Auckland Apartments

Unfortunately I don’t have time to read the entire article in detail at this time, but a couple of comments regarding the Auckland market – specifically apartments.

The influx of apartment development continues not because of demand, but rather the fact that these projects transpire over a period of 12-18 months or more – high-rise projects typically do not break ground for two or more years.

Developers/investors are in a position where they have to decide whether to lose capital invested during the preliminary phase, or take a risk and move forward as planned.

Many of the developments underway in Auckland transpired when demand exceeded supply and the market was in top gear.

The powerful dollar counteracted common sense and foresight.

The typical Auckland apartment is a very high-risk investment for those who cannot afford to sustain a short to medium term downturn – which in many segments is now evident.

The problem facing investors/owners of a “typical” Auckland apartment is the standard of development is low to mediocre resulting in limited upside [capital gains].

In saying this, if the apartment can be retained through the current cycle [3-5 years], then there is still potential to generate a return on investment.

The New Zealand real estate market is undervalued.

Auckland developers in general are overlooking the fundamentals in an attempt to maximize profit. They are delivering the same product – small low to medium quality dwellings, poor design, combined with cost-effective [cheap] materials.

The objective was/is to sell for top dollar, but unfortunately supply is now leading demand, which can result in lower valuations across the board as they attempt to “dump” their product.

Auckland is certainly a viable investment location in the long term. But there needs to be more focus on larger, high-end/quality apartments which satisfy buyers/investors who are being overlooked – in an attempt to make a quick buck. This in turn will stabilize the market and increase valuations across the board.

The trend in Auckland today is nothing more than detrimental to the wider market and therefore high-risk for the short to medium term investor.

— Michael

The comments about building quality probably apply to some Australia locations.

One of my QSs just did an inspection on a new building in Sydney. He was lamenting the quality of the work. Lots of apartments these days have single brick exterior walls and plasterboard internal walls. They look okay, but they’d be noisier.

He rarely sees a building either where there aren’t problems with the cement render – cracks etc.

And as I’ve said in another post, as soon as the east coast has one of those 10 day rain spells there will be lots of leaking buildings. It’s been a couple of years since we’ve had that sort of rain and there are lots of buildings that haven’t had their waterproofing put to the test.

Of course anything built on clay will also move around a bit when that clay get its first decent soaking and starts to expand.

Relevant to this issue of building quality are the changes to Home Owners Warranty Insurance in NSW. I recall hearing early this year (and I’m going off my memory here) that buildings over 4 stories that were commenced after January 1 this year will not be covered by HOW Insurance. This means any defects that show up have to be fixed by the builder, if they’re still around. Somebody please correct me if I’m wrong on this. It’s not really something that concerns me, so I didn’t pay much attention to it at the time it was announced.

Scott