"Falling Knives" And Auckland's Apartment Market
By Kieran Trass (Author, Property Market Analyst and Director of the Hybrid Group of Companies)
The stage is set for Auckland's CBD apartments to fall in value by up to 40% over the next few years.
Great caution must be exercised if you are considering buying into this falling market. If you buy too soon you may suffer from "catching a falling knife" as values continue to fall after your purchase. It is obviously dangerous to catch a knife before it hits the ground and buying into Aucklands CBD apartment market right now is equivalent to catching a falling knife. Auckland's CBD apartment values are already falling due to a combination of factors including a severe oversupply, dwindling international student numbers, lack of demand from tenants and subsequently plummeting returns. Now may look like a great time to buy into this distressed market as apartments can be bought at prices much lower, than their inflated asking prices, but caution in any distressed market is wise.
There is literally a flood of supply of apartments available to buy or rent which is resulting in a distressed market. The number of apartments in the CBD have nearly doubled from that of just 2 years ago. We have seen an increase to over 12,000 completed apartments in Auckland's CBD plus another 4,000 are under construction plus another 3,000 are planned to be constructed in the next few years. But there are a large amount of apartments on the market for sale now and, this figure could increase within the next 18 months to more than 5,000 (the equivalent of 25% of Aucklands entire CBD apartment stock).
The current oversupply is having a detrimental affect on the level of achievable rents and sale prices. One example of falling rents is a studio apartment in central Auckland whose owners were originally achieving $350 a week just over a year ago but had to reduce the rent to $200, to secure a tenant for just three months. Studios of around 30sqm which were originally being sold for around $150,000 are now only worth about $100,000, if you are lucky. Local buyers have all but dried up, as increasing local concern about the ever increasing dire state of the apartment market, has become more apparent. Many banks only lend 50% of the purchase price of small apartments and some refuse to lend on them at all. Many large apartment projects are still under construction, accounting for several thousand more apartments yet to hit the market which will continue to impact on achievable rental levels and sale prices.
Many of the apartments were sold off the plans in the last few years whilst being promoted on the strength of the strong influx of international students who needed suitable accommodation. Many more are now being sold to investors overseas who are unaware of the current status of this oversupplied market. There has however been a dramatic reduction in the number of international students choosing to study in New Zealand over the last 2 years. Recent Department of Labour statistics reveal new student levels have dropped from 30,486 in 2003 to just 17,488 in 2005. Many of these students were being accommodated in Aucklands CBD within close proximity of many language schools, several which have since closed. Even more alarming is the large reduction in Chinese student numbers from 14,100 in 2003 to 2,700 in 2005. Many of these students were located in and around Aucklands CBD.
Every day the pool of apartments available to rent is increasing as new apartment buildings are being completed. So seeking tenants amongst a dwindling pool of potential tenants continues to get harder. Some apartment owners are now offering rent holidays or free trips overseas if tenants will sign up for just a 6 month rental term and this is attracting tenants who already live in the CBD occupying older or inferior apartments .
The short term prospects for Auckland's apartment market look grim as the stage is set for the oversupply of apartments and the undersupply of tenants to continue. Many buyers who purchased off the plans are trying to sell their apartments before completion but to no avail as potential buyers are few and far between at current prices.