All figures compare the year to March 2019 with the year to March 2018
The Auckland central apartment sector has softened over the last couple of years in line with the wider Auckland residential market. The removal of the threat of a capital gains tax (CGT), the lowering of the official cash rate (OCR) to a new record low and decreased mortgage rates, however, will continue to stimulate activity in the investor heavy apartment market.
The Auckland Central Residential Apartment market witnessed exponential value growth from 2012 to 2017 with median Apartment values growing by 137%. This value growth has been supported by a solid economy with strong population growth, low levels of unemployment, low interest rates and easy access to credit.
The last couple of years has seen value growth in the Auckland residential sector, apartments included, consolidate. This is largely a result of affordability constraints and banks reigning in their lending, making it harder for purchasers to access credit.
In combination with this, the introduction of the overseas investment amendment act 2018, prevents overseas persons, subject to some exclusions, from buying residential property in NZ. Apartments can however be purchased off the plans in large developments of 20 or more units, supporting development for this type of housing.
A number of legislative changes of late however, are likely to strengthen activity and confidence in the residential sector going forward. The government’s decision not to pursue a capital gains tax at the next election is likely to increase sales activity, in particular, for apartment accommodation, due to high levels of investor interest for this type of housing.
The Reserve Bank’s decision to reduce the OCR to 1.5%, a new record low for New Zealand, has resulted in a reduction in mortgage rates, making the servicing of loans easier.
When analysing the number of transactions for Auckland Central Apartments over the last three years by price bracket, the proportion of sales within each price bracket has remained relatively unchanged. Apartments in the $400K – $1M price bracket made up the largest proportion of sales over the year to March 2019, holding a 46% share of all transactions.
It is important to note the level of stratification within the Auckland apartment market. Those apartments brought to the market can range from modern Penthouse accommodation such as the ‘Super penthouse’ in the Seascape, being marketed at above $20 million, or the Penthouse at 51 Albert street recently sold for $13 million, to entry point affordable inner city apartments. Leasehold versus freehold apartments also often drives variation in sale prices, resulting in a wide spread of value bands.
Construction activity for Apartment accommodation has ramped up since 2016, largely as a result of the Auckland Unitary Plan becoming operative allowing increased intensification in the city. While construction activity peaked in 2018 with a total of 1,200 Apartment consents issued, consent numbers remain elevated over the year to March 2019 with 870 consents issued.
Going forward construction activity may temper. Banks are becoming more risk adverse, a position which is likely to be exacerbated should they be forced to hold more capital following the review on the subject currently being conducted by the Reserve Bank. Large scale development projects will, in all likelihood, be viewed as high risk with credit therefore limited. In combination with this, construction costs are continuing to increase, putting further pressure on development.
An increasingly changing perception towards Apartment living is however encouraging for developers. An ongoing trend towards refurbished character apartments, converted offices and a sweep of new modern apartments, completed to high standards, is seeing investors, baby boomers, empty nesters and first home buyers, in particular, demand these quality properties.
When analysing the stages of development Auckland Central Apartments are in, it is clear that there is still a large amount of construction activity underway. Currently, according to the Greater Auckland RCG tracker, there are circa 3,350 Auckland Central Apartments under construction, with scheduled completion by Q4 2021. Circa 1,113 homes have recently completed construction in the city, adding a vast amount of additional stock. While funding for developers and increasing construction costs continue to add risk to developers, a number of developments have been put on hold or cancelled. This is largely a result of the residential market settling with values and activity remaining subdued.
Interest remains strong however for apartments that are of good quality with good amenity, functional design, well located and well connected.
Future Drivers of Apartment Demand
A number of key upcoming infrastructure projects and major events in Auckland will put further pressure on the demand for inner city apartment accommodation.
When breaking rents down by their lower quartile, median rent and upper quartile in key Auckland central apartment localities, it is well illustrated that the area to achieve the highest rental return is Harbourside. Eastern CBD apartments, on average, achieved slightly higher rents than those on the West. Agency feedback suggests that pressure remains on the rental market and we could expect to see further upwards movements on rents over the year.