There was good bidding on the handful of apartments on offer at this week's Ray White City Apartments auction.
Two shoeboxes and a more luxurious owner-occupied apartment were up for grabs and all three sold under the hammer, with the shoeboxes achieving yields above 8.5% for their new owners and the high end unit providing a tidy capital gain for its vendors.
The full results:
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1215/430 Queen St. The Volt complex. A 40sq m plus balcony, two bedroom unit. Not much of a view from inside but looking along Mayoral Drive from the balcony and located in the thick of things in the CBD. Rented at $400 a week on a periodic tenancy. Sold for $227,400, giving its new owners a gross yield 9.2%. Rates $957 a year and the Body Corporate levy was $3,587. No previous sales history available.
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627/72 Nelson St. The Zest complex. A 37sq m plus balcony, 2 bedroom unit with car park and views across Victoria Quarter to the Harbour and North Shore. The apartment rented for $350 a week and and the car park for $50 a week. Sold for $238,500 giving its new owners a gross yield of 8.7%. Rates $959 a year and Body Corporate levy $4,817. According to QV.co.nz the apartment and car park were originally purchased for $214,500 in 2003.
- 11/23 Graham St, CBD. The Galleries complex. A 122sq m 2 bed/2 bath, freehold unit with tandem parking for two cars, located on the bluff above Fanshawe St and facing the Viaduct precinct across the road, giving it partial harbour views. Sold for $880,000. Rates were $2,751 a year and body corporate levies $7491. According to QV.co.nz it was originally purchased for $795,000 in 2005 and then resold in 2010 for $690,000.
21 Comments
Good work Ostrich.
Also this talk of yields being around 9% is misleading. If we want to compare returns of apartments with typical freestanding residential dwellings then the body corp fees must be deducted. The apartment return will not look so great after BC deductions are made.
In fact it's about time all this talk of gross returns with residential property was dropped. In commercial property net returns are used as anything else is meaningless.
gross returns is the proper figure to use - but not gross _revenue_.
BC deductions are totally unavoidable and not negotiable (like rates in free standing) so MUST be factored in to find gross return.
things like agent commission, insurance, marketing/advertising, repairs are negotiable and form the net return - but because they are so variable by management, they're not valid for comparisons. Likewise commercial practices such as discounting, leaseback, holding/key fees, I would tend to put under advertising-type (promotional) costs and thus net.
Rental yield is useful measure of the amount of rent the capital invested in a property will provide, allowing a common comparison between different properties. The reason net yields are quoted for commercial properties is that they usually have net leases, where the tenant pays most of the outgoings such as rates, insurance and most maintenance costs. However that is not usually the case with residential property where these costs are typically the responsibility of the landlord, so the yield is gross.
Deducting body corporate levies from the rental income of an apartment will not give a true comparison with a stand alone house, because the owner of a stand alone property faces many of the same expenses that are included in body corporate levies, such as insurance and maintenance. They are just not wrapped up into a single, budgeted monthly payment.
I dont agree with using the lower quartile prices against median rents under the assumption that all rentals are lower priced. It gives an over inflated impression of the yield.
From this article, looks like greg is using actual figures from individual properties, i.e actual sale price v actual rent.
I am a fan of freehold apartments if the yields make sense.
You simple can not look at prices over the last 5-7 years though and conclude that apartment prices never move, or decline over time, as there was a boom in auckland where prices got too far ahead of where they should of been, hence the flat price growth since mid 2000s. I expect to see the same thing with stand a long houses in auck over next 5 years as the prices dont make sense anymore.
My apartment has half the value consisting of prime wellington CBD land (approx 1% share of land the building is on). And as such I expect value growth to at least keep up with inflation, which means significantly higher returns than the mere 7% net yield I'm getting, which a lone is enough to justify putting my money into the place over the bank
For investors, property is, or should be, a numbers game and they will often try and out perform the overall market, which means they will tend to be more active in the lower priced bands in an area. Conversely owner-occupiers are often ruled more they hearts than their heads and will tend to pay as much as they can afford for a property. So there tends to be a skew towards the lower priced properties for investors and towards the higher priced end of the market for owner-occupiers. But it is only a trend. There will always be exceptions.
The lower quartile is the point at which 25% of prices will be below that figure. So in general terms, lower quartile is used as a proxy for the bottom end of the market, median for the middle, and upper quartile for the top end.
The reason that median rents and lower quartile price figures are used to calculate yields in broadly based market reports, is that all of the rents recorded will relate to rental properties, but only a percentage of the sales will have been purchased as rental investments. Using the lower quartile price attempts to align the price with where the investment units are likely to be sitting within the total market. But no system is perfect.
That's an interesting theory but unfortunately it doesn't hold up, because many investors are also developers who look for opportunities to build new units to add to their portfolios. That gives them some equity up front from the development margin and then they receive the ongoing rental income stream. These properties add to the overall rental stock and eventually appear as rental accommodation in the census. But they don't appear in the sales stats. So you can't take the rented/owner-occupied housing ratio from the census and apply it to the monthly sales stats. It doesn't work.
You haven't established a match between the census data and the monthly housing stats, which is what you argument appears to be based on. You might as well say the number of homes sold last month went up by 10%, therefore the housing stock must have increased by 10%. The point you miss is that the number of homes sold in any given period is many times greater than the number of new dwellings added to the total housing stock, because of churn. So the composition of the buyers and sellers behind the monthly sales stats will be different to the household composition figures in the census. They are completely different sets of numbers. One doesn't mirror the other.
I see things in a more straightforward way. According to the March 2006 census tables, in the Auckland region there were 130,230 households that were renting their home (defined as living in a dwelling not owned by them or a family trust, and paying rent). At the March 2013 census, that number was 154,347. So the number of rented dwellings had increased by 24,075. Over the same period (March 2006 to March 2013) the REINZ recorded 179,961 dwelling sales in the Auckland region. That means that the total increase in rental stock accounted for just 13.4% of all property sales over the five years. The actual number would have been less than that because many of the new rental units would have been developed/built from new by their investor/owners, as I have previously stated. So I can see nothing in the numbers to support your argument that investors are making up such a large proportion of housing sales in Auckland. Rather than making up the 45% of sales that you maintain, the real figure is likely to less than 10%.
Hi Greg, thank you for your response.
I completely understand that BC fees usually have insurance etc tied up in their fees. However it is not difficult to extrapolate this information from the AGM minutes.
Of course with commercial properties general outgoings are paid by the tenant, so calculating net income is pretty easy - generally speaking you just look at the lease. (assuming there's no structural repairs or similar required...)
What i am suggesting is - any investor who is not solid bone between their ears will calculate their net return before they purchase, be it residential or commercial. If they are so irresponsible to only consider gross return, then in my opinion, they will eventually lose their money.
As the saying goes, "a fool and his gold are soon parted".
Astute investors compare net returns.
You wouldnt stop there. You would also look at funds in long term maintenence, read all minutes of annual meetings and look for any possible future one off levies if LTMF doesn't look like covering them (leaks, window refurbishment, pool issues). Are water rates included in BC or expected to be paid by tennants? Some BCs even have things like Sky tv included, which means this must be considered when assessing rent (most rental apprasals wouldnt include this factor, but good for an extra 15-20 a week). If the building is older than 1976, has it had an earthquake assessment yet? If not, be careful as it will likely need one in near future (yes even in auck, volcanoes can produce earthquakes too and last time I checked research papers volcanic eruption in auck is just as likely as a big earthquake in welly. If it has had one, and is not considered earthquake prone, then you will be good for at least the next 15+ years before another assessment is likely, in which time LTMF should be built up.
How can you conclude that 'nil excess rental income'?
At 7% net yields, you get a 7% return Vs 3-4% in a bank? If you are comparing apples with apples (i.e lump sum of cash of 2595000) the apartments still beat the bank even when brought at the over inflated prices during the mid 2000 apartment boom
100% leverage for apartment v. no leverage for bank dep, thats the difference. A pure apples with apples with a bank dep would see either 1. borrow 100% at 6% to get net return of 3%, lose even more money than would with 100% leverage apartment senareo, or 2. buy apartments outright with no leverage.
Your bank dep figures assume 2.5million lump sum in cash up front (no leverage), therefore a correct comparison should be with someone putting the 2.5mill into the apartments (no leverage used) to get the improved net 7% yields.
I have looked at the apartments mentioned and they are slums in the sky. You cannot live in them they are just a convenient crash pad if you work in the city from Monday to Friday and you would have to get the hell out of there for the weekend with your dirty laundry to try and get clean before you return on Sunday night. Body corp fees and neighbours from hell you have no control over renting all around you.
Slums in the sky ! Also who would want to live in Auckland CBD and it doesn't look easy to make a buck here. In Auckland CBD for a few days with time on my hands. The shops look meagre. The few customers, seem impoverished.
The towns and shops of Central Otago where I have just been are thriving by comparison. Downtown Auckland seems a bit of worry.
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