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Dunedin: Mecca of the South

Dunedin’s property market may be slowing – as it is New Zealand-wide – but the outlook in this southern city is not entirely gloomy. We look at the city’s potential for property investors and if it lives up to its slogan – “It’s all right here”

Monday, June 2nd 2008, 2:09PM

by The Landlord

With its Scottish heritage (Dunedin is the Gaelic name for Edinburgh), Dunedin has a reputation for being naturally conservative. However, this is only partially true – as evidenced by some exciting new developments. Chief of these is the proposed massive new Carisbrook Stadium, mentioned in detail below. Besides which, there are virtues in being conservative, especially where investment is concerned.

Stability is the keyword of the Dunedin rental market. No matter what the overall real estate market is doing – whether house prices are up or down, whether sales are rising or falling – Dunedin offers investors security. A stable income stream, rather than spectacular capital gains, is the underlying market characteristic.

There are two main reasons for this:
  1. That natural southern conservatism. Dunedin property prices, while recording respectable gains, have not risen by leaps and bounds as they have in glitzier areas, notably Queenstown. Speculation has not been rife, as it has elsewhere. The housing market is therefore less volatile
  2. Otago University. Dunedin remains very much a university town. The need for affordable rental accommodation – both for students and visiting academics – remains constant.
However, Dunedin is not static. First, opportunities exist for investors beyond the traditional student market. Second, it would be wrong to assume that investors can buy any old property and just sit back and watch their money roll in. Renters are demanding better quality accommodation. This means increased commitment on the part of property owners. And third, Dunedin – like everywhere else in the country – cannot expect to stay immune from the ongoing effects of the national real estate market.

Dunedin facts and figures
  • Population, Dunedin city: 118,683 (2006 Census). This is an increase of 4,341 people, or 3.8%, since the 2001 Census
  • Number of students: approximately 25,000 (according to Dunedin City Council)
  • Median income for people aged 15 and over: $19,400. (New Zealand average: $24,400 (Statistics New Zealand). The lower median is likely due to the significant student population).
Dunedin is a compact city. Because it is fringed by hills – like Wellington – there is not a lot of new land to develop. As a result, new buildings in the heart of the city tend to be redevelopments of existing sites. New residential subdivisions are built outside the city centre, to the south, for example in Mosgiel.

Maori Hill, where streets rise up sharply from the main thoroughfare of George Street, contains some of the city’s finest heritage houses. Some have been restored; others have been converted into student flats.

Across the causeway you come to the beachside suburb of St Kilda, with its surf beach and saltwater swimming pool. Continue along Otago Peninsula – winding up to the albatross colony at Taiaroa Head, and you pass by some attractive real estate by the bays. Being on the eastern side, these properties retain the sun longer, but are of course further from the city centre.

House prices

The median sales price in February 2008 (the latest available at time of writing) was $244,000. There were 244 sales. These figures compare with a median of $240,000 and 285 sales in February 2007.

REINZ’s Dunedin regional president, Liz Nidd, of Nidd Realty, says those figures do not indicate a big downturn. “I am pleased to observe there’s not a freefall, because [the sales price] has oscillated between $240,000 and $260,000 for 18 months to two years. However, median days on the market have increased…It’s definitely slowing. There’s more on the market and it’s taking longer to sell.”

The huge increase in property values across the country – while perhaps not reaching the stellar height of some areas – have still been impressive, says Nidd. “We have had pretty spectacular gains, but a lot of that has been catch-up.”

President of the Otago Property Investors’ Association, Cliff Seque, is blunt. He says the market is “going sideways”, and he expects the national downturn will have an impact.

“I can see prices down 10 to 15% – especially if you have bought in the last year. There are quite a few houses that aren’t selling and are being rented out. People are becoming landlords by default.”

While it is universally acknowledged that the housing market has slowed, reliable income, not continuing large capital gain, is the name of the game for investors.

Residential and investment property specialist Jason Whitehead, of Cutlers MREINZ, sums up this view on his website, describing Dunedin as “a mecca” for property investors.

“Great capital gains have occurred over the past two years, which has been attractive, though most investors are looking for investment property that produces positive cash flow and is good enough to stay positive in any rental market. In other words, good enough to attract great tenants despite whether the overall real estate market is good or bad.”

The rental market

  • Rented dwellings 2006: 11,763
  • Mean weekly paid rent 2006: $218
  • Rented dwellings 2001: 11,811
  • Mean weekly paid rent 2001: $156
(Source: Statistics New Zealand)
  • Median rental for New Zealand in February 2008: $300 per week.
  • Median rental for New Zealand in November 2007: $290 per week.
  • Median rental for Dunedin February 2008: $250
  • Median rental for Dunedin November 2007: $250
(Source: Massey University Property Studies Department)

According to the Dunedin City Council’s website, the rental market “is quite diverse, offering numerous types of accommodation, including short and long-term leases, multi-share student flats, townhouses, units and family homes.”

A look at properties available for rent at the time of writing included a three-bedroom house, decorated throughout, for $200 a week; a four-bedroom house with “good-sized bedrooms”, two bathrooms, and two sunrooms for $280 a week; another four-bedroom house “fully renovated” and “fully insulated”, for $360 a week; and a six-bedroom semi-furnished house for $480 a week.

While these rates may be lower than many other New Zealand centres (as are house prices), it is apparent the investment in insulation and renovation pays off in significantly higher returns – which tenants are happy to pay.

Central Chambers Apartments offers “luxury lifestyle living… in a landmark inner-city Dunedin building.” One and two-bedroom new apartments, including a penthouse with a roof garden and views of Dunedin city and harbour, are currently being marketed for short or long-term rental. Short-term rentals are from $680 a week for a one-bedroom apartment and $980 a week for a two-bedroom apartment. Long-term rentals are from $350 a week for a one-bedroom apartment and $500 a week for a two-bedroom apartment, unfurnished.


“They underpin the market,” says Seque.

Nidd describes students as “a captive market but a market all of its own.”

With its average student population of 25,000, it’s unsurprising that the university plays such a huge role in Dunedin’s identity and economy. Otago University remains in the heart of the city – not on the fringes, as it is in many other New Zealand cities. “Scarfies” have had a reputation for occasional raucous and unruly behaviour (couch burning, the annual “Undie 500”, which descended into a near riot, sparking calls for it to be banned). However, as a major medical training ground, it is undeniable that most students put their noses to the grindstone and work very hard. As most come from out of town, they need rental accommodation.

Students pay on average about $90 for a room, says John Cutler, principal of Cutler Real Estate and rental specialist.

In the past, some Dunedin rental properties – especially the many old, large wooden houses – have had an appalling reputation for being cold and damp. Tales of mushrooms sprouting in bathrooms and students burning beer crates to keep warm in winter have not been uncommon. But students have become cannier. They will not put up with any old place (especially given the prospect of massive debt). They will look long and hard to find somewhere comfortable. There may be some old dives, but the situation is changing.

“The day of the average grotty student flat is coming to an end,” says Seque. Students want heat pumps and dishwashers.

“The students expect heat pumps. They expect it to be warm,” says Cutler.

Grant Roydhouse is a charted accountant with Grant Thornton, and a property investor with holdings in the student sector. He says the demand for better quality student accommodation is “a general trend that’s been evident for some years now.”

Roydhouse says there has been an increase in first-year students this year, but a slight decrease in international student numbers. He knows of only a few places that have been hard to find tenants for, and suspects that has more to do with the quality of the accommodation than lack of demand.

He reminds investors that improvements to a property can be offset by tax – repairs are 100% deductible, and that could give a 33% reimbursement (depending on tax rate), and depreciation can be claimed for capital investments such as heat pumps.

Barclay Sievwright, of Edinburgh Realty, who specialises in university rentals, says there are about 700 different landlords for the main campus. With around two and a half students available for every room, ongoing returns are virtually guaranteed, “but you have to provide something of quality.”

Sievwright says for years it was possible for students to get a room for under $100 a week; this barrier has now been broken. However, it’s still possible to get a very good room for $120 a week, and $130 at the outside – making Dunedin still a lot more affordable than the North Shore, Auckland, or Wellington.

Location has a major impact. Students can opt either for the vibrant city centre, the quieter southern side or Otago peninsula, or a rural setting. Sunshine hours are also important. Renters are advised to look for the sunniest places possible, and this advice makes sense to landlords, too. Warm, comfortable places will always command higher premiums.

However, renovations are not easy. Over 50% of housing stock is pre-1920s, says Seque. “They are very hard to heat. That’s one of the problems with the older places.”

Rental returns

Nidd says the picture is mixed. “I have heard some say it’s hard to rent some of the expensive places, and others say they can’t get enough of them.”

Cutler says the rental market is “pretty full. We’re pretty chocker. The university is full. There’s a few vacancies for quality places.”

Seque says some places, such as three-bedroom houses asking $300 a week, have been hard to let. He says the market includes students, but also “a lot of people from out of town who have been transferred in. They don’t want to commit themselves to buying a home.”

He says higher mortgage rates will have a flow-on effect. “People have been paying more interest than they have been getting in rents and are not going to put up with that for much longer.”

He anticipates rents will go up.

Cutler also expects rents “will probably be going up,” but cautions there will be resistance if they rise too much.

Nidd also expects a possible rent rise. “With days on the market [extending], and numbers of sales back, there will be some adjustment. People having to pay more interest could get it back through rentals.”

Roydhouse, too, picks rents will rise. “It’s not a case of will rents rise because of the interest rates – there’s definitely reasons for upward pressure on rents. It’s just a matter of balancing that against supply and demand.”

How much will they rise? With inflation between 3% and 4%, Roydhouse says investors should figure on a rental rise double that figure over the next year. With high interest rates, it could be more, but that would be impossible in one hit. Tenant selection is important. Tenants will be prepared to pay extra for somewhere that’s tidy. “People will say they can’t afford it but they have a bottom line, a standard that’s more important than compromising.”

His other main advice to investors is to ensure cash flow is secure. Otherwise, if they are highly geared, the bank “could come knocking” and it would be time to sell.

Professor Bob Hargreaves, head of Massey University’s Property Studies Department, says the numbers of people renting nationwide has been increasing. “I made a general statement that renting is half the cost of owning – it’s a no-brainer to go for renting in the short term. House prices don’t move in sync. House prices are levelling off and declining in some areas. Rents are more tied to wages and salaries.

“At the moment we have pretty full employment. If you look at it on a graph house prices have doubled, rents have gone up about half.”

A big increase in rents would be unsustainable, says Hargreaves. “If things get too tight the kids move back in or people doubling up in the flats, two to a bedroom.

“The numbers of people renting is going to increase… There’s a steady decline of people owning, the population is increasing anyway. The fact our population is increasing means if you are a bit hard up then renting is half the cost on a cash flow basis.”


The Real Estate Institute’s Dunedin-based vice president, Mike Elford, describes the commercial real estate market as positive. “It’s quite good. It’s a strong market because we are quite a conservative market. The equity levels are better than some other areas. We don’t have the big up and down swings that other markets have.

“There have been larger residential investors who have sold down their portfolios and moved into commercial because there are net returns and they have grown their equity.”

New developments

The most exciting new project planned for the city is a huge 30,000 seat fully enclosed stadium to replace Carisbrook Park.

The Dunedin City Council gave the project the green light in March. At an estimated cost of $160 million – partially funded by ratepayers – the new stadium will be one of the largest in New Zealand, and the only one with a full-sized roof. In backing the project, Dunedin, despite its small population, has shown itself to be more proactive than larger cities such as Christchurch. It will be intriguing to see the flow-on effect for residential property investors – together with hotel and motel owners – who could ask higher prices during big matches.

Other projects include the Wall Street Mall development, off George Street. According to Dunedin mayor Peter Chin, this is “on track to deliver a host of new retailers to city shoppers.”

Chin mentions a total revamp of Logan Park, turning it into “the city’s major sports field complex”. Other projects are the upgrade of the Otago Settler’s Museum; the link with sister city Shanghai being strengthened with the nearly completed Chinese Garden; and a new East Otago Community and Cultural Centre at Waikouaiti.

Alan Worthington, resource consent manager for the Dunedin City Council, mentions an Esplanade apartment block development, a new Bunnings in an industrial area, and relocation of some 300 hospital staff.

The historic Old Post Office building, opposite the renovated Mercure hotel in the central city, has consent for hotel and apartments.

New residential developments include a large project on 35ha in Mosgiel.

The city council says the number of building consents is surprisingly high. A total of 413 building consents were received for January/February this year, compared with in 380 for the same period last year, an 8.6% increase. There has been a 25% increase in new dwellings.

Chief building control officer Neil McLeod says he has no idea why. More people renovating may be one reason. “That’s entirely possible because of the increase in house prices. More people are saying, ‘I am fairly happy with my location and I’ll turn it into what we really want rather than selling and moving.’ ”

The outlook

“On the whole, Dunedin is often more stable than anywhere else in the country,” says REINZ’s Nidd. Other commentators agree, although they point to a cooling market and limited opportunity to recoup losses or higher mortgage interest rate charges through large increases in rents.

Rental returns and house sales are different. However, with slow sales, and the possibility of zero or even negative capital growth in the short to medium term, a prudent and cautious long-term investment strategy is advisable. In other words, focus on the future, not short-term gain.

Future growth

As previously mentioned, the need for well-insulated, good quality, and affordable accommodation is strong and expected to continue. Several out-of-town architects have designed new houses in Dunedin. One of these, Christchurch architect Roger Buck, specialises in passive solar design and energy efficiency. This makes sense as a long-term investment with energy prices likely to go only higher.

Dunedin’s winter climate is cold and damp. While not as severe as Europe or North America – or, indeed, Central Otago – new residents routinely complain about cold and uncomfortable houses.

As energy costs rise, and awareness of the need for energy efficiency increases, houses that are well built and cheap to run are likely to find ready buyers – or tenants – despite their higher upfront building costs.

Older houses can be retrofitted and insulated, albeit with difficulty and expense. The cost of doing so is tax deductible for property owners who own them as rental properties. Refurbishing and renovating Dunedin’s many fine old houses is likely to pay off – not just in financial returns, but in the knowledge that history and character are being preserved. Where else in the world can you live in a fine two or even three-storey Victorian or Edwardian mansion for under $100 a week?

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Lender Flt 1yr 2yr 3yr
AIA - Back My Build 6.19 - - -
AIA - Go Home Loans 8.74 7.14 6.75 6.39
ANZ 8.64 7.74 7.39 7.25
ANZ Blueprint to Build 7.39 - - -
ANZ Good Energy - - - 1.00
ANZ Special - 7.14 6.79 6.65
ASB Bank 8.64 7.14 6.75 6.39
ASB Better Homes Top Up - - - 1.00
Avanti Finance 9.15 - - -
Basecorp Finance 9.60 - - -
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BNZ - Classic - 7.14 6.79 6.65
BNZ - Green Home Loan top-ups - - - 1.00
BNZ - Mortgage One 8.69 - - -
BNZ - Rapid Repay 8.69 - - -
BNZ - Std, FlyBuys 8.69 7.74 7.39 7.25
BNZ - TotalMoney 8.69 - - -
CFML Loans 9.45 - - -
China Construction Bank - 7.09 6.75 6.49
China Construction Bank Special - - - -
Co-operative Bank - First Home Special - 6.79 - -
Co-operative Bank - Owner Occ 8.40 6.99 6.79 6.65
Lender Flt 1yr 2yr 3yr
Co-operative Bank - Standard 8.40 7.49 7.29 7.15
Credit Union Auckland 7.70 - - -
First Credit Union Special - 7.45 7.35 -
First Credit Union Standard 8.50 7.99 7.85 -
Heartland Bank - Online 7.99 6.89 6.55 6.35
Heartland Bank - Reverse Mortgage - - - -
Heretaunga Building Society 8.90 7.60 7.40 -
HSBC Premier 8.59 - - -
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 7.85 7.05 6.69 6.59
Lender Flt 1yr 2yr 3yr
Kainga Ora 8.64 ▼7.74 ▼7.35 ▼6.99
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 8.50 7.99 7.79 7.55
Kiwibank - Offset 8.50 - - -
Kiwibank Special - 6.99 6.79 6.65
Liberty 8.59 8.69 8.79 8.94
Nelson Building Society 9.00 7.65 7.25 -
Pepper Money Advantage 10.49 - - -
Pepper Money Easy 8.69 - - -
Pepper Money Essential 8.29 - - -
Resimac - LVR < 80% 8.84 8.09 7.59 7.29
Lender Flt 1yr 2yr 3yr
Resimac - LVR < 90% 9.84 9.09 8.59 8.29
Resimac - Specialist Clear (Alt Doc) - - 8.99 -
Resimac - Specialist Clear (Full Doc) - - 9.49 -
SBS Bank 8.74 7.74 ▼7.09 ▲6.95
SBS Bank Special - 7.14 ▼6.49 ▲6.35
SBS Construction lending for FHB - - - -
SBS FirstHome Combo 6.19 6.14 - -
SBS FirstHome Combo - - - -
SBS Unwind reverse equity 9.95 - - -
Select Home Loans 9.24 - - -
TSB Bank 9.44 7.79 7.55 7.45
Lender Flt 1yr 2yr 3yr
TSB Special 8.64 6.99 6.75 6.65
Unity 8.64 6.99 6.79 -
Unity First Home Buyer special - 6.55 6.45 -
Wairarapa Building Society 8.60 6.95 6.85 -
Westpac 8.64 7.84 7.35 6.99
Westpac Choices Everyday 8.74 - - -
Westpac Offset 8.64 - - -
Westpac Special - 7.24 6.75 6.39
Median 8.64 7.19 7.17 6.65

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