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Wellywood on the rise

Wellington Central property is in high demand, despite challenges faced by the apartment market, writes Joanna Jefferies.

Friday, November 29th 2019, 8:00AM

A major upset in the Wellington mayoral race ended with Andy Foster taking out the mayoralty last month. It’s the first time, since 1986, in Wellington’s history that a first-time incumbent has been denied a return to office.

The race was a close one, but Foster says that Wellingtonians wanted change and it appears his campaign, which focused on transport, housing, and eradicating homelessness, addressed their concerns.

Foster is certainly facing some challenges ahead, with a growing population and shortage of housing supply, as well the impact of the Kaikoura earthquake on apartment housing and commercial buildings in the city. But while tight supply keeps the property market buoyant, there is a question around who will fund the sky-rocketing costs of shoring up apartment buildings against future seismic events.

Currently apartment owners have been asked to stump up costs for investigating their buildings, which can cost close to 90% of the average rateable value of an apartment, according to Inner City Wellington (ICW).

ICW conducted a survey of 16 residential apartment buildings this year and found that the average cost of strengthening those apartments was $241,571 per unit, and $436,868 including extra costs such as legal fees.

An additional challenge some apartment owners face is sky-rocketing natural disaster insurance premiums. Premiums are known to have trebled since 2011 in some cases, with one small complex going from $14,000 in 2011 to $57,000, making their annual body corp levy $12,000 per apartment.

Some owners of apartments, particularly those where their buildings are not deemed an earthquake risk, are refusing to insure, thereby putting themselves at risk.

But while there are risks involved in purchasing apartments, it is a market investors should consider, says JLL manager of residential valuations Steven Lamontagne.

“There’s a really big appetite for single bedroom apartments in the city – that’s the big thing that’s going on right now.”

Lamontagne says the demand is coming from millennials, who are after double-glazing, a heat source and small, modern spaces. However, despite many inner city apartment developments popping up he says demand is unlikely to be met.

“I think there’s still going to be an under-supply.”

He also sounds a note of caution to investors considering this niche investment: “Insurance costs could blow up and that comes straight off the bottom line, so you need to do your homework. There’s still a bit of an unknown with the earthquake ratings and what insurers are going to do.”

For investors willing to take the risk, yields look attractive. According to CoreLogic data, Lambton one-bedroom apartments have a 9% yield, while two-bedroom apartments achieve a 6.2% yield. In Te Aro, the yields are lower, but still healthy at 6.2% for a two-bedroom apartment and 5.6% for a one-bedroom apartment.

Ray White Wellington’s Kahn May says investors targeting higher yielding properties are doing well. Out of 15 investment properties he’s seen sold recently the returns were healthy.

“For slightly over 50% of them the proposed percentage returns were in the 5% range, just over 30% were in the 6% range and about 20% were in the 7% range – so you can still get an okay return in Wellington.”

Tenant demand high

Wellington is home to some big employers, including central government, Massey and Victoria universities, the film industry, hospitality and retail. The population is growing and there is an estimated shortfall of 5,744 houses in the Wellington region as a whole.

In response to the growing population and the increased desire for inner-city apartment living, many new developments are coming on to the market including apartments in The Paddington, Dixon Street apartments, Ramada, and Ink’d in Mount Victoria.

There are many more in the pipeline says Oxygen business development manager Nicki Waapu. “Dual key seems to be a popular option. Furnished one bedrooms just fly off the radar. Obviously you’ve got the student market as well – we’ve got them ringing up now looking for three or four bedrooms.”

Waapu says along with students there’s a good supply of working professionals in the inner city, as well as “a lot of older people who are renting as well, so I don’t see the demand stopping any time soon”.

A recent property viewing of a two-bedroom apartment in one of the older inner city complexes illustrates the level of demand; Waapu had six lots of prospective tenants attend, all of whom applied for it.

Values buoyant

Values in the central city suburbs have all risen around 5% over the past year, which is likely to be due to lower than normal supply.

Wellington Property Investors’ Association president Richard Bacon has experienced this first hand with a recent two-flat property purchase. 

“I needed to get a registered valuation in order to get finance and it came in at $200,000 above what I was paying for it. I was getting a good deal anyway – but that was double what I was expecting it to be. I was expecting it to be $50,000 to $100,000 off what I was paying for it so that was a pleasant surprise.”

He puts the increase partly down to a rising market, and encourages other investors to consider multi-tenancy deals.

“I’m re-structuring to be multi-tenancy rather than single tenancy because now that losses are ring-fenced the portfolio needs to become cashflow positive.”

However, despite the current great market conditions for purchasing, he believes the market will flatten off.

“Wellington tends not to have the same extremes in the market that Auckland has, but it does still follow the same pattern and usually a few years later. Auckland has done its mad dash and it has flattened off and Wellington will do the same because that’s how the pattern happens and I think we may see the last flush this year.”

Strategies for increased yield

Wellington Central’s yields are in line with national averages, but iFindProperty Wellington property investment specialist Peter Ambrose says if investors are able to find stock where they can increase the number of bedrooms or improve the overall product “you’re going to get the rental return to support that”.

He says the closer rentals are to the universities and the centre of town, the higher the rent, but he encourages investors not to rule out the surrounding suburbs, as they can achieve good yields there too.

He recently sourced a three-income property for a client in Newtown for $1.2 million which will have an 8% yield, following a renovation. 

“Those are the kinds of deals I look for around Wellington, where you can improve the product by renovating and by adding bedrooms.”

Year ahead

For student rentals it’s coming into the rental season, and Ambrose’s expectation is that rents will be as strong as the peak rental period this year or slightly above it.

He says sales volumes have been low in Wellington year-on-year, but they are starting to see a late spring flourish.

In the year ahead, he thinks some investors will be looking to cash up due to tightening regulations in the rental industry, and this will provide opportunities for investors still in the market.

“I think the Wellington Central market is a strong market and I personally think it’s a great place to invest, given the increased number of tertiary students and the central government [employees], there’s always going to be a strong demand for rental properties.”

May has a similarly positive perspective on Wellington’s market: “There is more interest in the Wellington market now than I have seen in my 12 years in real estate – Wellington is really going ahead.”

 

Tags: landlords property investment property values real estate rental market rents

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Lender Flt 1yr 2yr 3yr
ANZ 5.19 4.05 ▲4.05 4.49
ANZ Special - 3.55 ▲3.55 3.99
ASB Bank 5.20 3.89 4.05 4.39
ASB Bank Special - 3.39 3.55 3.89
BNZ - Classic - 3.49 3.45 3.99
BNZ - Mortgage One 5.90 - - -
BNZ - Rapid Repay 5.35 - - -
BNZ - Std, FlyBuys 5.30 4.45 4.35 4.55
BNZ - TotalMoney 5.30 - - -
China Construction Bank 5.50 4.70 4.80 4.95
China Construction Bank Special - 3.19 3.19 3.19
Lender Flt 1yr 2yr 3yr
Credit Union Auckland 5.95 - - -
Credit Union Baywide ▼5.65 ▼4.75 ▼4.75 -
Credit Union North 6.45 - - -
Credit Union South ▼5.65 4.75 4.75 -
Finance Direct - - - -
First Credit Union 5.85 3.99 4.49 -
Heartland 6.70 7.00 7.25 7.85
Heartland Bank - Online - - - -
Heretaunga Building Society 5.75 4.80 4.95 -
HSBC Premier 5.24 3.54 3.54 3.69
HSBC Premier LVR > 80% - - - -
Lender Flt 1yr 2yr 3yr
HSBC Special - - - -
ICBC 5.15 3.18 3.18 3.20
Kainga Ora 5.18 4.04 3.95 4.39
Kiwibank 5.80 4.14 4.30 4.64
Kiwibank - Capped - - - -
Kiwibank - Offset 5.15 - - -
Kiwibank Special - 3.39 3.55 3.89
Liberty 5.69 - - -
Napier Building Society - - - -
Nelson Building Society 5.70 4.25 4.15 -
Pepper Money Near Prime 5.64 - 5.44 5.44
Lender Flt 1yr 2yr 3yr
Pepper Money Prime 5.18 - 4.98 4.98
Pepper Money Specialist 7.59 - 7.39 7.39
Resimac 4.50 4.86 3.89 3.94
RESIMAC Special - - - -
SBS Bank 5.29 4.85 5.05 5.49
SBS Bank Special - ▼3.39 3.45 3.89
Sovereign 5.30 4.15 4.29 4.55
Sovereign Special - 3.65 3.75 4.05
The Co-operative Bank - Owner Occ 5.15 3.49 3.59 3.89
The Co-operative Bank - Standard 5.15 3.99 4.09 4.39
TSB Bank 6.09 4.35 4.25 4.69
Lender Flt 1yr 2yr 3yr
TSB Special 5.29 3.55 3.45 3.89
Wairarapa Building Society 5.70 4.85 4.99 -
Westpac 5.34 4.15 4.09 4.49
Westpac - Offset 5.34 - - -
Westpac Special - 3.39 3.45 3.99
Median 5.34 4.04 4.09 4.39

Last updated: 4 December 2019 9:11am

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