Auckland's CBD (central business district) apartment market has made a rapid recovery due to the resumption of overseas students being allowed into New Zealand.
CBD apartments are a niche market that to a degree marches to the beat of its own drum.
Like the mainstream residential property market it is also affected by things like changes in mortgage interest rates, bank lending criteria and taxation rules. But it differs to the rest of the market in that it is completely dominated by investors and most of its tenants are students, which are estimated to account for around three quarters of the sector's tenancies, especially for the smaller apartments often referred to as shoeboxes.
Overseas students make up a big proportion of those numbers. The sector was hit hard when the borders were closed due to pandemic restrictions in early 2020, with the number of overseas students diving abruptly from 21,153 in January 2019 to just a few dozen a month.
Delanie Horrobin, the Business Development Manager at Ray White Supercity Property Management, which manages one of the largest portfolios of rental apartments in Auckland's CBD, said the vacancy rate for CBD apartments shot up from just over 7% in 2019 before pandemic restrictions were introduced, to 15% to 20% in 2020.
"A lot of properties were left vacant for a long, long time. Many owners suffered hardship," she said.
However the sector began recovering once travel restrictions eased and overseas student numbers started picking up again, which has happened surprisingly quickly.
According to the Ministry of Business Innovation and Employment, just 90 people arrived in NZ on student visas in January last year. That had picked up to 4152 by July last year, and 7413 in January this year. In February another 13,638 arrived, which was heading back up towards the 21,153 that arrived in February 2019.
Horrobin said her company noticed the pick up in demand from tenants in December, which is usually a quiet month with many students giving up their flats and heading home at the end of the academic year.
"We started to see increased numbers of attendees at our viewings, even in December when it is usually quiet. It was steady all the way through, it didn't die off, she said.
"And then [in January] it really picked up."
Horrobin said the CBD apartment vacancy rate dropped back to about 10% late last year and has kept falling since.
"I'd say it's back to where it was [in 2019]. It's been a full recovery," she said.
That has not gone unnoticed by investors.
Over the last few weeks interest.co.nz has noticed a change in mood at the Auckland CBD apartment auctions it monitors.
While the overall housing market remains well and truly mired in the doldrums, the mood at the apartment auctions has been more upbeat, with more people attending and more apartments selling under the hammer (you can see the results of all the Auckland CBD apartment auctions monitored by interest.co.nz, including the prices achieved for those that sold, on our Residential Auction Results page).
Investors have been buoyed by the fact that not only have vacancy rates fallen, but rents have been rising.
According to the latest bond data from Tenancy Services, the median rent for one bedroom apartments in Auckland's CBD increased from $395 a week in December last year to $433 in January this year, while the median rent for two bedroom apartments increased from $515 a week to $560 over the same period.
However it appears that the selling prices of apartments are yet to reflect those changes, with interest.co.nz's auction results showing that most of the apartments selling are still fetching prices that are significantly below their rating valuations.
Some investors are sensing lower vacancy rates and higher rents will eventually push up prices, so are jumping in now to buy at a higher yield and make a capital gain further down the track.
Of course it's a strategy that is not without its risks and it's worth noting that although rents have jumped up this year, they are still below their historic highs.
Bond data from Tenancy Services going back to the beginning of 2016 shows that the median rent for one bedroom apartments in the Auckland CBD peaked at $450 a week in November 2017 and again in November 2019, while the median rent for two bedroom apartments peaked at $590 in May 2019.
So rents still have a little way to go to get back to those levels.
The graph below plots the monthly median rents for Auckland CBD apartments from January 2016.
It shows that rents have pretty much remained remarkably stable over that period with relatively small fluctuations, so significant growth, whether that be in rents or prices, may yet prove elusive.
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28 Comments
I looked at buying an apartment as an investment a couple of years ago. Most of the buildings have been put together by Donald Duck’s chocolate factory and need remedial work. Then there is the drunken drug fuelled zombie apocalypse every evening in the streets. A huge negative for urban living !
Some students are back for UNI, but there are very few indian students doing the dodgey business courses .... I know this as I frequent the hole in the wall indian lunch bars etc and its still very tumbleweed.
IT GUY, they're here to eat your job! They're likely to work more than you and for less than you take. Market 101. Also, they'll pay for your kids' tertiary education while also doing the jobs they don't want to, they drive taxis, deliver pizzas etc. We want them for the sake of our economy.
Bit of a stretch from IT Guy's observational comment.
Not long until we see media articles about damp, leaky and cold apartments?
Complete with photos of frowning foreign exchange students obligatorily folding their arms for dramatic effect, with buckets of water strategically placed around the room.
Exactly. I stayed in a number of the nicer, newer, supposedly well built apartments in Auckland and there were signs of early wear and tear everywhere. Even those were very poorly constructed. I even briefly stayed in a smaller apartment block in Grey Lynn that required a total overhaul with every resident needing to move out due to the amount of work required. It was 5 years old and the cost of the remedial work exceeded the cost of the entire build. I wouldn't go near any apartment building in Auckland if I was looking to purchase.
A close family friend lives in a 4 bedroom apartment in Remuera, which is worth north of $4-$5 million. Not leaky, but plenty of building problems. Ridiculous considering the location / value.
Apartments are a nightmare everywhere in Auckland.
Avoid them like the plague.
TTP
The best investment strategy is to do the opposite of anything TTP suggests
Money will keep flowing into speculative markets until real returns disappear and deposit yields become more attractive. We're not too far away from the point when these landlords would regret having their yields matched by a 5 year deposit which are already touching 6%. Why would someone take on so much debt at 7% when you can make a decent return on a deposit.
Deposit yields have peaked.
I'm not banking on that. These bail outs and the war(s) will keep inflation ticking up, and rates (negative as they are in real terms) have to follow.
Rates are already hugely contractionary. I don't understand this assertion that rates need to exceed inflation. The only requirement is that enough money is taken out of circulation to rebalance the economy. That has already happened, the rest is a spectator sport only. Don't believe me? Wait a couple of months.
The time to buy is when nobody wants to buy. I know someone who bought 4 apartments at sizeable discounts with enough of a deposit to get past the current tax lunacy. They'll do well while everyone else complains about how unfair it all is.
You need to understand cashflow.......
Auckland CBD is one of the few markets that didn't have crazy prices increase during COVID, so it is less exposed than most areas and is benefitting from the post-pandemic recovery.
Rising rents should be ringing alarm bells for RBNZ as rents are a substantial component of CPI (Over 10% of the index weighting currently) and it's non-tradable inflation item. If the rental market picks up RBNZ will need to raise rates further.
I increased mine to top band of market rent last year due to the tax changes. I used to sit lower band.
If rents pick up, more circulating cash is turned into tax. It's disinflationary. RBNZ cannot raise rates much further, which is the same as saying they don't need to.
A key reason that I thought CPI inflation would have subsided quite lot by May 2023 was that rental inflation would drop a lot. But while it certainly has in Auckland (0% YOY) and in some other locations, it’s been pretty high in others.
Perhaps due to high rates of building in Auckland but not some other locations. I note that Lower and Upper Hutt have had low rental inflation, perhaps not a coincidence that they have also seen a lot of townhouses built.
Be quick.
I wouldn’t get too carried away with this. University of Auckland finished a whole lot of student accommodation around the time of lockdowns, which sat almost empty for quite a while. Now international students are back it will be accommodating quite a few of them.
I know plenty of young people who have lived in the CBD over recent years, who work full time (not students). Quite a few of them have reverted to living in suburbs. Small apartments aren’t great for WFH, plus there is less desire to avoid commutes if you only have to commute in to the CBD 1-2 days per week.
Plus the generally higher levels of seediness in the CBD these days.
Great to hear some good news amongst the mostly dreadful news
I've been tracking apartment prices (studios and one bedders) are they are down significantly.
Any proof or just anecdotal claims…
That's pretty much what the article says. It also says rents are back up, i.e. yields are back up too, and prices will follow.
The article also points out that inner city apartments do not necessarily follow the rest of the "housing" market and often have market cycles all of their own. If you've lived in big cities like London, New York, etc. you'll know this to be true. (A few bargains still to be had but the wise - who like yield and eschew capital gains, have been filling their boots.)
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