buyers it sold for $100,000.
There was also competitive bidding on two apartments that because of their size and facilities would have been suitable for owner occupiers and both sold under the hammer.
However buyers remain wary of leasehold properties, and although there were two bidders for an apartment in the upmarket Lighter Quay complex in the Wynyard Quarter precinct, it was passed in with a highest bid that was believed to be well below the reserve.
The full results were:
- 319/184 Symonds St. A 48sq m one bedroom apartment with car park in the Citta complex, rented for $365 a week. Sold for $282,000. QV records show it was originally purchased for $255,000 in 2003.
- 104/79 Halsey St, Lighter Quay. Leasehold. A 102sq m, two bedroom, ground floor apartment with 2 car parks, offered fully furnished. With a management contract in place to an accommodation provider which expires in October. It was passed in with a top bid of $340,000. QV records show it was originally purchased for $845,000 in 2008.
- 10G/15 Whitaker Place. A 2 bedroom apartment that is part of the Columbia student accommodation complex, leased to the complex management company until 2024. The property had a $1 reserve but after fierce bidding sold for $100,000. QV records show it was originally purchased for $151,000 in 2002.
- 121/149 Nelson St. A 56sq m, 2 bedroom apartment with car park, which was owner occupied but had its rent assessed at $450 a week. Sold for $280,000. QV records show it was originally purchased for $335,000 in 2005 then resold for $265,000 in 2008.
- 2008/10 Waterloo Quadrant. A 41sq m two bedroom apartment with car park on separate title, with a hotel management contract in place. Sold for $346,700. QV records show it was originally purchased for $305,000 in 2003.
5 Comments
So let me get this straight. You're lucky to scrape out a 1% p.a. capital appreciation in apartment buying, but in most cases you actually lose money?
Yes there might be a 6-7% yield available, but post mgt fees, service charges, maintenance, voids etc I think you would be lucky to get much above a 5%, and face the very real prospect of capital falls (as most of the original owners above did, and as is highly likely given the volume of apartments to be built in Ak in coming years).
It's the same with houses where you will struggle today in Ak to believe in anything more than a "possible" total return of 5% p.a. including capital gains over the next 5 years, which is lower than an equivalent period term deposit at a bank.
Why are kiwis so mathematically illiterate?
The rate of inflation is a fair measure of capital gains on apartments. History will show freehold apartments have exceeded inflation, but I like to be conservative and use 2.5% growth.
And heres some math for you. Take 80% lending on an apartment (say 300k value) that grows at 2.5% p.a for 5 years and is neutrally geared (rent covering interest and all BC's and rates). Whats the return on equity invested? Hint, its a lot more than 2.5%...
Look, if you believe in continuing capital growth then certainly the higher yield you can get on apartments means leverage can pump you to an OK return, theoretically. Because you get R(cap growth) / D(deposit %) you have the beauty of "leveraged returns" on the way up, i.e. if you can convince a bank to lend you 80% on an investment property, a 2.5% growth rate would get you a 12.5% annual capital return on your equity.
But my point above still holds, this relies on capital growth (as all leveraged plays do). Historically you don't get that sort of growth in apartments, and looking forward it looks like a glut of new apartments are coming which will likely lead to capital values falling like they have in most of the cases in the article above.
Oh, and leverage works the other way in reverse as the equity eats all the losses. So with your 80% loan, a 10% fall in the capital value results in a 50% loss to you!
For houses in Ak, it makes even less sense than apartments. At curent interest rates and yields, you really need to believe in >5% annual capital growth per year to even beat a risk free term deposit. Now Auckland has historically delivered around 5-6% growth over very long periods but with a lot of volatility. We are coming off 2 years of >10% growth so what does that suggest if you believe in mean reversion? And I don't believe the oft-touted drivel of a housing crisis; rents in Ak are growin 3.8% yoy. Christchurch is 11% demonstrating what a real housing crisis leads to.
I also think we will see net immigration numbers fall from their current peak. Our economy will slow markedly in coming quarters given the milk boom coming off and other countries will be more attractive to live and work as places like the UK are now booming and you can earn 3x as much as here. Even in Aussie, you can buy a huge renovated Queenslander (5 beds) in Brisbane, with inground pool, in a top suburb, for under $1M. That's a city bigger, wealthier and with stronger fundamentals than Auckland. What does this amount buy you here in Ak? A 3 bed do up on a postage stamp in a sub standard school zone? We really do need to wake up to the silly purchase choices we are making. High house prices don't make us wealthy as a nation - they just leave us with bigger mortgages and more susceptible to economic shocks.
I have an apartment that returns 9.9% gross, 7.5% net. I used equity sitting in other properties to buy it (effectively 100% leveraged). So its a lot like a carry trade. I borrowed at 5.99% locked in for 5 years to get a net return of 7.5%, with likely rental increases over that 5 year period. So leverage does not need to rely on capital gains to work. This is in wellington not auckland. Any capital gains are a bonus and make the returns that much better. In general I agree with you, but still money to be had for people willing to look a bit harder (and outside of auckland..).
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