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New Zeal for New Zealand

auckland dusk

1 December 2014

A booming economy, a young multicultural population, strategic location and sustained development activity make this Pacific Rim nation a global real-estate investment magnet.

Consider this. In 2013, New Zealand was the tenth most popular country for Chinese real estate investors. In just one year, this compact nation on the Pacific Rim has surged in popularity to the fifth spot, with Chinese investors accounting for a quarter of all investments by foreigners in New Zealand’s real estate. “Overseas investors are waking to the renewed potential of New Zealand, with the Chinese investors leading the charge,” says Bobby Sapra, Principal Owner at Auckland-based Harcourts consultancy, adding that large volumes of transactions across the real estate spectrum now come from overseas investors, right from low-budget residential deals to upscale commercial acquisitions.

NEW OPPORTUNITIES

A developed country, with a steady domestic market driving the economy at a healthy rate of 3.5 percent and strong foreign investments fuelling future growth, New Zealand is fast emerging as a key market in the Asia Pacific region. Financial capital Auckland is New Zealand’s largest and fastest growing city, accounting for more than one third of the country’s economic output and home to a third of the country’s population. Among its greatest attractions are its coastal location, low population density and outstanding work/lifestyle options, not to mention the pristine beauty and clean environment that make this country a magnet for talented professionals from across the world.

As the first major city in the world to greet the new day, its financial markets open two hours ahead of Sydney, four hours ahead of Tokyo and five hours ahead of Hong Kong, Shanghai and Singapore. “The significant growth in population that Auckland is experiencing has placed great demand on housing, and the average price for a three bedroom home has increased by 80 percent in the past 10 years to NZD 650,000 (USD 507,000),” says Peter Thompson, Managing Director, Barfoot & Thompson, adding that in the past 12 months alone, average house prices have increased by 12% to NZD 740,000 (USD 577,000).

While residential realty prices are 16.9 percent higher than the pre-GFC crisis peak in 2007, strong economic growth is converting into commercial occupier growth and investor confidence. “The past twelve months have seen a surge in investor demand, with sectors beginning to perform at levels not seen since before the GFC,” says Justin Kean, National Director of Research & Consulting, JLL New Zealand, adding that in 2013, Auckland office capital returns were a robust 15 percent.

As the New Zealand economy matures and there’s surge in demand across all sectors, the country’s real estate market is poised for fresh growth. In addition to the demand for space from occupiers, demand for real estate assets from investors has been strong over the last two years. “More specifically over the last 12 months, there has been strong demand for assets from international investors who see New Zealand as both a safe haven and good investment opportunity,” says JLL’s Kean.

INVESTMENT MAGNET

Foreign investments are even more visible in commercial property, accounting for 48 percent of the total investment in 2014, compared with only 13 percent of the investments in commercial property in the previous year. “Overseas buyers now see New Zealand as a leading destination for capital investments and as a key location in the Asia Pacific region. The yield spread available on prime assets in New Zealand is relative to regional peers,” says Kean, adding that the growth outlook means that a number of global institutional investors are including New Zealand as part of their wider global allocation.

One of the attractions of investing in property in New Zealand is that there is no capital gains tax on the rise in value of a property. “New Zealand has limited restrictions on overseas residents buying residential property. The government’s position is that offshore buyers are not distorting the market or adding to pricing issues,” says Thompson, adding that given the restrictions that apply in many other countries, New Zealand is being seen as an increasingly popular investment option by offshore buyers.

The increasing investment is reflected in the ownership pattern in Auckland, with most of the new transactions being driven by investors. “Nearly two-thirds of the homes in Auckland city are being acquired by investors and only a third are being purchased by end-users,” says Matt Shirley of Auckland-based Bayleys consultancy.

FUTURE’S BRIGHT

The outlook in Auckland and Wellington is bullish. With vacancy in both markets extremely low and limited new supply in recent years, the conditions are in place for strong rental growth as well as value appreciation. It is estimated that to keep pace with the growing population Auckland needs a minimum of 10,000 new residences to be built a year, and as the current rate of building is less than this, the pressure on prices is unlikely to ease in the next few years.

While a section of market observers say that Auckland homes are ‘fully priced’ vis-a-vis New Zealand incomes, compared to property prices in other international cities such as Melbourne and Sydney, Auckland prices are still extremely competitive. “New Zealanders returning home after working overseas for many years, and also new immigrants, find Auckland home prices attractive,” says Thompson, adding that thanks to limited investment stock, demand will remain elevated, as a result of which the market will see strong pricing levels in the years to come.

Freehold or leasehold

Most New Zealand residential property is built on what is locally called ‘freehold land’ where the buyer purchases the land and house. However, there are small pockets of land in Auckland where homes are built on ‘leasehold land’, where buyers buy only the house, and pay a yearly lease to the land owner. Properties on leasehold land sell for less than the equivalent house where the land and building are purchased.  Accountants, solicitors and real estate agents can give guidance on this issue, and buyers must be clear whether a property is on leasehold land or freehold.

Student community drive rental market in varsity city

Auckland has two main universities with a student population of close to 70,000, of which over 10 percent are international students. Besides, as many as 30,000 international students are enrolled in English language courses in Auckland at any given time. “Majority of these students study in the CBD and rent accommodation within public transport corridors, creating a demand for smaller apartment in the inner city area and ensuring a firm rental market,” says Peter Thompson of Barfoot & Thompson. The second impact is on suburbs bordering the CBD – a high proportion of the population in places such as Ponsonby, Arch Hill and Grafton are students. “This has had the impact of supporting rental yields across the CBD and surrounding suburbs as well as driving the development of student accommodation at certain times in the cycle. We are currently seeing an upswing in the development of student accommodation with several high density projects underway in central Auckland,” says JLL’s Kean.

The strong education sector has traditionally underpinned tenancy demand for smaller one and two bedroom units, yielding rents between 6 – 10 percent. “Auckland’s tertiary education establishments are now a key driver of the country’s mainstream economy,” says Shirley of Bayleys, adding that for the Auckland apartment rental market, this means a long-term sustainable tenancy stream