Pain hits in apartment market
Sunday Star Times | Sunday, 29 July 2007
Apartments bought as investments are proving to be anything but, writes Greg Ninness. He tells the cautionary tale of an ordinary couple who lost about $70,000.
Investors in Auckland apartments have been copping losses of up to $200,000 when selling their properties, a Sunday-Star Times survey has revealed.
And 80% of the surveyed apartment sales on the city's CBD western fringe, which has the greatest concentration of investment apartments (those intended as rental units rather than for owner occupation), sold for less than their purchase price.
While price drops range from $2000 to $200,000, the losses to investors would have been even greater when real estate agents' commissions and legal fees are added.
The 25 sales in the survey took place between February and May. Twenty apartments sold for less than their purchase price and five posted increases.
The fall in value is especially bad news for investors, who are already being squeezed by rising mortgage interest rates and hikes in other costs, such as council rates. Those costs, increased further by last week's Reserve Bank decision to increase rates by another 0.25%, will test many investors' resolve to hang on to their properties for the long term.
Surprisingly, not all of the surveyed properties which lost value were tiny "shoebox" apartments. Some were relatively spacious, with extras like car parks, which are supposed to help them hold value.
And while Auckland has by far the largest concentration of investment apartments in the country, the financial pain is being felt well beyond the city's boundaries.
Typical of those caught in the meltdown are Palmerston North couple Ian and Sue Bailey who incurred a $60,000 capital loss when they sold an Auckland CBD apartment in May for $190,000.
They could not get projected rents, and the prospect loomed of having to refix their loan at a higher interest rate.
All up, they estimate they lost $70,000 on their investment, and they have had to add $45,000 to their own mortgage.
"Financially, it's probably set us back about eight years," said Ian. "But it's taught us a valuable lesson and hopefully things will start to come right by the end of the year."
The Baileys resent a common perception that many apartment buyers were just out to make a quick buck.
They worked hard for their money, Ian for Resene Paints and Sue as a driver for a Palmerston North bus company.
They had a modest but comfortable family home in Palmerston North and with their children grown up, they were looking for ways of building up their retirement savings.
They had already bought a couple of rental units several years previously and in Palmerston North's steady real estate market, these had proved to be reliable if unspectacular investments.
They were also regular savers and had built up a nest egg of $30,000 in the bank.
In 2004 they saw an advertisement for the Volt apartment complex being built in Auckland.
The 418 apartments were being developed by Conrad Properties, one of the country's largest apartment developers and it occupied a prime site on Auckland's Queen St, just a stone's throw from the Town Hall and university.
Its apartments were being sold by Brick Securities, a company that specialised in selling apartments off the plan and was famous for its "just a thousand dollars down" advertisements, which promised people they could buy a brand new apartment with a $1000 deposit and borrow the rest.
The Baileys thought buying an apartment in Auckland could be a good thing because the city was growing and it would spread the risk beyond their hometown.
When Ian responded to the advertisement he was surprised when the salesman said he would fly to Palmerston North to talk about the project in person.
True to his word he arrived on the Baileys' doorstep a couple of days later with a glossy brochure and a sale and purchase agreement in his hands and a slick line of sales patter on his tongue.
He suggested they buy a two-bedroom apartment for $250,000 which would include all the furniture and furnishings, even down to the cutlery and linen, which made it very attractive to out-of-town investors.
Brick Securities had prepared a financial forecast based on a $1000 deposit and a projected rental income when complete of $420 to $440 a week.
The Baileys had already set up a Loss Attributing Qualifying Company to own their other rental units, which enabled them them to offset any losses the new apartment generated against their other income.
Ian thought borrowing the entire price was too risky and thought it would be better to use the $30,000 they had in the bank as a deposit.
Even so, the repayments on a $220,000 mortgage and other expenses such as body corporate fees ($3000 a year) meant the Baileys would be facing a small but manageable cash loss each month on the apartment. "I told him we were putting $30,000 of our life savings into this and we wanted some good advice," Ian said.
The salesman replied that he wouldn't be selling them if he didn't think they were a good investment and he was going to buy a couple himself. He returned to Auckland with a signed contract in his pocket.
The Volt project was completed last December, but the Baileys' investment immediately fell short of expectations. Their apartment was tenanted straight away, but the most they could get in rent was $320 a week, $100 to $120 less than they had been expecting.
Their tenants were students and Ian's inquiries suggested they would probably vacate the apartment at the end of the year and it could then remain vacant for two to three months until university resumed. Instead of the small loss they had anticipated, the Baileys were bleeding cash and by Christmas it may have got worse.
They decided to cut their losses and sell, but that didn't end the pain.
The real estate agents took $15,000 of the $190,000 sale price in commission and other expenses.
All up, Ian estimates he and Sue lost about $70,000 on their investment. Their $30,000 is gone and they have had to add $45,000 to their mortgage.
So cash is still tight, but they are not bitter about their experience.
The Baileys have also learned not to rely too heavily on valuations when considering buying property.
An online estimate of their former apartment's market value provided by Quotable Value last week came in at $221,000, even though similar apartments to theirs have also been selling recently for less than $200,000.
Real Estate Institute president Murray Cleland said the price falls were part of a market correction.
"Possibly that end of the market may have been overheated in the early days when it started and perhaps values were a bit ambitious. Now the market will determine what the values are.
"People going into those investment apartments should do their homework really well and make sure they get some very sound advice before they invest in them," he said.
Sunday Star Times | Sunday, 29 July 2007
Apartments bought as investments are proving to be anything but, writes Greg Ninness. He tells the cautionary tale of an ordinary couple who lost about $70,000.
Investors in Auckland apartments have been copping losses of up to $200,000 when selling their properties, a Sunday-Star Times survey has revealed.
And 80% of the surveyed apartment sales on the city's CBD western fringe, which has the greatest concentration of investment apartments (those intended as rental units rather than for owner occupation), sold for less than their purchase price.
While price drops range from $2000 to $200,000, the losses to investors would have been even greater when real estate agents' commissions and legal fees are added.
The 25 sales in the survey took place between February and May. Twenty apartments sold for less than their purchase price and five posted increases.
The fall in value is especially bad news for investors, who are already being squeezed by rising mortgage interest rates and hikes in other costs, such as council rates. Those costs, increased further by last week's Reserve Bank decision to increase rates by another 0.25%, will test many investors' resolve to hang on to their properties for the long term.
Surprisingly, not all of the surveyed properties which lost value were tiny "shoebox" apartments. Some were relatively spacious, with extras like car parks, which are supposed to help them hold value.
And while Auckland has by far the largest concentration of investment apartments in the country, the financial pain is being felt well beyond the city's boundaries.
Typical of those caught in the meltdown are Palmerston North couple Ian and Sue Bailey who incurred a $60,000 capital loss when they sold an Auckland CBD apartment in May for $190,000.
They could not get projected rents, and the prospect loomed of having to refix their loan at a higher interest rate.
All up, they estimate they lost $70,000 on their investment, and they have had to add $45,000 to their own mortgage.
"Financially, it's probably set us back about eight years," said Ian. "But it's taught us a valuable lesson and hopefully things will start to come right by the end of the year."
The Baileys resent a common perception that many apartment buyers were just out to make a quick buck.
They worked hard for their money, Ian for Resene Paints and Sue as a driver for a Palmerston North bus company.
They had a modest but comfortable family home in Palmerston North and with their children grown up, they were looking for ways of building up their retirement savings.
They had already bought a couple of rental units several years previously and in Palmerston North's steady real estate market, these had proved to be reliable if unspectacular investments.
They were also regular savers and had built up a nest egg of $30,000 in the bank.
In 2004 they saw an advertisement for the Volt apartment complex being built in Auckland.
The 418 apartments were being developed by Conrad Properties, one of the country's largest apartment developers and it occupied a prime site on Auckland's Queen St, just a stone's throw from the Town Hall and university.
Its apartments were being sold by Brick Securities, a company that specialised in selling apartments off the plan and was famous for its "just a thousand dollars down" advertisements, which promised people they could buy a brand new apartment with a $1000 deposit and borrow the rest.
The Baileys thought buying an apartment in Auckland could be a good thing because the city was growing and it would spread the risk beyond their hometown.
When Ian responded to the advertisement he was surprised when the salesman said he would fly to Palmerston North to talk about the project in person.
True to his word he arrived on the Baileys' doorstep a couple of days later with a glossy brochure and a sale and purchase agreement in his hands and a slick line of sales patter on his tongue.
He suggested they buy a two-bedroom apartment for $250,000 which would include all the furniture and furnishings, even down to the cutlery and linen, which made it very attractive to out-of-town investors.
Brick Securities had prepared a financial forecast based on a $1000 deposit and a projected rental income when complete of $420 to $440 a week.
The Baileys had already set up a Loss Attributing Qualifying Company to own their other rental units, which enabled them them to offset any losses the new apartment generated against their other income.
Ian thought borrowing the entire price was too risky and thought it would be better to use the $30,000 they had in the bank as a deposit.
Even so, the repayments on a $220,000 mortgage and other expenses such as body corporate fees ($3000 a year) meant the Baileys would be facing a small but manageable cash loss each month on the apartment. "I told him we were putting $30,000 of our life savings into this and we wanted some good advice," Ian said.
The salesman replied that he wouldn't be selling them if he didn't think they were a good investment and he was going to buy a couple himself. He returned to Auckland with a signed contract in his pocket.
The Volt project was completed last December, but the Baileys' investment immediately fell short of expectations. Their apartment was tenanted straight away, but the most they could get in rent was $320 a week, $100 to $120 less than they had been expecting.
Their tenants were students and Ian's inquiries suggested they would probably vacate the apartment at the end of the year and it could then remain vacant for two to three months until university resumed. Instead of the small loss they had anticipated, the Baileys were bleeding cash and by Christmas it may have got worse.
They decided to cut their losses and sell, but that didn't end the pain.
The real estate agents took $15,000 of the $190,000 sale price in commission and other expenses.
All up, Ian estimates he and Sue lost about $70,000 on their investment. Their $30,000 is gone and they have had to add $45,000 to their mortgage.
So cash is still tight, but they are not bitter about their experience.
The Baileys have also learned not to rely too heavily on valuations when considering buying property.
An online estimate of their former apartment's market value provided by Quotable Value last week came in at $221,000, even though similar apartments to theirs have also been selling recently for less than $200,000.
Real Estate Institute president Murray Cleland said the price falls were part of a market correction.
"Possibly that end of the market may have been overheated in the early days when it started and perhaps values were a bit ambitious. Now the market will determine what the values are.
"People going into those investment apartments should do their homework really well and make sure they get some very sound advice before they invest in them," he said.
Comment