Often seen as an affordable entrance to the Auckland property market, developers are promoting not only price but the location and lifestyle associated with apartment living. For people who work in the city, the benefits of living close to work are apparent. However, it doesn’t quite allow for the Kiwi dream of owning a house with a yard for the kids to play in, turning many away from the idea of apartment living. In reaction to this, developers are stepping up promotion of the lifestyle associated with that of living in apartments, close to shops, cafés with a gym and other amenities. For some, the lifestyle is enough, but for others, they remain locked into the idea of the Kiwi property dream.
But do Apartments Make a Good Investment?
We’ve analysed and compared sales of two bedroom apartments in Auckland CBD with traditional two bedroom units Auckland wide from 1992 to 2017. On average, traditional two bedroom units in Auckland have 264% higher growth, doubling the performance of CBD apartments in Auckland. While apartments only outgrew traditional two bedroom units three of the 25 years.
Why do Traditional Two Bedroom Units Outperform Apartments?
Sharing a Small Land Area
With the entire building sharing a small footprint of land, apartment owners don’t get the benefit of the increase in land value compared to traditional two bedroom unit owners where there is a smaller number of interests on the land; this means that unit owners get a larger percentage per interest. When compared to apartment owners because there is a large number of interests on the land, the percentage change in growth of land is much smaller per interest.
According to Colliers, there will be around 2770 apartments due to be completed in 2017, which is the highest since the peak in 2005 with projections for next year to hit a record-breaking 3840 to be completed. This continuous sharp increase in supply for apartments means there is a potential supply exceeding demand. With ongoing continuous construction, excess supply will continue to impact apartment prices, as the law of demand and supply dictates price will only rise when demand exceeds supply. Therefore, the continued construction of apartment blocks can suppress the potential of capital growth.
The Kiwi Dream
Apartments by nature are small indoor units found in high rises usually located in high-density areas. In contrast, for many who dream of owning their home or investment property, they have a vision of a very different property. That vision is a standalone house with a yard and opportunity to grow, which an apartment cannot offer. The differences of living in an apartment compared to a standalone can be missed if not considered; carparks usually cost extra, body corporates have a broad area of control on what you can and cannot do to your property, with the addition of being an ongoing cost each month for maintenance and management of the apartment. Living in a non-residential area, the possibility of your view being blocked by another property built next door after construction is a very real risk, as more than ever the city skyline is moving towards taller buildings all over the city centre. Compare this to a suburb like Mt Eden which abides by the residential building zoning rules which only allowing small to medium density housing under specific conditions, unlike the central city. Therefore as apartments only appeal to a smaller percentage of the market, there is less demand and a slower increase in the rate of capital growth.
A Real Example
Comparing two real-life properties which were both sold in 1993 and in 2017, one is an apartment in the CBD, and the other is a two bedroom unit in Mt Eden. The apartment although a 1920’s conversion has undergone a recent refit throughout. With the traditional unit in clean condition with comparable interior quality to the apartment. The unit has a smaller floor area and an outdoor area to contrast with the larger floor area of the apartment and small balcony.
Comparing these two properties, we can see that there is 547% difference in price growth in favour of the two bedroom unit, with the value overtaking that of the apartment significantly since 1993.
The Hands off Investment
Because of the hands-off nature, many investors see apartments as a safe investment in unfamiliar areas. In most instances, there is a local community in the form of a body corporate which looks after the property as a whole including your apartment. Body corporate management, although not as financially attractive as managing your own property will allow for more peace of mind for investors who do not have the local knowledge and resources to manage the property themselves.
In summary, as attractive and central apartments in the CBD there are key drawbacks that come with apartment investment. As Auckland grows, because of the massive potential to add new apartments in Auckland CBD, we expect two bedroom units to continue to outperform the apartment market until the point comes where the demand for new apartment developments diminishes, and supply remains fixed. However, it will take generations for families to move from the Kiwi dream to apartment living so in the forseeable future tenant appeal will remain limited, making traditional units a more appealing investment.